The Social Security Act was brought into effect on August 14, 1935. Taxes had been collected for the first time in January 1937, and the first lump-sum payment was made that same month. Regular ongoing monthly benefits started January 1940. In 1939, the law included benefits for the retiree’s spouse and children, called “Survivors Benefits” (New York Life 1). Disability benefits were then added in 1956. The current version of the Act has been reformed to include social welfare and social insurance programs (2).
Social security is a social insurance program that is funded through dedicated payroll taxes. The best way to insure that Social Security does what it was intended to do – help provide a secure and comfortable retirement – is through a system of personal retirement accounts, which will allow workers to privately save and invest their Social Security taxes. Retirement plans were first introduced to New Jersey teachers and New York Police Officers in the early nineteenth century. Many privately owned businesses began offering their own retirement benefits for their workers, known as formal pension plans.
Government Social Security only occurred after the Great Depression. In 1935, Franklin D. Roosevelt advocated the public provision of retirement income during his presidential champagne, launching an Old Age Pension System that would provide annuity benefits to retired workers (Galasso 184). Initially, the plan was conceived as a fully funded system that would provide benefits without having to raise taxes or the national debt. But only a few short years later in 1937, the security system became a PAYG (pay as you go) system.
Benefits were also extended to cover the retiree’s family/dependents. Later, an extensive plan was added to the program when the addition of Disability Insurance (DI) was inserted to protect workers and their dependents from income losses due to injuries during their work life. Signs of a breakdown occurred in 1972, when the cost-of-living increased, causing inflation and changing the benefit calculation to an average growth rate system. Currently, Social Security is facing an overwhelming fate. It is estimated that major deficits will arise within the short span of 10 years.
Social Security will be bankrupt, and many of those who are paying into this fund will receive a 0% return. One may ask how this could be when people have been paying these extensive taxes since 1935. “For 25 years, [Social Security] has been taking in more than it has been paying out, and now has a $2. 5 trillion reserve fund invested in government bonds” (Bethell 2). What this means is that the government has been reaching into the Social Security funds of the American people and replacing this money with IOUs, bonds which were placed without the intent of ever paying them back.
The money has been used for decreasing the National Deficit all the way to donating for natural disasters in other countries. However, Hal Gershowitz, founder and CEO of New Century Information Services, contends that the system was ruined by other means. Sixty years ago, more workers were available and were able to support the benefits of one person. Since then, the ratio has dropped to 3. 3-to-one. It is estimated that in 40 years, the ratio will have dropped over a point, reducing it to 2 contributors to every 1 worker.
With this sort of decline, support for benefits will be impossible (1). Presently, there is a leftover of collected taxes. Mark Brandy, professor of economics at Ferris State University, explains how, in 2008, Social Security collected nearly $805 billion and the money paid to cover benefits and administrative costs were $625 billion. This left an additional $180 billion that was paid toward Social Security but never used. Since then, this surplus has grown totaling $2. 4 trillion (2). The obvious question is where did the money go?
Ideally, this money should have remained in the services’ account to protect against situations as the existing one. With the cost of living increasing, the loss of workers rising, and the number of retirees growing, extra money is needed to cover these expenses. But, instead of taking it from the extra funds collected, the money was taken and spent on other non-Social Security programs by the government. The Treasury Department gave permission to the Social Security Act (SSA) Program to replace the money with bonds held in the Trust Fund.
With this type of lending, the government is in debt with itself causing what is called intergovernmental debt (Brandy 2). What the Trust Fund essentially represents is the amount of money needed to be collected a second time to relieve this debt. It is clear that the government is highly unqualified to take care of the people’s money or retirement funds. Its relentless need to spend allows it to outright steal from its American citizens. If any other company would do this, it would be guaranteed that someone would be sent to prison.
The government is the exception and also one of the main reasons for the system’s failure; but the American Citizens are the ones who will suffer the most. According to the Employee Benefit Research Institute report of June 2010 “…Social Security has helped to drastically lower the poverty rate among the elderly – from 35 percent in 1960 to less than 10 percent today. [Social Security] provides 40 percent of the income of people 65 and older,” (qtd. in Bethell 5). With such a need for this fund, it is a shame that the next generations will be unable to benefit from it.
Most of the people currently collecting Social Security rely on it considerably. There is no wonder many encourage the saving of Social Security. According to Michael Tanner, director of health and welfare studies at Cato Institute, by 2018 the program will begin running a deficit, paying out more in benefits than it takes in through taxes. The resulting shortfall will necessitate at least a 50 percent increase in payroll taxes, a near one-third reduction in benefits, or some combination of benefit cuts and tax increases.
Overall, Social Security faces a long-term funding shortfall of more than $25 trillion (53). The idea of saving Social Security is a misguided statement as saving the system does not in fact fix the system. A reform is needed to do all the things Social Security was intended to do: provide security for retired seniors and provide the best return on an individual’s money. Instead of saving Social Security, a transition should be imposed: a new and better retirement system based on individually owned, privately invested accounts.
Such a system would d allow workers to accumulate real wealth that would prevent their retiring into poverty (54). Public discussion about the reform of Social Security usually revolves around the long-term efficiency of such a plan. As noted from the very beginning, Social Security’s main objective was to secure and prevent the financial destruction among the elderly, who by their old age are presumed to be less able to fend for themselves. It can be understood that many young workers may be uninformed, uninterested or unable to formulate a personal savings plan for themselves.
