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SOCIAL SECURITY SYSTEM.
Term Paper ID:28119
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Essay Subject:
Examines 3 options of reform for 21st Century. Background of system, programs, need for change.... More...
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Paper Abstract:
Examines 3 options of reform for 21st Century. Background of system, programs, need for change.
Paper Introduction:
INTRODUCTION
The elderly population in the United States is growing in number as people live longer and as the baby-boom generation reaches old age, and yet this older generation may have a more precarious existence than has been true in recent decades for that population. There has been much rightful concern about the elderly in America in an era in which the extended family no longer holds sway so that the elderly are more often completely on their own. Another concern has been related to the so-called entitlements in the federal budget--Social Security, Medicare, Medicaid, and welfare--and the impact a reduction, either by design or because the system is not secure, will have on the elderly. Some see the system as politically untouchable, while others consider ways to reform the system and reduce the costs.
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Jones, though, states, "Social security isnot facing a crisis" (Jones 25). This sort of change has already been recommended for specific SocialSecurity programs, such as Medicare, which faces a crisis all its own,along with the entire medical system over the next several decades.Demographic changes have been pushing the Medicare system toward acatastrophe, along with the Social Security system and other so-calledentitlements that are paid for by the younger generation. A trust fund is not as speculative as the IRA andother accounts recommended by those who value privatization, and such asystem would also not leave one segment of worker out in the cold whilebefitting a different segment. Kotlikoffsays that the system is in worse shape today than it was when some warnedabout it in 1983 (Kotlikoff 21). In 1956 the age atwhich women become eligible for some benefits was reduced from 65 to 62,and in 1961 men were given the option of retiring at a reduced level ofbenefits at the age of 62. In any case, the base is no longer able tofund the Medicare system as it did in the past. If we assume that the system is introuble, though, this options becomes less valuable given that this isprecisely what we have been doing for many years--raising taxes whilereducing benefits. Some see the system as politically untouchable,while others consider ways to reform the system and reduce the costs.Efforts to change the system are based on the view that without change, thesystem will disintegrate and serve no one. Tanner says this would be covered by havingthe government guarantee a minimum pension benefit, something lower than iscurrently promised or that would only kick in if the individual's accountwas below a certain level upon retirement (Tanner 19-2 ). Individuals would then be free to choose the fund manager who wouldbest meet their individual needs and could change manager whenever theywished. Later extensions includedseveral classes of workers not covered under the original law. Kingson and Williamson criticize some such proposals when they notethat this sort of change would undermine the basic objectives of SocialSecurity, for this would place American families at greater economic risk,especially the low and moderate income families. The Social Security system is funded by taxes paid into it bythose working today, while the money that goes out is paid to retirees whono longer work. The headquarters are inBaltimore, Maryland, and the administration maintains ten major regionaloffices and many district and branch offices throughout the country aswell. The older worker will be reluctant to accept raising theretirement age again. They already see the money paid into Social Security as beingsaved for them, which it is not, but such a fund would eliminate the kindof shortfall that occurs today when one generation is much larger than theprevious one, which is the real threat to Social Security at the presenttime. The Social Security program thus combinesthe insurance objective of wage replacement with welfare considerationsthrough SSI and similar programs (The Academic American Encyclopedia onlineedition). About $41 billion in medical benefits wasbeing provided under the Medicare program, with all of these totalsincreasing rapidly. The programs have shown rapidgrowth, which in turn reflects their value to voters. Such a raise issignificant but manageable and has been instituted before. Through the years, the level of benefits was gradually increased inan effort to keep pace with inflation. The Progressive Policy Institute, of which Clinton was a member forseveral years, has made several recommendations in this area. The Social Security Administration replaced the original SocialSecurity Board in 1946 and became part of