The United States Social Security Act of 1935 instituted the beginning of a welfare-type system of benefits for retired and disabled persons. When it first began, the Social Security system brought in much more money than it was obligated to pay out. During the 1940s this system was used more as one of revenue for the federal government that anything else. It aided citizens after recovering from a deep recession, and was never meant to continue more than a few decades. Yet, here in 2006, the system has become a large part of American society. In the face of rising healthcare and prescription drug costs, it is one of the few aspects of old age that Americans have come to look forward to.
The majority of skeptics agree that the Social Security system is failing, and if things do not change, then soon enough it will not be able to fulfill its intended purpose. There are a few very viable solutions to fixing the problems that Social Security faces, however no real solution can come without some burden. There is the question of how the Social Security Trust Fund should be warped in order to meet upcoming needs. Taxes could be raised, or benefits for current Social Security recipients could be reduced. The minimum age to receive benefits could even be raised. Others believe that the cure to this economic nightmare lies in privatization. By privatizing Social Security, a more individual-driven, proactive system of self-taxation would be created. I believe that the alleviation of what will become an incredibly burdensome financial obligation for the US government lies in simply demolishing it where it stands today. It is unclear what the “right” answer is to the problem that Social Security will inevitably become, however an analysis of the system and its critics is the best way a logical solution can be manufactured.
The Social Security system was initiated by Franklin D. Roosevelt in 1935 as a means of providing income for workers who had retired and therefore could not provide a sufficient level of income in order to survive. At the same time, money also goes to people who can not or do not work, whether of disabilities or other reasons. The way the system works is that all tax-paying, income earning individuals must pay a Social Security tax, that is then pooled at the Social Security Administration. Then, to those individuals that qualify to receive benefits, payments are made. David C. Colander calls the Social Security system an “unfunded” one; by this he means that individuals that receive benefits are able to receive more per month than they had been putting into the system each month prior (Macroeconomics 393). This, he says, is because of the large ratio of payees to beneficiaries that the system enjoys (393). The surplus that the Social Security Administration registers each year is then used to offset the national deficit. Because the Administration has many more contributors than beneficiaries, the volume of money brought into the organization is far greater than the amount paid out. The real issue that Social Security is going to face, however, is when the amount of money received is less than that which the Administration is obligated to pay out. This will happen as a result of the large influx of retirees that the 2020s will bring. The baby-boom of the mid-20th century is the cause of this influx; however, it is an unavoidable issue that the government is better off facing sooner, than later. There are several “solutions” to this problem, but each has its pros and cons.
Colander tells us that in 1983, the government passed an act that set up, essentially, a trust fund in which all Social Security surpluses could be placed as a reserve (394). This would help offset the large number of beneficiaries that the baby-boom will evoke in the early 21st century. The problem with this method is that when the trust fund eventually does dry up, most likely near the year 2040, the Social Security system will be in crisis again. Trustees of the Old Age, Survivors and Disability Insurance program, another name for Social Security, believe that the only method of remedying such a state would be to act right now, either by increasing the Social Security tax by 2.02% or by decreasing current payout benefits by 13.3% (http://www.ssa.gov/OACT/TR/TR06/II_highlights.html#wp76460).
On the flipside, however, others believe that the privatization of Social Security is a better bet. The privatization of an institution with the magnitude of that of the Social Security system could not happen simply overnight. A gradual shift from Social Security tax payments to privately managed contributions would have to happen over a period of time. This would not, however, erase the obligations that the Administration has already made to millions of people that presently receive benefits. This is where the problem with privatization lies. If individuals stop paying into the system because their retirement contributions are privatized, then the money that the Administration needs in order to meet its obligations in paying benefits is instantly dried up. Regardless of how much money any trust fund may have accumulated over the last two decades, it was not made to support all the beneficiaries of the Social Security system strictly on its own. The principle behind the trust fund is that it would help the smaller influx of Social Security tax payments in financing the retirement pensions of all the baby-boomers. So this is where the most obvious and plausible solutions to the Social Security issue find themselves stuck in a rut.
Critics of the system have varying levels of skepticism for its future. Some believe that the financial problems the future will bring to the institution of Social Security are really not all that severe, and that small adjustments now can easily take care of any foreseen problems. Paul Krugman denotes the entire baby-boomer/Social Security issue as merely “a problem of modest size” (“Inventing a Crisis” 1). He reasons that if the US were to allocate money to a fund dedicated to alleviating any stress the Social Security Administration might face over the next twenty years, that such issues can be avoided altogether. Krugman jokes that the amount of funds necessary for this solution is less than what the US has spent in Iraq in recent years, and about equal to the amount of money that President Bush’s tax cuts have saved the richest people in America since their initiation in 2002 (1). Analysts like Krugman do not believe there is a real major crisis approaching in the realm of Social Security, however many others feel quite a bit stronger about the matter.
