Social Security Long-Term Solvency Problems

Social Security is the federal insurance program in the United States handling Old Age, Survivors, and Disability Insurance (OASDI). Established in 1935, Social Security is funded by taxes from salaries and contributions from those in business or self-employed people. Internal Revenue Service (IRS) is the agent that collects them. The income collected from the taxes is managed by the Social Security Trust Fund. It is, therefore, a requirement that all persons earning in the United States contribute to Social Security Income. This paper will review the Social Security long-term solvency problems and probable solutions.

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Solvency could be described as the capability of a company to cater to its long-term financial obligations. The opposite of solvency is liquidity which has to do with short-term needs. Today, the Social Security Fund is able to pay all the beneficiaries and maintain a surplus (Tannahill 1). This trend is destined for a change as predictions indicate that the insurance fund will not be able to fully compensate its members in the near future. There is a need to urgently address this long-term solvency problem. Collapsing of the fund would have devastating effects on the old population that depends on it.

In the near future, the fund will not be able to meet its financial obligations. Going by the available statistics, the fund will be receiving less income than its expenditure. By 2018, the beneficiaries will be drawing more money from the fund than it will be receiving from contributions. This is the time when so many people will retire after reaching the age of 62 years (Tannahill 2). The retiring group will comprise people who were born in 1946, a year perceived as the start of the boom for children. The simple explanation for the origin of the problem could be based on the fact that the people retiring now did not bear many children to secure the fund. As such, the fund will have more retirees to cater to than the workers contributing. Back in 1950, for example, the ratio of retirees to the working population was 1:16. Today, the ratio is 1:3, and very soon the trend will revert altogether. It would be right to imagine a ratio of 2:1 in the future.

Just like conventional medical care schemes, medical care insurance needs a lot of funding (Caswell 3). This means that the beneficiaries are also entitled to free medical care through the fund. Social Security will be incapable of footing the medical bills for its members in the foreseeable future.

Although the government has managed the fund for the period it has been in existence, it has also initiated problems. Over the years, the fund has been having surpluses in its budget. The government has always taken advantage of the surplus to bridge the deficits in the federal budget. At the moment, the surplus is about $100 billion. This is expected to change over the next ten years when Social Security will have annual deficits of $100 billion. The government has failed to secure the surplus for future use by the fund. Investing such money would have ensured the sustainability of the fund. When the government ceases getting any money from Social Security, it will be forced to increase taxes and cut on expenditures for some programs, further affecting development. Surprisingly, the same government is today doing very little to ensure the survival of Social Security. The policymakers are busy campaigning for medical care for all without formulating plans to safeguard the future of the fund.

The best solution for solvency problems is to stabilize Social Security and medical care financing. The first step should be to slash benefits that members are entitled to. This should be done using a formula that will take into account the number of contributors versus that of beneficiaries. The process will definitely have some effects on the Social Security budget. There is also a need to lower the medical spending (Caswell 1). This could be done by encouraging citizens to seek alternative medical care and strengthening of private insurance firms.

The government could also brace itself for cash injection into the fund to cater for the deficit. This means that any shortfall in the fund’s budget would be bridged by the government. Going by the forecasts, the government will therefore be required to give the fund $100 billion annually. The figure is also expected to rise every year. Despite being a workable solution, it will have far reaching implications as it will burden the federal budget that is already in deficit. It will also mean that the money meant for development and other programs will have to be reduced.

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The current taxation formula should be reviewed to broaden the tax brackets. Increasing the tax will ensure that the extra money is got from contributors to maintain the beneficiaries. According to the current ratio, this measure would see the tax rise to the levels that workers may not afford. This solution cannot therefore be applied on its own. It requires to be considered as a supplementary measure.

The mandatory retirement age should be raised to 65 years. This translates to three years of delayed benefits for the immediate workers to be affected by the change. If implemented, it could reverse the trend and enable the fund to increase its capital base in the three years preceding the new retirement point. The health of the workers whose retirement age will be increased should be taken into account. At this age, work pressure could lead to serious medical problems further burdening the medical care insurance. This solution should be used as an emergency measure to give the government time to put its house in order.

The government should work on reducing the cost of living. Once this has been achieved, the moral authority for urging beneficiaries to take lower benefits will have been achieved as well. For the workers, the marginal propensity to save and invest will be increased, which would mean that other sources of retirement security will be realized, hence reducing the pressure on the Social Security.

The government should consider eliminating the cap on taxable income. This would mean that all the income earned is brought on board in terms of tax. The measure would ultimately enlarge the fund. It would be a worthwhile undertaking as all low and high income earners will pay more taxes. There is an absolute need for action to be taken as soon as possible.

Works Cited

Caswell, Kyle, Timothy Waidmann and Linda J. Blumberg. “Financial Burden of Medical Out-Of-Pocket Spending by State and the Implications of the 2014 Medicaid Expansions.” Inquiry. 50.3 (2013): 177-201. Business Source Complete. Web.

Tannahill, Bruce A. “Social Security Retirement Benefits–The Basics.” Journal of Financial Service Professionals. 67.6 (2013): 27-30. Business Source Complete. Web.

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StudyCorgi. (2020, November 12). Social Security Long-Term Solvency Problems. Retrieved from https://studycorgi.com/social-security-long-term-solvency-problems/

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