the newly created U.S. In 1939, however, before any benefits hadbeen paid, the first of numerous extensions to the system was made toprovide benefits for survivors and dependents. However, the fact that many would have to be bailed out begs thequestion of how much this system would cost. In cases where any individual's contributions do notentitle him or her to the socially desired level of benefits, individualequity and social adequacy conflict, a matter that has to be resolved ifthe program is to survive. The first option is to keep the system operating by patching up theproblems in Social Security in its current form with a combination of taxincreases and benefit reduction. "The Hard Facts about Social Security." Challenge (November-December 1996), 16-18.Pear, Robert. The second proposal is to replace the current Social Security systemwith a new system that relies primarily on IRAs. Social Security payments are growing in real terms at about 6 percent a year, but Medicare and Medicaid are growing at double-digit rates (Miller 28 -281). The writers feel that the President should consider thechanges that are taking place in American demographics and find a way tokeep the system in balance. Works CitedThe Academic American Encyclopedia, 2 , online edition, Danbury CT.Baker, Dean. Some shift in the way the money ismanaged and disbursed is needed, and some degree of means-testing mighthelp reduce the burden, however unpopular it might be. This could be repeated, raising the age higher than 67.We could also reduce benefits to a better cost of living measure than isnow used and by reducing pensions to those who are well off. These arechanges that can get through the process but that do not solve the problemand that in fact may make it worse. What would beneeded to make the system fully solvent would be a net reduction inbenefits of at least 25 percent (Mitchell and Quinn 17). Another form of private account suggested by Tanner would be apersonal savings account (PSA), chosen by the individual employee andmanaged by the private investment industry in the same way as 4 1ks orIRAs. Departmentof Health, Education, and Welfare in 1953 (reorganized in 1979 as theDepartment of Health and Human Services). SSI is another program intended to correct inadequacies in thestate systems (The Academic American Encyclopedia online edition). In some ways, the system, has never recovered from thischange. A 4 -year-old male now will pay about $175, more in taxesthan he will receive in benefits. So far, they have not been, so perhapsthe public is ready to listen to new ideas and take a new approach. In 1983, Congressapproved changes in the social security law designed to restore thesolvency of the system. He is likely to offer them some otherconcession in order to gain control of this particular entitlement program(Hallow 26). During the195 s, for instance, state and local government employees, members of thearmed forces, and many farm workers, domestic workers, and self-employedprofessionals were taken into the system as well. The taxable wage base, or maximum amount ofearnings that can be taxed, is escalating as well, since the ceiling islinked to the growth in wages. This redistribution is crucial to the low- and moderate-income elderly who depend most on social security (Kingson and Williamson 29).Privatization would fail to provide what the Social Security system haalways provided--a floor of protection for all Americans and a shared riskin doing so. However, in order toeliminate the deficit that is currently estimated over the next 74 years,we would have to have an immediate tax increase of about 2.2 percentagepoints, from 12.4 to 14.4 percent of covered payroll. "The Social Security Sky Is Not Falling." Challenge (November-December 1996), 23-24.Marshall, Will and Martin Schram. New York: HarperCollins, 1994.Mitchell, Olivia and Joseph Quinn. There has been much rightfulconcern about the elderly in America in an era in which the extended familyno longer holds sway so that the elderly are more often completely on theirown. "Shortfall Posted by Medicare Fund Two Years Early." New York Times (February 5, 1996), A1, B7.Richman, L.S. . Thefact that they do not need the money does not assuage them, since they seethe money as theirs to begin with and as being returned to them when theyare older. There is some evidence recently that more Americans are willing totalk about such changes, though, as can be seen in the proposals recentlymade by presidential candidate George W. BACKGROUND Concerns about the Social Security system have been growing in recentyears with the perception that the system may be failing so that when thecurrently younger generations get older, the system will not have money fortheir old age but will be bankrupt. The generation after that will find thesituation even worse and will pay more than $22 , more in taxes thanwill be received in benefits (Miller 291). People really look upon SocialSecurity as an entitlement and believe, erroneously, that they are onlygetting back the money they have put into the system over