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Social Security Reforms in the United States

Social Security Trust Fund according to Diamond & Orszag (2004) is ‘the way by which the federal government of the United States (US) accounts for surplus payment from employees and employers to the Social system that are not needed to pay current benefits expenses’ (p. 4). Kollman and Nuschler depicts that although the system displays surplus funds currently, in the long run (by 2041) the funds will be exhausted and only 73% of the system’s benefit allocation will be done with what is being received currently (2002, par. 1). Further, Kollman and colleagues state that the projection on the system’s expenses would be 14% more than its receipts over the next 75 years (from the year 2002). In 2025, people or workers contributing to the program will grow by 14% as compared to those who will be benefiting as they will grow by 74% (2002, par. 1). This has urgently called for the Social Security system to be reformed to cushion the adverse effects in the future.

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The benefits of Social Security funds are slowly running out. An article in Newsroom Solution, 2009, warns all Americans below the age of 55 to stop relying on Social Security for retirement padding but rather, should start investing (par. 1). This is due to the reason that benefit allocation of the system is presumed to be more than the income. Further, workers currently contributing into this system are likely to reap fewer benefits during their retirement age than the current retirees. Caplinger (2007) reports that Social Security will run comfortably till the year 2041(par.3), but Sloan (2008) disagrees with Caplinger’s view. Sloan (2008) states that the exaggerated prediction of Social Security being saved is not realistic, since problems will crop up when the Security will start cashing out more than it receives (par. 2) as from the year 2008. Sloan further states that the Social Security Fund does not own any asset rather it holds treasury securities. Therefore, this cannot help the government to reduce its deficit as its part of the federal government.

Kollman and colleagues denote that, the revenue of the Security will increase to $7.2 trillion but the system subsequently will run into depletion due to increase in payouts (par. 3). At this point, other receipts will be needed to pay up for the deficit, but if there is no other government revenue to pay up the deficit, then the following might be implemented; increases in taxes, reduction of spending or borrowing. A big number of people do not have faith in the Social Security system as they foresee that it will be under par to their future expectations.

Social Security reform has proposed an increase in taxes and this has brought about mixed reactions in the public. In 2005, Hederman, Beach and Grossman pointed out workers were paying 6.2% tax of their wages towards Social Security and employers added 6.2% on the workers contribution. In reality, the workers gave up 12.4% of their wages towards the Security fund (par. 5-6). In addition to this, Social Security trustees are estimating, and at the same time proposing an increase of 1.89% on the payroll tax to go up to 14.29% in total. Their prediction is that the increase in the taxes will help to reduce the deficit in the Social Security system which is meant to occur later on in the future. An average worker might oppose this proposition as it has a negative impact on their household budget. Hederman and colleagues carefully points out the impact of increase in taxes on the US economy as follows (par. 4);

  • First, it will have an effect on jobs – increase in taxes will result in increased labor costs and consequently reduce employment levels.
  • Hederman and colleagues denote a spill over effect on the economic growth of US. The increased taxes will result in reduction in the Gross Domestic Product of the US.

In general, payroll taxes have been increasing over the years aiming to increase contribution in the Social Security fund. The table below shows the percentage of payroll tax increase from 1945-2030.

Year 1945 1950 1955 1960 1965 1970 1975
Percentage
of payroll tax
2.00 3.00 4.00 6.00 7.25 8.40 9.90
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
10.16 11.40 12.40 12.40 14.59 14.59 14.59 14.59 14.59 14.59 14.59

A table showing the changes of payroll taxes in percentage, by Rodriguez J.L (1997).

N.B: In the year 2000 – 2030 the percentages of payroll taxes are projected.

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On the other hand, baby boomers have reached their retirement age, the first group, in the year 2008 after attaining 62 years. This poses a great challenge to the Social Security system of the United States. The expense of the fund will be more than the income received. This is due to the fact that the population of people beyond 65 years is rapidly growing than the working population. Hence the fund will be depleted fast. In 1935, the founding year of Social Security, life expectancy at the age of 65 was twelve and half years but currently it is running at eighteen years, future projection is 19.3 years in the year 2030. Also, as the number of those benefiting grows, tax rates are still intact within the current law according to a publication of National Academy of Social Insurance (n.d, p.9). Therefore, the incoming funds cannot be stretched to accommodate the growing population.

All together, Social Security fund has short term benefits, and these benefits accrue to the baby boomers. As time passes, the situation also worsens and if the government does not act immediately, the baby boomers may also experience reduced benefit payments. The children (current workers) of baby boomers are worst hit. The reason being, what is currently available or being contributed by the current workers in the fund, cannot sustain the era of benefit payments. The workers are therefore obligated to dig deeper in their pockets to support the system. As stated earlier, taxes are bound to increase and even a reduction in government spending will be experienced. Consequently, the ratio of the people drawing benefits to that number of those paying into the Social Security is bound to reduce by 2030. This implies that the baby boomers may have their benefits being reduced as their children (the current worker) cannot support them fully.

The Social Security fund has been able to achieve its set goals namely; reduction of poverty level and provision of minimum standards of living of the old, in the previous years. However, offering the same treatment to the current and future generation becomes a challenge. Strategies and propositions have been put up to suppress and eventually delete this problem. Liebman (2005) suggest that reuse of the tax code which was in use at the President Clinton era will bring forth more than enough surplus revenue to the Social Security fund (par. 4). Further he says that the proportion of American with savings to supplement their income from the Security fund is minimal. Therefore, the younger generation should start saving at an early age. This will enable them to supplement their income from the Security fund and also maintain their standards of living once they retire (par. 5).

It has also been suggested that the government should reduce their expenditure equivalent to the deficit experienced in the Social Security fund. The amount saved will thus be diverted to the system and remove the imbalance experienced. The suggestion of borrowing has also been considered. The board of trustees is meant to approach the government and borrow money to fill up the deficit. Another key reform proposed is that workers should have personal retirement accounts where they can save part of their payroll taxes. Workers should also have safe investments which will guarantee them safe retirement benefits.

To conclude, the United States of America should focus on the danger predicted in its Social Security fund system and derive ways of avoiding it. The largest population of baby boomers has already started reaping their benefits but the future for them is uncertain. This is due to the reason that the Social Security fund is faced with imbalances caused by demographic factors. People supporting the system are less compared to those reaping benefits from the system. To cushion the future, people are encouraged to save and invest elsewhere so as to have a better retirement period.

Reference

Caplinger, D. (2007). Social Security is saved!. 2009. Web.

Diamond, P.A. & Orszag P.R. (2004) saving Social Security: a balanced approach. Washington, D.C: Brookings Institution Press.

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Hederman, R.S.Jr., Beach, W.W., & Grossman, A. (2005). The unacceptable costs of raising payroll taxes to “save” Social Security. 2009, Web.

Kollman, G. & Nuschler, D. (2002). Social Security Reforms. Domestic Social Policy Division, congressional research service. 2009. Web.

Liebman, B.J. (2005). Reforming Social Security. 2009. Web.

Newsroom solutions, (2009). Is Social Security really running out? Web.

Rodriquez, J.L. (1997). Social Security privatization in the United States and the Chilean experience. Washington, D.C: Cato institute.

Sloan, A. (2008). Social Security is running out of time. 2009. Web.

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