Social Security is the cornerstone of American social policy, but it is also a lightning rod for reformers. Even in the beginning of the process, Congress could not agree on how it should proceed, threatening to drop the old-age insurance from an omnibus security bill that included welfare, unemployment compensation, job training, child welfare and some public health components. Now, in the late 90’s, Social Security is being threatened by financial problems. Needless to say, there are quite a few ideas on how to reform the system.
Although financially stable for decades, the now-antiquated system is facing hard times. Reports of the system’s imminent insolvency have turned cries of support into alarm. The Social Security system is expected to begin running a deficit within only 15 years (paying out more in benefits than it collects in taxes).
Without reform it will be unable to pay promised benefits by around 2034. What began as a plan for increased financial security has instead thrown the country towards a future of economic uncertainty.
Congress designed Social Security to operate as a pay-as-you-go system. That means no money is actually set aside by the government to pay benefits in the future. When workers pay taxes into the Social Security “trust fund,” most of the money is immediately paid out as benefits to today’s retirees. The leftovers go straight to the Treasury in exchange for federal IOUs and are used to finance the national budget. But when Social Security begins running a deficit in 2012, there will be no more leftovers, and the government must begin paying back its IOUs to keep the system afloat. Because no money has actually been saved for this purpose, Congress will be forced to significantly increase public debt, cut spending or raise taxes.
The Essay on Social Security System
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Even worse, unless something is done, the entire Social Security system will use up its government IOUs and go bankrupt by 2034. No wonder citizens of all ages are alarmed — will they ever see their Social Security dollars again? Changing demographics have spurred the impending crisis. Today, fewer workers support each beneficiary. The baby boomers are aging and not having as many children, and people are living longer, thus collecting benefits for a longer period of time. Since the system is pay-as-you-go, these demographic changes spell trouble. A smaller and smaller group of workers will have to provide for more and more recipients.
The size of the problem should not be underestimated. The government will owe an estimated total of about $9 trillion more to current workers when they retire than it will have collected from them in taxes. This Social Security liability is more than twice the official national debt. It is larger than the total value of the United States gross domestic product. Raising Social Security taxes enough to keep the government’s entitlements promises to future retirees would require doubling or tripling these taxes. That means taking 30 to 40 percent of every worker’s wages just to pay retirement benefits. Such tax hikes are not economically or politically feasible. Alternative remedies — which keep our promises to today’s seniors without bankrupting other generations — must be identified and pursued. Without careful, comprehensive change soon, at least one generation of workers will be left stranded without benefits. Not a happy ending for a system designed to ensure exactly the opposite: unfailing financial security for everyone.
There are several ideas in play, but the most interesting is the one that looks at a major privatization of the system. In this and the other major plans, all future retirees would receive payment from two sources: a guaranteed minimum benefit and an additional amount that reflected the returns individuals earned on their “personal security accounts”.
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Both components of the benefit would be financed by the payroll tax. Because the guaranteed part of the benefit would be based only on a portion of the payroll tax, it would be significantly lower than the benefit that low-income retirees now receive. Each individual’s additional benefits would depend on the performance of his or her PSA, which the worker would control.
Most of the privatization plans would entail significant tax increases or newly generated borrowing to maintain current benefits for workers who will be retiring in the next ten to twenty years, as payroll taxes are shifted to the new accounts. This would be necessary because workers now in their fifties have relatively little time remaining before their retirement, and suddenly shifting to a personal account system would leave them at greater risk of ending up worse off. They would have less of an opportunity to accumulate sizable accounts, and the short-term horizon would leave them more vulnerable to a downturn in investment markets. As a result, younger workers would have to pay taxes for both current retirees’ benefits and for their own future benefits. People would be able to choose the risk/return combination that best suits them. The well-off could invest more aggressively while lower- and middle-income retirees could opt for more secure though lower-yield investments. Individuals would own their own accounts, so they would face less risk if future generations defaulted on promises to pay benefits. National savings would likely increase if payroll taxes were raised to finance the transition to a privatized system.
Finally, by shedding the enormous financial obligations of the government to future retirees, Social Security privatization, when fully implemented, would virtually eliminate the challenge of generating sufficient taxes to provide promised benefits.
Another method of reform would be to means test recipients to make sure that they would benefit from Social Security. The most commonly proposed form of means testing would be to reduce or eliminate the Social Security benefits for retirees who receive substantial investment income during their retirement. One of the advantages is that, by reducing benefits, means-testing could alleviate some of the future pressure on the Social Security program by reducing Social Security payments to middle- and upper-income elderly. This would not immediately pose a threat to lower-income retirees. Means-testing could promote national savings by cutting benefits to higher-income workers while maintaining current tax levels, thus reducing the government deficit or increasing its surplus.
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Another proposed reform is to invest some of the Social Security Trust Funds in the stock market to prevent future shortfalls. Under current law, the Trustees of the Social Security Trust Funds may invest the surplus that the fund accumulates only in U.S. government securities, the debt the government issues to finance its borrowing. Because these securities are the safest investments available, they pay a relatively low rate of interest. Under one proposed plan, part of the Trust Funds would be invested in stocks through an unmanaged index fund holding a diversified portfolio of shares. (More than half of the Trust Funds would remain in Treasury securities.) An independent “investment board” nominated by the president and approved by the Senate would oversee the investments and would be allowed to invest the Trust Funds’ money. Because stocks have generated higher investment returns in the past than Treasuries, diversifying might leave the Trust Funds with greater assets over time.
There can be no doubt that the Social Security System, as we have known it in the past, is in need of reform. The old saying that “Demography is Destiny” has doomed the system unless significant reforms are enacted. A wholesale elimination of Social Security would have devastating effects on the psyche of older Americans, as well as having untold political consequences on our government. The private sector has always been the primary engine of growth for the economy; perhaps it is time to let it be the primary engine of saving Social Security.
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... are then invested in a portfolio of securities or other assets managed by investment professionals. Investors in Unit Trust Scheme or Mutual Fund do not ... 2002b). 1. 6. 6 Subjective Norms An individual’s perception of social normative pressures, or relevant others’ beliefs, that he or she ...