a lifetime. Governmental efforts toreform the system have bogged down in arguments over how to do it, andwithout a comprehensive approach to change, the government has been makingsmall, often insignificant, and sometimes contradictory changes. Today, those paying in will likely never see a return onthat money when they get older because there are more and more peoplecollecting benefits and fewer people paying them into the system in thefirst place, at least in relative terms. RECOMMENDATION The third alternative is the best for making a change, and that is tocreate a permanent trust fund under government management for this purpose. The system covered more than 9 percent of the jobsin paid employment. The Social Security Act of 1935 provided retirement benefits only toretired workers themselves. Mandate for Change. Raising taxesin this manner might help, but it would be highly unpopular and might notbe passed. (In 1965, Congress also establishedthe separate Medicaid program.) The 1935 Social Security Act attempted to set up a system under whichworkers would receive at least as much in benefits as they had contributed,a goal that was considered crucial to public acceptance of a compulsoryprogram. The second aspect of reform they cite is afocus on fairness, and here is where the tax on higher-income recipientsenters: The new President should propose reforms for federal retirement and health programs that will ensure that wealthy people receive no more than their fair share of these taxpayer-financed benefits" (Marshall and Schram 37). ANALYSIS OF OPTIONS Analysts cannot agree on how badly off the system may be. These programs provide direct payments to maintain the incomeof retired or disabled workers, their dependents, and their survivors andto defray some of the medical expenses of retirees and their spouses at age65 and older. As a result of the rapid inflation, sloweconomic growth, and high unemployment that characterized the late 197 s,the fund experienced an increasing gap between tax receipts and outlays.In 1982, for the first time, the retirement fund borrowed money from thedisability and the hospital funds to pay benefits. Still,it remains an uphill fight for the most part, without a guarantee ofsuccess, and without any assurance that we will not have to keep raisingtaxes an reducing benefits indefinitely. This option is analyzed by Mitchell and Quinn, who note that in thepast, whenever we have seen problems in the system, we have usually chosento raise payroll taxes to meet the shortfall. "Is a generational conflict coming?" The World & I (May 1993), 24-27.Kingson, Eric and John Williamson. "The Assumptions Are Too Pessimistic." Challenge (November- December 1996), 31-32.Hallow, Ralph Z. Though the retirees' lobby has not been vocal, as noted, it is clearthat there is opposition to this plan and that reducing that opposition isan important element in getting the provision passed. This value hasseemed to preclude reform, and to get any reform at all it is necessary toestablish a popular basis for these reforms (Marshall and Schram 34-35). The concern is that as thepopulation ages, the burden on younger people to maintain the system willbecome too great, and the system will malfunction. The problem is increasing as the size of subsequent generationsincreases, and this means that while the current generation of near-retirees is likely to be able to avoid an impoverished old age even withtheir inadequate private savings, the baby-boomers will not be sofortunate: On its present trajectory, Social Security will be unable to sustain today's benefit levels by the time the boomers shuffle off to shuffleboard. New York: Berkley books, 1993.Miller, R.L. There is indeed no way totell how much it would cost without knowing how many people would fallshort, and that is simply subject to too many variables to make an accurateestimate at this time. The danger is evident first in thesize of the entitlement system: Entitlement payments on Social Security, Medicaid, and Medicare now exceed all other domestic spending. Would it reduce benefits in the long run,or are we only cutting back on the taxes needed to run the same system? TheInstitute has said that spending reforms in entitlement programs are a mustif we are to balance the budget and reduce the deficit. If funds for the upper tier were diverted from the current (already inadequate) payroll tax, as proposed, a transitional tax of about 1.5 percent of taxable payroll would be required over the next seventy years to finance the remaining unfunded liability (Mitchell and Quinn 17). In a social insurance plan, however, where universal andcompulsory protection is the goal, individual equity may be de-emphasizedin favor of social adequacy--a standard of living below which it is felt noone should fall. social security programs are financially self-sustaining--they are funded on a pay-as-you-go basis through payroll taxescollected in equal amounts from employees and employers during theworkers' years of active employment in accordance with the FederalInsurance