Social security is the largest welfare program in America, covering nearly all the American workers. In 2005, it covered around 92 percent of Americans aged over 65 years. In the same year, 156 million Americans were submitting social security taxes and 47 million were receiving monthly reimbursements. This program was formed in 1935 to guard millions of Americans against poverty in their old age, those who might become disabled and survivors after the death of the breadwinner. Over the years, it has grown from 3.5 million recipients in 1950 to 35.6 million in 1980 to 46 million in 2001 and 47 million in 2005 (Jansson, 2005).
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The fund is regulated by the Federal Insurance Contributions Act (FICA). It is financed through a tax on workers income of up to $106,800 a year (according to the figures for 2008). A payroll tax of 12.4% shared equally between the employer and the employee is paid. The program do not operate individual accounts or taxes received invested on behalf of individual contributor, rather the funds collected finance current benefits being paid on a structure called “pay-as-you-go”. The surplus is then put in government treasury securities and placed in the Social Security Trust Fund (Karger & Stoesz, 2009).
Currently, the program covers a wide range of beneficiaries who include retirees, disabled workers, survivors of the deceased and family members of the beneficiaries. For these people this is an important source of revenue and others rely entirely on it. Approximately two thirds of beneficiaries aged 65 years and above, social security makes up more than half of their total income. Further, the fund makes up 90 percent or more of the total income of one thirds of the elderly recipients and 20 percent of them rely completely on. This shows the profound importance of the fund to most of the country’s elderly.
It is not even enough for a comfortable life for these people as the average amount is about $10,000 per year (Diamond & Orszag, 2005). In recent years this program has received a lot of debate due to the problems it is facing. The first one is the rooming long-term deficit the trust fund board projects though it has experienced short term surpluses since 1983 for example in 2008, surpluses stood at $180 billion. The Board of Trustees of the OASDI in their 69th annual report in 2009 projected that by 2016 the benefits paid will exceed the revenue collected. Then from there the fund will be able to over the deficit for several years from interest from loans to US Treasury and then will become unable to cover all its expenses (Karger & Stoesz, 2009).
Secondly is the lack of adjustments for two decades though the circumstances have changed greatly. The economy and the society have evolved rendering some aspects of the program irrelevant. Demographic trends have changed whereby the number of contributors to the program is declining relative to the beneficiaries. In 1960, the ratio of workers paying into the program to beneficiaries from the same stood at 6.1:1, this ratio shrank to 3.2:1 in 2008 and is projected to be 2.1:1 by 2040. Another factor is that life expectancy has rose and continues to do so meaning that retirees will get benefits for a longer period of time.
The Federal Reserve Chairman warns that this trend is long term. The surpluses accumulated after the payment of the benefits buys Treasury securities which are then put in the Social Security Trust Fund. This surplus was $2.4 trillion in 2008 which the government uses to fund the general budget becoming a component of national debt. The Board of Trustees of the OASDI projects that the government will owe the fund approximately $3.7 trillion by 2016 (Karger & Stoesz, 2009).
Proposals put forward to salvage the program
Considering the above situation, calls for reform to solve the social security program crisis have been consistent with some analysts calling the situation dire. There are also the proponents of privatization of the program mainly the conservatives. These argue that the program should be reformed such that there is less government control in order to orient it to the current development where the financial sector has evolved to handle such a program.
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Under this structure workers would be allowed to make a choice from a small number of investment alternatives approved by a government agency to which their payrolls would be invested in. these would then pay workers or their heirs after retirement through annuities financed from these accounts. This, they argue will allow workers to invest in securities that would bring high returns for workers and which would translate to a comfortable retirement rather than the meager benefits workers are receiving currently.
However, the proposal to privatize may not address the whole issue since the social security fund is based on three principles: providing benefits to workers and their heirs incase of retirement, death or disability; give higher annual benefits in comparison to their earnings for the workers with lower incomes; and give comparable wage rates to those who are close in age. Introducing individual accounts would deviate from these principles. The workers could also make the wrong investment decisions where they might end up losing. The benefits could also be given in lump sum in which case they can be outlived leaving the worker in poverty. Maintaining individual accounts also calls for administrative costs which would render the benefits less generous (Diamond & Orszag 2005; Koitz, 2001).
A viable alternative that aims at maintaining the principles of the fund while saving the plan from crashing would be a plan that addresses the changes in life expectancies and those of the labor market. This would shield the worker from loss from stock market crashes and inflation while ensuring that benefits lasts throughout the life of beneficiaries. The plan would also deal with long term deficits therefore ensure the stability oft the fund and the federal budget. The proposal would address three components that are making the fund unstable. First is the life expectancy component which has increased from 65 in 1940 by five years for women and four years for men and is projected to maintain this trend. The plan will make an modification to stabilize the changes in benefits and changes to payroll taxes by half each.
The second component is earnings inequality which has been increasing over the years. More and more workers are going over the social security taxable amount. The result is that their living standards are improving and therefore their life expectancies too which leaves the low income earners at a disadvantage. This renders the funds principle of providing lower income earners with a relatively more generous benefit than their wages diminishing.
The adjustment the proposal suggests will put a gradual rise in maximum taxable earnings and a gradual modest benefit reduction on relatively higher income earners. The third component is the legacy of debt history generated in the early years of the fund as early beneficiaries contributed less and got the full benefits. This means that the current generation will get less and less benefits. This makes the fund to service a debt that never ends. In order to deal with this, the proposal will make three adjustments. First gradually make social security universal. This way every American worker bears the burden of the past generosity.
Secondly, a legacy tax on earnings above the maximum taxable base would be introduced so that high income earners contribute to paying the debt in proportion to their earnings. Finally, introduce a universal legacy tax on future workers and recipients (Koitz, 2001).
Diamond, P. A., & Orszag, P. R. (2005). Saving Social Security: A Balanced Approach. Bookings Institution Press.
Jansson, B. A. (2005). The Reluctant Welfare State: American Social Welfare Policies Past, Present, and Future. Thomson Brooks/Cole.
Karger, H., & Stoesz, D. (2009). American Social Welfare Policy: A Pluralist Approach. Allyn & Bacon.
Koitz, D. (2001). Seeking Middle Ground on Social Security Reform. Hoover Press.