Social Security is one of America’s most imperative and successful programs. Its reform is one of the nation’s most exigent public policy debates. Social Security is essentially funded on a pay-as-you-go basis that means the benefits of current retirees are paid by the taxes of current workers. Social Security discourages saving and distorts work incentives, negatively affecting income in old age and national income in general. Despite its huge expenditures, it has not eliminated poverty among the elderly (Michael D. Tanner, Pp: 37). The present paper explains the reform of the social security program proposed by President Bush and the current social security problems and its alternative solution, which includes privatization.
The problem here focuses on two main issues: The first one is that what changes are required to make Social Security solvent and when it will be executed. During the 2000 Presidential campaign, President Bush stated that by allowing workers to put some of their Social Security taxes in personal accounts where they could invest in stocks if they so desired. He later appointed a commission to make recommendations to improve Social Security.
The commission issued a report on December 21, 2001, which includes three options to reform the program. All options feature individual accounts. In May 2001, he appointed a commission to make recommendations to reform Social Security. President Bush believed that any change to the system must maintain the full benefits promised to exist retirees and near-retirees. He has called for a changeover to partial privatization using individual accounts that could be invested in the stock market.
The basic plans of the Bush are: if an individual chooses for a private account and throughout his working life he earns more than 3 percent per year, on average, he comes out ahead. In 2005, the possibility of changing the Social Security system became a major political issue. The national Old age, Survivors, and Disability Insurance (OASDI) program, popularly referred to as Social Security, is the largest income-maintenance program in the United States.
Based on social insurance principles, the program provides monthly cash benefits designed to replace, in part, the income that is lost to a worker and his or her family when the worker retires in old age, becomes severely disabled, or dies. About 95 percent of the jobs in this country are covered. Workers in covered jobs and self-employed persons recompense Social Security taxes on their earnings that, along with matching taxes paid by the employers of workers, provides nearly all revenue for financing benefits and administrative expenses (Social Security Programs in the United States, 1993).
Social Security is also credited with keeping 15 million people from falling below the poverty line and with reducing the proportion of the elderly in poverty to about 12 percent, no higher than that for other adults. (Robert Eisner; Pp: 3). The largest component of OASDI is the payment of retirement benefits. Throughout a worker’s career, the Social Security Administration keeps track of his or her earnings. The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. The legal authority to make the payment rests on the accounting solvency of the system, its current cash inflows from FICA, and interest plus accumulated surplus.
The great majority of the assets in the surplus are special Treasury bonds, i.e. they are IOUs that the federal government owes itself. While the worker’s retirement income benefit is based on his PIA (primary insurance amount), the PIA is also used to calculate the other benefits for disability, widows, and survivors’ monthly income. Unlike a private pension plan, the Social Security Trust Fund does not hold any substantial marketable assets to secure workers’ paid-in contributions. Instead, it holds non-negotiable United States Treasury bonds and U.S. securities. June O’Neill demonstrates the irrelevancy of the Social Security Trust Fund, supports Siems’s analysis.
O’Neill shows that the Social Security Trust Fund is an accounting measure, not an accumulation of real assets that can be used to pay future benefits. That means a current system of Social Security is essentially irrelevant to the program’s future. The federal government lacks a mechanism that would allow it to save today against the future demographic and financial pressures that will make Social Security’s current structure unsustainable over the long term.
Social Security’s problems are not just a question of financing. Merely finding sufficient funding to defend Social Security fails to address the serious shortcomings of the current system. Charles Rounds raised another flaw in long-established Social Security. Many workers assume that if they pay Social Security taxes into the system, they have some sort of legal guarantee to the system’s benefits. But this is not true. It has long been settled law that there is no legal right to Social Security (Tanner, 2004).
Martin Feldstein concludes that our current Social Security system is acting as a tow on economic growth in two important ways. First, the payroll tax distorts the supply of labor and the type of compensation sought by workers. Those losses are inevitable because of the low return implied by the PAYGO character of the unfunded Social Security system. Second, the system reduces national savings and investment. He contrasts that with a system of individually owned, privately invested accounts, which would both increase capital investment and have a positive impact on labor productivity. A fully implemented system of individual accounts, according to Feldstein’s calculations, would raise the well-being of future generations by an amount equal to 5 percent of gross domestic product each year as long as the system lasts.
Although the transition to a funded system would involve economic as well as political costs, the net present value of the gain would be enormous. According to Daniel Shapiro, Social Security reform would not be justifiable if it was economically beneficial but morally suspect. Shapiro looks at this question from a variety of philosophical perspectives including those of classical liberals that are based on individual liberty, as well as that of egalitarians that frame their arguments in terms of fairness and are concerned with economic security, and of communitarians who seek to foster a greater sense of community. He concludes that regardless of the philosophical approach, a system of individual accounts would be morally preferable to today’s Social Security system (Michael D. Tanner; Page Number: 2).