Michael Tanner, a chief analyst at the Cato Institute, is one of those skeptics that speak a little more critically of the Social Security “crisis.” There are many analysts that, like Tanner, can already sense the impending crisis that Social Security is going to bring to America. Tanner feels that the financial burden can be solved by benefit cuts and tax raises, as well as large government subsidies. This seems to be the general consensus, as we can see. What, however, Tanner feels is the “larger crisis” is the fact that “workers [are] forced to pay 12.4% of their wages into a system that cannot pay them the promised level of benefits” (“Signs of Crisis are Clear” 1). This touches on an entirely different aspect of the crisis at hand: the psychological one. Individuals will not be happy knowing that they are paying an excessively large amount of tax to support the baby-boomers, when all the money those people put into the system was squandered away by the government each year it was received. The fact that it seems incredibly unfair, I believe, will ultimately cause members of my generation to favor privatization. It appears as though the government is going to have to pay back a large amount of the money that it has used over the years as a result of revenue through the Social Security tax. This will have an enormous effect on our country’s budget, which is why cynics like Tanner are as critical about this crisis as they are. One thing, however, that everyone seems to agree on, is the fact that our government needs to act fast, and it needs to act now. The sooner a remedy to the financial crisis that lay ahead is engineered, the less of an impact it will have on everyone.
Keeping in mind that a solution to the Social Security problem must be enacted much sooner than later, the government and economists must not do a haphazard job of taking such action. Colander points out that the real problem facing our country in the next several decades is not so much the institution of Social Security itself, but the fact that as a large number of individuals head into retirement, they will stop producing real goods. At the same time, they will be consuming many more real goods than before, in the form of utilities, medicines, etc. This will throw off the current equilibrium between the aggregate demand and aggregate supply curves. What should be the government’s real focus in solving the Social Security problem, is trying to enact policies that will ensure that in the future, real aggregate demand will equal real aggregate supply (396).
What I propose to do, in attempting to handle the lopsided age distribution of our country’s population, is to abolish the Social Security system immediately. The government basically should just buy out the Social Security system. It would do this by writing everyone in our country who has contributed to the system in some way, a check. If you are poised on brink of retirement, and have been contributing to the system for 50 years, then you should receive an amount of money equal to the average total payout of social security benefits to individuals after they retire. If you have already received some benefits, or you have not contributed quite so much to the system, then the check you receive shall be based on an established prorated system, thereby ensuring equality for everyone. The scale for payouts would be determined by some type of government committee or panel. At the same time as these prorated payments would begin, the privatization of Social Security would begin, and there would be no more Social Security tax, or benefit payments. The only remaining purpose for the actual Social Security Administration itself would be to oversee the distribution of all the checks that would need to go out to all the working people of America.
Clearly, a massive payment of this type would cause all kinds of problems, including inflation and an immeasurable deficit. This is why such payments cannot be all at once, but instead must be spread out over a certain, extended amount of time, ideally between 10 and 20 years. Additionally, the payments must be set up so that each year the payments increase up through the very last year. For example: Say I am 40 years old, and have earned so much income and have paid so much money into the Social Security system; according to the prorated system of benefits return, I am owed $51,000 by the government, to be paid out over the next 15 years; the first year I would receive a check of say $1300, then each year this payment would increase by $300, so that by the 15th year I would receive a check for $5500; this would complete my payback, which I could have invested privately after receiving each check, in addition to more privatized financing of my retirement as a result of no longer having to pay a Social Security tax. While instituting this policy, the government would also need to raise taxes in order to help finance all of these payouts, which will require much more than what the $1.7 trillion that the OASDI Trustees Report claims the Social Security Trust Fund contains, can provide.
The annual deficit is expected to decrease over the next five years which means that the government will begin spending less money; surpluses beyond that look fairly healthy as well. Because there will be less deficit each year, and ultimately surpluses available to spend, it makes sense that the payments individuals will receive should increase each year to match the changing deficit. At the same time, these payments, once initially established in a finite value, will not be interest bearing and thus as the GDP also increases over time, the actual real value of what the government is spending will become much less. In a nutshell, with the extra money that the government will have to spend, combined with what’s in the Social Security Trust Fund, it will be able to pay individuals, as managed by the Social Security Administration, over long periods of time. This is because as GDP rises and inflation occurs, these payments become worth less over time, therefore the meatiest parts of the Social Security Administration’s “severance packages” will be distributed when they are worth the least. In this way, the government saves money, and most Americans do not know one way or the other what’s going, even though the system makes sense to them and seems fair.
Most analysts of the current Social Security system believe there are myriad logical courses of action that the government can and should take, that will ensure a good chance of solving the system’s problems. None of these “solutions,” however, can be implemented without a great deal of pain, financially and psychologically, to both the government and its citizens. This is why I feel that there is no other truly effective and viable solution than simply to disband the entire institution.
Works Cited
Colander, David. Macroeconomics. 6th. New York: McGraw-Hill/Irwin, 2006.
Krugman, Paul. “Inventing a Crisis (Synopsis).” New York Times 7 Dec 2004.
Social Security Administration, "2006 OASDI Trustees Report." Social Security Online. 30 May 2006. Social Security Administration. 30 Nov 2006 http://www.ssa.gov/ OACT/TR/TR06/trTOC.html.
Tanner, Michael. “Signs of Crisis Are Clear.” USA Today 1 Feb 2005.
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