Contribution Act (FICA). The Institutestates that the first aspect of this reform should focus on the basicrelationship in federal entitlement programs between working and receivingbenefits. This is a form of privatization in that it also depends on investing fundsand encouraging growth, but it places the onus for doing so on thegovernment and allows for a continuation of the safety net that has been soimportant up until now. By 1983 retired workers, theirdependents, and their survivors were receiving about $152 billion annuallyfrom the Old Age and Survivors Insurance (OASI) portion of the program,while Disability Insurance was dispensing about $18 billion to disabledworkers and their dependents. This is an appealing proposition to many because it emphasizespersonal responsibility, thus promoting a value that would have largerbenefits. Another concern has been related to the so-called entitlements in thefederal budget--Social Security, Medicare, Medicaid, and welfare--and theimpact a reduction, either by design or because the system is not secure,will have on the elderly. "Why Baby-boomers Won't Be Able to Retire." Fortune (September 4, 1995), 48.Tanner, Michael. Mitchell and Quinncite a precedent for this, noting that in 1983, income taxes were levied tokeep the system solvent and net benefits were lowered for high incomerecipients. It would continue indeed to fund everyoneat the same basic rate and could be managed in a way that allows for growthby increasing income through taxation as needed without reducing benefits. In the past, this has worked effectively because thenumber of retirees did not exceed a certain number and the people paying incould support it. The authorsalso suggests investing a portion of the trust fund in private equities inhopes of higher returns to continue funding at current levels (Mitchell andQuinn 17). The baby-boomersconstituted a very large population base, and upcoming generations arelikely to be smaller in number. Workerswith dependent spouses also receive additional benefits, regardless of thelatter's employment history. NEED FOR CHANGE The issue of what to do about different aspects of Social Securityhas been a thorny one for some time, and a number of groups have becomeinvolved in trying to create a system that would be fair without goingbankrupt. Reform of the Social Security system at any level has been made verydifficult by the popularity of the programs. At that time the 1935 principle of a fairrate of return was weakened, and benefits were based on average earningsduring a shorter period of coverage than the original base of lifetimecontributions. An analysis of theissue will lead to a consideration of three options and which might bestserve the needs of the nation. For that matter, it is not clear that the businessworld could absorb the increase in the number of workers that would resultif people continued working to an older age, and the plight of the olderworker is already a concern in the system. Tanner says that the system will beinsolvent by 2 9 (Tanner 19). "It's Time to Privatize Social Security." Challenge (November-December 1996), 19-2 . How viable this option is depends onwhether the system is really in as much trouble as it is claimed by some orwhether the system is in good shape. The new law accelerates the tax rate increasesscheduled for 1985 and 1989 and raises the tax on the self-employed to alevel equal to 1 percent of the combined employer-employee rate. This will not necessarily change the way people view the system,though. Of course, such a system would be risky and would leave manypeople exposed if they selected a poor manager or if the market changedthrough no fault of their own. The normal retirement age was raised to 67, a change to bephased in slowly over the next century--delaying benefits is the same as acut in benefits. The principal programs are: Old Age, Survivors,and Disability Insurance (OASDI)--now officially called Retirement,Survivors, and Disability Insurance--and Hospital Insurance (HI), orMedicare. The three options are as follows: M Option 1: Patch up Social Security in its current form with a combination of tax increases and benefit reduction. The system then becomes uncertain--would it solvethe problem or create a new one? These benefits are financed by a payroll tax that hasrisen from a rate of 2 percent at the inception of the program to more than13 percent by the early 198 s. The year 1957 saw the introduction of thenational Disability Insurance (DI) program, under which a separate fundwas established to provide cash benefits to workers over age 5 who becometotally and permanently disabled. Baker agrees and says that theassumptions being made about the system and its potential failure are toopessimistic (Baker 31). In addition, it is not clear if the growing economy couldsustain that sort of raise for long. Social security is a series of public programs designed to protectworkers and their families from income losses associated with old age,illness, unemployment, or death. Another aspect of this option would be to reduce benefits