The concern for Social Security is not only the elderly, but the young workers that will eventually need this cash reserve to provide for themselves and families when work can no longer be physically possible. Michael Tanner, author of Social Security and Its Discontents, states “The coverage of everyone is usually said to be a necessity because the young are myopic and would not perceive the need to accumulate assets for their old age in the absence of a government mandate. However, a mandate does not require a pay-as-you-go program.
To the extent that compulsory saving is desired, it can be attained more directly with a system requiring individual accounts and the accumulation of privately held assets” (48). Many critics believe that there is no real problem with Social Security and that the only problem lies in the financial division of the program. Therefore, solutions offered generally do not deal with the real problem. Focus is not directed to improve the low-wage workers benefits, fairness to women or minorities or even increasing rates of return (David 2).
Not surprisingly, since the idea of saving Social Security only consists of altering it, the most commonly offered proposition is the raising of taxes. “The National Academy on an Aging Society suggests that there is no limit to the amount of taxes American society can bear if they are used for a good cause such as preserving Social Security” (qtd. in Tanner 167). These people see Social Security as a good, much needed program for society. Therefore, they feel its maintenance is one that can demand whatever price tag required. The idea that raising taxes is the one plausible answer is absurd and laughable.
The terribly painful process to moderately raise taxes would result in the destruction of jobs and economic growth. As Table 1 shows, the tax increase needed to restore Social Security to solvency is extremely large. The government must acquire new funds to maintain benefits after the system begins running a deficit in 2018. In 2020, an additional $536 per worker will be necessary to maintain the benefits of retirees (Tanner 168). The increased need from each worker will only increase as time moves on, leaving the working class virtually incapable to finance the program.
Moreover, an increase in taxes like this would be most detrimental to low-income workers, who are least able to afford it. This would in turn, effect the workers family, dependents as well as resulting in a major loss in economic growth. An alternative to the reaction of increased tax rates suggest targeting the tax increase on upper-income workers. Vincenzo Galasso, Associate Professor of Economics at Bocconi University quotes, “In 2003, workers pay Social Security taxes on the first $87,000 of wage income. Income above that level is exempt from Social Security taxes.
Approximately 84 percent of all wage income earned in the United States falls under the cap and is subjected to the tax”, (Galasso 189). For workers who earn above the current cap of earned wages, the amount of tax increase would increase to 12. 4 percent, paying more than half their income in federal taxes alone. Over the next 10 years, it can be expected that an economical growth loss as well as millions of job losses will result (Tanner 171). In Chile, the Pension Reform law of 1980 introduced a revolutionary innovation.
The law gave every worker the option to remain under the government-run pension system or putting the former payroll tax money toward a privately managed personal retirement account(PRA), resulting in 95 percent of the workforce making that switch (Tanner 189). The change has been visibly noticed leaving the private investor with higher returns and personal management of their savings. The Retirement benefits with the new system allowed workers yielded paybacks 50-100 percent higher than the PAYG system (Bethel 5).
The success seen in Chilean pension reform has made its influence on other countries including Latin America and Europe. In a country that utilizes the personal retirement account, neither the worker nor the employers pays a payroll tax. Instead, 10 percent of his wage is deposited, tax-free, by his employer each month into his own PRA (Tanner 190). This allows the worker to have sufficient funds in his account to fund his retirement as well as it being completely tax-free on its return. A worker is not limited to 10 percent deposited wages as he is allocated up to an additional 10 percent each month.
This rate of deposited wages equals approximately 70 percent of his final salary (Galasso 147). Workers have the opportunity to choose any one of the private pension fund companies to manage his PRA. This also creates healthy competition while creating a higher return on investments. Michael Tanner explains in his book that upon retiring, a worker may choose from three general payout options. The first allows a retiree to use his capital in his PRA to purchase an annuity from any private life insurance company.
Second, a retiree may lay leave his money in his PRA and make programmed withdrawals, subject to life expectancy of the retiree and his dependents while still being able purchase a life insurance policy. The third can be a mix of any of the previous two (Tanner 193). Each allow personal investments in stock, mutual funds or any other investment opportunity they see fit. The PRA program solves the typical problems of a pay-as-you-go system with respect to an aging population and the number of workers per retiree.
Personal retirement accounts tie the accounts to the workers, not the employer, leaving the funds portable. Stop and go workers are not penalized as they would be using the PAYG system which factors in each month of earnings in its payout. The United States had a compassionate sense of obligation to the long time worker by finding a way to make sure they were financially stable during their final years of rest. The idea was there but the structured plan was not. With a system the country has now, certain failure will surely come.
Instead of saving a broken system, reform is desperately needed to save its people. With a private retirement account run system, the people are in control of their future. There is no greedy, overrun government dictating their money but rather the idea of freedom, competition and sound investing control its outcome. A PRA program allows for economic growth as well as a higher return the PAYG system could never offer. The United States was born on the conception of freedom for every citizen.
Allowing its people the responsibility and opportunity with careful minute oversight allows personal goals to be made and executed. The mature worker will be able to make his own choices with the money they fairly earned. There can be no concern with the ratio of workers and retirees as each worker is accountable for themselves. The best way to insure that Social Security does what it was intended to do – help provide a secure and comfortable retirement – is through a system of personal retirement accounts, which will allow workers to privately save and invest their Social Security taxes.
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