Currently, Social Security takes place more in payroll taxes than it needs to payout. By 2018, it will start to receive less in payroll taxes and will need to tap its surplus, held in U.S. Treasuries, to meet its obligations. By 2042 (or 2052), that surplus will be tapped out, and payroll taxes will only be able to cover a portion of Social Security’s obligations. Weisbrot said that the payroll tax increases were made to shore up the system in each of several decades. “The problem for Social Security is no different than the problem it’s faced previously, except that it is smaller” (Jeanne Sahadi; 2005).
At some point, however, any change in the law, the Social Security Administration will finance payment of benefits through the net redemption of the assets in the Trust Fund. Because those assets consist solely of U.S. government securities, their redemption will represent a call on the federal government’s general fund, which for decades has been borrowing the Trust Fund’s surplus and applying it to its deficit. To finance such a projected call on the general fund, some combination of increasing taxes, cutting other government programs, selling government assets, or borrowing would be required.
Advocates of major change in the system generally disagree that drastic action is necessary because Social Security is facing a crisis. Bush described it as a “structural problem” and then, in his weekly radio address of January 15, 2005, said that Social Security “is on the road to bankruptcy”. In Kotlikoff’s view, the central aim of public social security restructuring in favor of the market is to reduce the burden of existing expenditures, thereby averting a fiscal crisis of the state (John Dixon; Page Number: 2.)
In public opinion, the movement toward a privatized individual account social security system offers the best option, where individuals save and accumulate assets to provide for their retirement.
In general, privatization advocates believe that individuals are the best decision-makers about how much risk they should undertake with their retirement funds but do not show in any detail how individuals would have this power under the yet-not-described privatization scheme. Advocates of privatization have long criticized Social Security for lower returns than the returns available from other investments, and cite numbers based on historical performance.
They argue that the “efficiency” of the system should be measured not by costs as a percent of assets, but by returns after expenses. Other advocates state that because privatization would increase the wealth of social security users, it would contribute to consumer spending, which in turn would cause economic growth. The positive aspect of the current system of social security is that the long-term trend of U.S. securities markets cannot safely be extrapolated forward, because stock prices relative to earnings are already at very high levels by historical standards. Privatization of social security has been criticized on the ground that workers attempting to retire during any future such downturns, even if they prove to be temporary, will be placed at a severe disadvantage.
Critics also point out that, even surrendering for the sake of argument that such highly optimistic numbers are true, they fail to count what the transition will cost the country as a whole.
Bush made Social Security a prominent theme of his State of the Union Address. He outlined, in general terms, a proposal based on partial privatization. After a phase-in period, workers currently less than 55 years old would have the option to set aside four percentage points of their payroll taxes in individual accounts that could be invested in the private sector, in “a conservative mix of bonds and stock funds”. Workers making such a choice might receive larger or smaller benefits than if they had not done so, depending on the performance of the investments they selected. Although Bush described the Social Security system as headed for bankruptcy, his proposal would not affect the projected shortfall in Social Security tax receipts.
To sum up, Social Security is much more than a retirement program. It also pays benefits to disabled workers and their dependents; spouses and children of retired workers; and the survivors of deceased workers. Social Security needs fundamental reform, and that reform must come sooner rather than later. The system’s financial problems are deep and coming much sooner than commonly believed. But even more important, young workers are already being denied the benefits of the much higher returns and benefits that a privately invested Social Security system would bring. Every day that passes without reforming Social Security robs young workers of their future.
References
- Michael D. Tanner; 2004; Social Security and Its Discontents: Perspectives on Choice. Publisher- Cato Institute. Place of Publication: Washington, DC. Publication; Page Number: 3.
- Jeanne Sahadi, 2005; Social Security reform: A guide; CNN/Money.
- Social Security Programs in the United States, 1993. Journal Title: Social Security Bulletin. Volume: 56. Issue: 4. Publication Year: 1993. Page Number: 3-82.
- Robert Eisner. Social Security. More, Not Less: Century Foundation Press. Place of Publication: New York. Publication Year: 1998. Page Number: 3.
- Dixon John, Mark Hyde. The Marketization of Social Security. – editor. Quorum Books. Place of Publication: Westport, CT. Publication Year: 2001. Pp: 2.
- Social Security Programs in the United States, 1993. Journal Title: Social Security Bulletin. Volume: 56. Issue: 4. Pp: 3-82.