Social Security
Social Security is a hot topic of debate today,
since most American's believe
that the system is near collapse. The trust
fund that Americans have been paying
into for Social Security is likely to
dry up in 2029 due to the large number of
baby boomers heading into
retirement. Franklin Roosevelt set up Social security
to help the people that
had worked and Struggled all their lives in honest toil.
Social security
was set up to accomplish two main goals. The first goal of
Social
Security is to act as a disability or life insurance policy that
protects
almost all Americans. Currently, there are seven million survivors
of deceased
workers and four million disabled Americans that receive income
support from
Social Security. The second goal is to provide lifetime
retirement benefits that
rise with inflation. Social Security payments for
retirees are needed to keep
half of the elderly Americans above the poverty
line. A large number of baby
boomers believe that they won't see a dime's
worth of Social Security benefits,
and most younger people assume that once
they have reached retirement the
program will be gone. There have been many
proposed solutions to the Social
Security problem. A first possible
solution is to dramatically change the Social
Security Payroll Tax.
Another proposal is to change amount of benefits of the
provided by Social
Security. A third reform proposal includes investing Social
Security
money in stocks either by the government investing the money or by
setting up
mandatory IRA investing. Another major development in the future
of
Social Security is the recent proposals made by President Clinton's
Advisory
Committee on Social Security. In January of this year the
Advisory Committee on
Social Security presented a report of strategies to
save Social Security.
Shortly after the 261 page report was released
there was a huge increase of
debates and criticism over the future of Social
Security. The issue facing
American today is when and how to reform
Social Security. Although the American
public and political groups are
unwilling to accept the burdens of social
security reform, extensive reform
is needed soon to continue paying the current
benefits to American citizens.
A change in the Social Security tax is a possible
factor of reform to bring
the Social Security program back on track. Currently
the Social Security tax
is a flat-rate tax paid on all employment earnings up to
a specified limit.
Due to inflation the limit is increased every year currently
it is just over
$60,000. This tax is much harder on a lower income individual
because the
higher income individual is only taxed on their income that is below
a
certain amount set every year. It has been proposed that if the limit on
the
payroll tax were lifted, two-thirds of the projected Social Security
deficit
would be eliminated. Once the limit on the payroll tax is lifted a
rise in the
tax rate of the employers and the employees by 1.1% is predicted
to be enough to
solve Social Security's problems. This is assuming that two
evasive actions take
place. First the government will have to keep its hands
of this extra tax
revenue gained by the tax increases. Second the proposed
solution will only have
a chance to work if it is started immediately while
the baby boomers are still
able to add a little more cash to the trust fund
for there own retirement. This
solution isn't likely to be implemented by
today's political system. The
advisory council on Social Security would not
pursue the lift of the limit
because the support of the wealthy voters for
Social Security reform would be
lost. Americans are also weary of Social
Security tax increases. The middle and
lower class voters would also not
support a Social Security tax increase. A
recent poll by Money magazine found
that 70% of the public is unwilling to pay
more tax than the current 6.2%
rate. Another proposed solution to Social
Security's problems is a to
decrease the amount of benefits received by
retirees. The first way to reduce
the amount of benefits that are being paid out
is to adjust the CPI. Sen.
Daniel Monynihan of New York (Dem.) has proposed that
a 1.1% cut in annual
cost-of-living adjustments for pensioners would be a
reasonable solution to
Social Securities problems. The adjustment of the CPI
would reflect the
belief by many economists that the CPI overstates current
inflation. He
claims that this would almost completely solve the problems in the
Social
Security program by insuring that the expected inflow of funds would
equal
the expected outflow of benefits for future decades. An alternate approach
to
lowering the amount of paid benefits is to raise the retirement
age.
Currently the retirement age is expected to rise from 65 to 67 in
2037. A recent
poll taken by Money magazine found that 70% were in favor of
raising the
retirement age to 67 by 2016. This would decrease the amount of
benefits being
paid out, and give two more years for these individuals to put
money into the
system. Another proposed solution that would also lower the
amount of benefits
paid out is to cut benefits for the prosperous retirees
with incomes above
$50,000 dollars a year. The biggest problem with cutting
benefits of any kind is
that any politician that proposes cuts will instantly
lose support by elderly
that count for a major portion of the voters, so
cutting benefits is almost
impossible in our political system even if the
cuts are very small. A politician
would also be unwise to implement benefit
cuts only for prosperous retirees
because the support of the wealthy would
also be lost. The third major reform
proposal consists of investing the
Social Security tax in the stock market. The
biggest question for this type
of reform is whether taxpayers would decide where
to invest there tax money
or would the government choose for them. An individual
on this type of plan
would be required to invest a portion of there income in
stocks, bonds,
mutual funds, bank CDs, but not in gambling or other wild money
making
schemes. The tax payer on this type of program would then be able to
withdraw
their investments once there reach retirement age. The government would
also
insure that the retire still receive a minimum return even if
their
investments fail. The biggest advantage of this IRA style approach
would be that
Americans will finally be in control of their own
retirement fund. This proposal
has many advantages for politicians and voters
of all ages. There would no
longer be debates about retirement ages and you
could make your own choice on
when to retire. The debates on the how to
measure the rate of inflation with the
CPI to would no longer affect
benefit payments. The stock market could flourish
from the added revenue of
future retirees. The increase in investing also could
improve the state of
the American economy. There are a few drawbacks for this
type of reform. The
biggest is deciding how to finance Social Security for
people retiring before
this reform, since Social Security is run as a pay as you
go system. Social
Security is considered a pay as you go system because people
paying Social
Security now are paying for the already retired citizens.
