Social Security Reform Term Paper

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Social Security Crisis

While the United States does not provide a pension and health care for all its citizens as some countries do, we do have a program designed to make sure that all our older retired workers have some money on which to live. Called Social Security, it also provides money to people who are so disabled before retirement age that they cannot work, and (depending on the age of the children), widows and mothers of covered workers who die before the children are grown (Toner, PAGE). One factor in American history that contributed to the establishment of Social Security was the Great Depression of the 1930's, which wiped out many people's savings and left them in severe economic distress.

PROBLEM

While the great majority of Americans are in favor of Social Security, it no longer works well as it was first organized. The problem stems from shifts in population. Right now there are about 37 million people who are 65 or older. Their social security benefits come from the contributions being made into the system now, both by workers and by the companies employing those workers. Right now, there are about five workers paying into the system for every one person withdrawing benefits. However, by the year 2035, we will have about 75 million people of retirement in age. In addition they are likely to live longer, which means they will draw from the system for a longer period of time. Between the doubling of retirees and the fact that the numbers of workers will not increase much, the Social Security system is headed for major fiscal problems (Reynolds, PAGE).

There is one other significant stress on Social Security's financing, and that is cost-of-living increases in benefits. Since the size Social Security benefits a person receives is based on the wages he or she earned while working, increases are also tied to wages. Each year, benefits are increased based on the growth of wages in the workplace. This increase does not always reflect real increases in income to social security. In addition, over time it substantially increases the person's benefits (Reynolds, PAGE). For instance, if a person received $750 per month their first year on Social Security, by their tenth year it will have increased to over $820. In fact, experts assert that 45% of the increase in benefits from Social Security is the result of these automatic increases. Because of this, an economic boom would not help solve Social Security's looming fiscal problem, because wages would probably rise because of the boom (Reynolds, PAGE).

HISTORY OF SOCIAL SECURITY

First called the Old Age and Survivors Insurance, or OASI, Social Security was started in 1939. Until 1983 it survived successfully on its current fiscal plan, a pay-as-you-go approach that works when there are enough people still working to support those who have retired or who receive benefits for other reasons. In addition to the FICA taxes paid by current workers and employees, Social Security has investments that produce income. Ideally, the system should have reserve funds that can cover pension payments for from six to twelve months, a protection against recessions, when employment is likely to go up, reducing FICA contributions (O'Donnell, PAGE)

The combination of FICA taxes backed up by investments worked well until the country did experience a significant recession in the early 1980's. The OASI trust fund, its backup funds for emergencies, plummeted from almost $38 billion in 1974 to only $21.billion in 1985. Social Security was spending more than it was taking in. By October of 1982 that fun had dropped to $10 billion, which wasn't enough money to pay benefits for one month. In order to meet its obligations, the OASI trust fund had to borrow money from other funds. Essentially, Social Security was bankrupt (O'Donnell, PAGE).

One of the things the OASI Commission did was to change the funding. Originally organized on a pay-as-you-go approach, the commissioners switched Social Security to an advance-funding system. This means that the Social Security fund is building up money as time goes by. This worked well in the 1980's: by December of 1983, the fund balance was nearly $20 billion. By the beginning of 1999 it had grown to over $680 billion, and the commissioners predict that by 2008 the fund will be over $2.1 trillion (O'Donnell, PAGE).

Although those who predict problems for Social Security predict difficulties several decades into the future as the ratio between workers and retirees shifts shrinks, the figures presented here do not take into consideration that the United States could, and probably will, experience another recession at some time. Economies tend to move in cycles, and recessions do occur over time. If the United States experiences a significant recession, that event could accelerate Social Security's financial problems just as it did in the early 1980's.

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Unfortunately the high predictions for money in the trust fund totaling trillions of dollars encourages some people to believe that Social Security is operating well on its own and is unlikely to face any more fiscal crises. It sounds like a lot of money, and it would be if the workforce-to-retiree ratio wasn't going to shrink so significantly.

SOLUTIONS

Reduce benefits: Several solutions have been proposed to make sure Social Security remains solvent for the foreseeable future. One of the more unpopular ones was proposed by Federal Reserve Chairman Alan Greenspan. He proposed that Congress should pass laws that would cut people's benefits. This is unpopular with those receiving Social Security benefits or approaching that point, because they have counted on that money when planning for their retirement (O'Neil, PAGE). Such an approach is a problem for politicians because it would alienate a large number of voters.

Increase deductions: Right now, nearly five people contribute to Social Security for every one person drawing from it, but by 2030 the ratio will be less than three to one, and by 2080, the ratio will be about two to one. This means that the burden of supporting social security will fall more and more on the shoulders of those still working unless changes are made. (Reynolds, PAGE). Eventually that tax burden will become more and more oppressive. Some, such as President Bush, believe that increasing taxes as this would require would increase the risk of a recession, presenting even more serious problems For Social Security (Toner, PAGE).

One possible way to increase Social Security taxes without weighing down those paying the taxes could be to increase the earnings cap. Right now, people only contribute to FICA based on their first $90,000 in earnings. If that number were raised to $140,000, the maximum FICA tax paid by workers would rise from a little over $11,000 to over $17,000. The downside to this solution is that people who contribute more when they work will expect to withdraw more when they retire. If that happens, the net gain to Social Security might be quite small (Reynolds, PAGE).

Privatization

President George W. Bush would like to see Americans be more self-reliant and depend less on Social security for their retirement (Toner, PAGE). He argues that the approach appropriate at the end of the 1930's does not reflect the financial knowledge and skills of today's workers. He proposes that workers be allowed to privately invest some of the money they would have otherwise paid as FICA taxes, making each individual more responsible for his or her retirement. Critics argue that Social Security should be "a guaranteed safety net" (Toner, PAGE). They argue that stock market investments are not guaranteed, so such a plan puts people's safety nets at risk. Critics see Bush's approach as putting them "at the whim of the stock market," something not every investor is comfortable with (O'Neil, PAGE).

However, Bush sees the privatization of some Social Security funds as an important goal, addressing it in his last State of the Union message. Critics fear that people will need investment advisors in order to make these investments and that they may or may not receive the information that is in their best long-term interests (O'Neil, PAGE). Critics also argue that Bush's approach can only make Social Security's future more uncertain. Since less money would go into Social Security, less would come out. The assumption is that the person's private investments would make up the difference, but there is likely to be great variation from individual to individual regarding how well their investments performed over time. Some critics believe that the privatization plan is actually an attempt to end Social Security over time and force each person to be entirely responsible for his or her financial security in old age (O'Neil, PAGE).

Do nothing: There are individuals who argue that we do not need to do anything because in actuality Social Security does not face any future financial crisis. Dean Baker, co-director of the Center for Economic and Policy Research, in fact, goes so far as to call it a "phony crisis." (O'Neil, PAGE) However, most people do not agree….....

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