at the sametime until the system had enough to fund what was left. The 1939 amendments to the Social Security Acttries to resolve the conflict in favor of social adequacy because the needsof millions of the elderly were not being met by the old-age assistanceprograms in individual states. Older voterssupported Clinton in 1992, and they may shy away from him if they see himas giving away their benefits. . It is emphasized by the Institute writers that the present systemtends to redistribute wealth from middle- and low-income people to high-income people because benefits are not tied to income level but to lengthof time at work. Entitlements are growing faster than any other part of the federal government budget. The latter suggestion is highly speculative at best. M Option 3: Create a permanent trust fund under government management for this purpose. Medicare was introduced in 1965,providing medical benefits for those over 65 and creating yet anothersocial security fund to finance them. Reducing pensions to those whodo not need the money has been suggested many times, but it has not beenimplemented because opposition is so great. The term may also refer to a broadsystem of support for all those who, for whatever reason, are unable tomaintain themselves. The specific proposals made by the Institute areprecisely what Clinton has proposed: 1) tax 85 percent of the SocialSecurity benefits collected by retirees with incomes of $1 , and above;2) reform federal civilian and military pensions to modestly limit thebenefits of wealthy beneficiaries; and 3) modestly lower the cap inretirement-related tax benefits for well-to-do people (Marshall and Schram4 ). The writers note that Social Security contains a nationalcommitment to help working people provide for their retirement byguaranteeing them public pensions, and the size of the pension and othermatters are related to how much income has been subject to the retirementtax on work. If the projections of the shortfallare at all wrong, this might not be enough to bring the system undercontrol, leading to more increases. Economics Today. U.S. Participation in social security iscompulsory, and benefits are paid as an "earned right," or entitlement.For these reasons, social security is a form of social insurance,distinguished in the public mind from social welfare, or direct grants ofaid to the indigent, based on need and financed by general tax revenues(The Academic American Encyclopedia online edition). In the United States the term refers specifically toa complex of national programs that began to evolve with the passage of theSocial Security Act of 1935 and that are now administered by the SocialSecurity Administration. "Undermining Social Security's Basic Objectives." Challenge (November-December 1996), 28-3 .Kotlikoff, Laurence. Again, this approach would be difficult to get implemented today.For one thing, the last raise was touted as saving the system, and it didnot do so. The authors note thatmeans-testing and privatization are never explained in terms of how theywould affect the current transfer of resources among different incomegroups: As currently structured, social security in effect provides a better return on contributions for low-income workers than for high-income workers due to its redistributive benefit formula. INTRODUCTION The elderly population in the United States is growing in number aspeople live longer and as the baby-boom generation reaches old age, and yetthis older generation may have a more precarious existence than has beentrue in recent decades for that population. M Option 2: Replace the current Social Security system with a new system that relies primarily on IRAs. This mightbe done as the two-tier system cited by Mitchell and Quinn, a system inwhich the lower tier would be a flat-rate minimum benefit focused on incomeadequacy, independent of earnings and contribution level, while the secondtier is a mandatory defined contribution plan, such as a 4 1k system, thatwould link benefits directly to contribution levels: To move the system toward solvency, the flat benefit would be quite low, on the order of two-thirds of the poverty level. This is a form ofprivatization, requiring each person to put a certain amount of money intoan individual retirement account as a hedge against retirement. Far fewer younger workers, too, can count on receiving company-paid pension benefits, since employers are increasingly leaving their employees to assume responsibility for their own retirements (Richman 48).The baby-boom baby-boom generation will find that the system is not such agood deal. Bush, proposals that in the pastwould have been political suicide. Recently it was noted that thesystem is running out of money earlier than originally predicted (Pear A1). Creating a trustfund would be a way to start managing the money better while assuring low-and middle-income people that they were being given the same benefits asbefore and that they would not have to become fund managers themselves todo it.
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