Social Security
Social Security is in dire
need of reform. If it continues to go unchanged, its outlays -- or benefits
-- will exceed the amount received in taxes in approximately 2018. This is
due to the changing demographics of the country as the Baby-Boom generation
begins to retire. Today the issue is heating up as the President brings it
into the spotlight for reform. But what are the problems, especially from
the viewpoint of 18-25 years olds, and more importantly, what options do we
have to solve them?
The program was created in the Great Depression to not
only reduce elderly poverty rates but also to remove their competition for
jobs in a struggling economy. The concept is based on a pay-as-you-go
system, which means today’s workers support the elderly of society, the
disabled, and survivors of workers, such as the children or the widow of a
deceased worker. Social Security is also an equity redistribution system,
as the poor receive a larger percentage of what they pay and vice versa for
the higher income earners.
The problems are that the demographics of the country
are changing drastically; fifty years ago, there were ten workers to support
every one retiree. Today that ratio is not 10:1, but instead 3:1. As the
Baby-Boomers retire that ratio will decrease to 2:1.[i]
But demographics are not the only problem; the
government spends any excess revenues collected from Social Security on
other programs, thus the surplus revenues fund larger government deficits.
Today revenues still exceed the benefits of Social Security, but these
revenues are not actually connected with the outlays from the taxes. Instead
the revenues from the Social Security tax are simply thrown into the same
pot as the rest of the government’s tax revenues. Today’s Social Security
Trust Fund revenues are being spent by the government and being replaced by
IOU’s (government bonds) that future generations, such as the current
college generation, will have to pay.
The solutions to these problems can be placed in the
following categories:
1.
Private Accounts - Private accounts would put the money that
you pay to Social Security into your own personal account instead of into
the government’s pool of taxes. It would change Social Security from a
pay-as-you-go system to one that has resources that more accurately reflect
the current needs because, instead of a smaller pool of workers paying for
the benefits of a larger pool of baby-boomer retirees, the boomers will be
putting money aside for themselves. It would remove the problem of the
government spending surplus Trust Fund revenues meaning that they government
would no longer be able to spend money that is suppose to be for social
security on other programs. This plan also has the possibility of increasing
private savings as it is a forced saving; however some experts note that
past policy changes have been ineffective in changing the private savings of
the country, and therefore contend that this is an unlikely outcome of
private accounts. Some even argue that there is a chance that private
accounts might reduce the amount of money people currently save for
retirement outside the Social Security system. We still believe there is a
need for a safety net that protects those of old age from poverty, therefore
any private account system would require some form of a backup plan to
protect from bad investments. People should be protected from reasonable
investment mistakes, i.e., investing in Enron in 1999. However, such
protections will cause people to pursue higher risk investments. This will
further reduce any potential economic benefits received from private
investing. There are serious concerns in the ability of personal accounts to
solve the Social Security shortfall. Even if they work as advertised, they
fall far short of closing the structural deficit and thus should not be
viewed as an effective solution. However, they might be useful as a small
part of overall reform so long as they do not significantly add to the
current fiscal deficit.
2.
Raise Taxes - Raising payroll taxes by a slight amount would
raise revenues and thus make the current system more sustainable in the
future. Today workers are taxed 6.2% on the first $90,000 of wage income
they make; after that, no further wage income is taxed. Thus perhaps a tax
on income after $300,000, at a lower rate, would increase revenues on the
wealthy and thus maintain or even enhance the progressive aspect of Social
Security. However any increase in taxes must be protected so that the
government cannot spend it on other programs. Potential revenue increases
include increasing the social security tax rate by 1%, which would eliminate
51% of the deficit. Increasing the wages that are taxed by Social Security
by 25%, which would reduce the structural deficit by 26%.[ii]
3.
Increase the Retirement Age - If the retirement age were
increased and people worked longer then revenues would be collected for a
longer time and people would receive benefits later in life, reducing the
net pay-out. This would not only decrease the number of retirees but also
increase the number of workers supporting these retirees. Raising the
retirement age is a reasonable solution considering the increasing life
expectancy of today compared with those of the past. According to the 2003
Social Security Trustee Report, a reasonable increase in the retirement age
compared to life expectancy would reduce the structural deficit by 33%.[iii]
However, there is a strong argument against this reform; the majority of
those who need Social Security the most are those with physically demanding
jobs, such as factory work. Thus their bodies wear out sooner and it is more
difficult for them to work so late into their lives.
4.
Change COLA Adjustment - The Cost Of Living Adjustment (COLA) is an
increase in the benefits of Social Security that has been in effect since
1975. It adjusts benefits for inflation so that people receive their fair
amount of money. However, many economists believe that the COLA overstates
the Consumer Price Index or inflation. The average overstatement is
estimated to be .22% a year. If the annual COLA were reduced by this amount
it would not only have an immediate effect but would have a large effect
over time. If it were reduced by .5% then benefits would decrease by 5% in
ten years and 9% in 20 years.[iv]
5.
Means Testing - Means testing is paying the benefits to those that need
them. This would save much revenue and would enhance the progressive part of
the system. However this would mean reducing a significant portion of
benefits for the public that has paid the most amount of money into the
system. 
Source: Gebhardtsbauer,
Ron. “Social Security Speaker’s Kit.” 2002. American Academy of Actuaries.
March 14, 2005.
http://www.actuary.org/socsec/speakerskit.htm#about>.
There are clear economic
problems with the current Social Security system and no. single all
encompassing economic solution. Any feasible reform must likely include a
variety of these solutions to reduce the deficit and maintain a sustainable
Social Security system. However this must be done without hurting any
particular group more than another, and thus must be done with much care and
increased political cooperation. Simply choosing one option and making it
the centerpiece of the plan does a disservice to America and should be
considered a misleading approach to solving the problem.
[i]
Holtz-Eakin, Douglas. Testimony on Reforming the
Federal Budget Process. Mar. 23 2004. Congressional
Budget Office. 2 Mar. 2005. <http://www.cbo.gov/showdoc.cfm?index=5220&sequence=0>
[ii]
Gebhardtsbauer, Ron. “Social Security Speaker’s Kit.” 2002. American Academy
of Actuaries. March 14,
2005.
http://www.actuary.org/socsec/speakerskit.htm#about>.
[iii]Gebhardtsbauer, Ron. “Social Security Speaker’s Kit.”
2002. American Academy of Actuaries. March 14, 2005.
http://www.actuary.org/socsec/speakerskit.htm#about.
|