Financing the
retirement for people before the reform isn't a proble, since the
baby boomer
generation is creating a $50 billion a year surplus. The baby
boomer
generation has also created a $500 billion surplus from recent years
which will
be enough to finance the their retirements. The other option is
for the
government to invest Social Security trust funds in the stock market.
The
advantage of this is that if market trends continue the government will
generate
gain an additional after inflation interest rate of about 7%.
Although this
option has many problems that will keep it from being a
solution. This option
would give the government a massive control of the
private economy. It is hard
to believe that the government will be able to
keep a hands off approach when it
controls huge blocks of stock in companies.
The American public doesn't have
enough faith in the government to trust that
it will be able to invest such a
large sum of money without being swayed by
political pressures. The new demand
for the stocks will decrease the demand
for bonds thus raising bond interest
rates which could hurt the economy. This
approach also doesn't have a plan of
action for slumps in today's volatile
market. Recently, the White House's 13
member Social Security Advisory
Council released three reform approaches. These
reform proposals are
different variations of investing Social Security taxes in
the stock market
and the use of private savings accounts. In each proposal by
the Advisory
Council on Social Security the benefits of retirees are maintained
and taxs
are also held at the same rate. The most popular of these approaches
was
supported by six of the members. This plan would keep Social Security
a
government-run retirement system. It calls for a study of investing up to
40% of
Social Security surpluses in the stock market. This plan is
strongly backed by
labor and retiree groups, but it may not be accepted
because of fears of
government ownership of the stock in private companies.
The least favorite
proposal among the council is only supported by two
members. It would require
all workers to put 1.6% of pay into mandatory
government-run individual accounts
that offer a choice of stock and bond
investments. At retirement, account
balances would be paid out as annuities
for the life of the employee. Few people
are strong supporters of this
variation, but it could be come a model for
compromise among the councils
three proposals. The final approach is supported
by five of the council's
members. This plan would divert into savings accounts 5
percentage points of
the 12.4% payroll tax paid by workers 54 or younger and
employers. The
remaining 7.4 percentage points of tax would help fund a the
basic Social
Security plan. This plan could become the standard plan for
radical
reformers, but it is likely that it will not be supported by
congress. The
private savings accounts could be good for the economy. Instead
of spending
almost all taxes from today's workers immediately as retiree
benefits, the money
will be placed in savings accounts that will grow by 2.5%
of the GDP every year.
This rate will be maintained as long as stocks and
bonds maintain the returns
they have generated in the past century. My own
proposal under ideal conditions
would not use the approach of investing in
the stock market. I am not that
excited about investing in the stock market
because I don't believe that today's
bull market will last. Although in order
for my most aggressive type of approach
to work there would have to be a
substantial tax increase and an adjustment of
the CPI, and I could never get
enough support for my proposal from the wealthy
or the retired citizens. In
order to make a proposal that would have any chance
of making it through the
house and the senate I have already compromised on
investing in the stock
market to reduce the increase in taxes and to keep from
decreasing benefits
substantially. I propose that to begin reforming Social
Security we need
to first adjust the CPI. This would cut down on the benefits
for those
receiving Social Security payments. Then I would propose that a law be
passed
to keep the governments hands off this money so we can gradually work our
way
away from the pay as you go system into a system that would insure
everyone
over 35 would be receive benefits under the traditional system.
Everyone under
35 would start having by having 4 percentage points of
there Social Security tax
put into individual IRA's. The percentage of the
Social Security tax that is put
in the IRA's would be gradually increased
until the benefits for everyone over
35 have been paid for. After
everyone over 35 have had there benefits accounted
for in the budget the
amount of the Social Security tax invested in IRA's will
stop at 8.5
percentage points of the 12.4% rate. The left over Social Security
tax will
then be invested in government Treasuries, or it would pay for a
basic
insurance plan that would be provided to the public. The amount of the
tax
invested in either of these areas would completely depend on America's
demand
for benefits from the insurance. This insurance would cover the same
goals of
the current system, and it would provide an allowance to anyone that
doesn't
meet a minimum benefit level from their IRA's.