The United States Social Security System
A Diving Airship-When Will it Hit the Ground?
In the United States, when one retires he or she begins receiving monthly Social Security checks. To supply this fund, a certain percentage of each worker's wages is witheld and is immediately redistributed to those citizens currently receiving Social Security benefits. This arrangement is due to the way in which the system was started, in 1935. At this time, when Roosevelt signed the Social Security Act into law, there were many people who needed benefits (recalling that this was around the time of the Great Depression). However, there was no money to pay those benefits with.
“The idea at the time was that people currently working would pay into the system, and their money would immediately go back out in the form of benefit checks. Each generation of retiring workers would get paid by the people currently working, and therefore the system would fund itself forever despite the fact that the system had no money to start with” (1).
The system was quite successful in 1935, as there were many more people paying into the system than were receiving the benefit checks. This healthy ratio of workers to retirees meant that individual workers did not have to pay a great percentage into the system in order to support the retirees. In fact, through 1950, only 2% of income (1% employee, 1% employer) was withheld for Social Security purposes. Currently this rate has increased to 15.30% of income (7.65% employee, 7.65% employer) being withheld for Social Security" (1).
When the Social Security system takes in more money than it pays out, U.S. Treasury bonds are purchased with the surplus, meaning that the government (in the form of the Social Security Administration) loans money (the surplus) to itself (1).
To visit the official website of the U.S. Social Security Administartion click here.
The Issue and Ideas
*The following information is current as of 2005.
Scales are fairly rapidly tipping toward the side of those collecting Social Security benefits versus those working and paying into the system. Due to this an increasing number of people are beginning to doubt the success of the system (2).
The government has made promises that it will not be able to afford the costs of the current pay-as-you-go system in the near future. There were 16 workers to support every one beneficiary of Social Security in 1950. This ratio has dropped to only 3.3 workers to support every Social Security beneficiary. Baby boomers will begin to retire in 2008, just one year from now. As well, benefits are scheduled to increase dramatically in the next few decades, and people are expected to be living longer. At the time that today’s youngest workers turn 65, there will be only 2 workers to support each beneficiary. If the system continues on its current track a 30-year-old worker of today will experience a 27% benefit cut when he or she reaches the normal retirement age of 65 (2).
If the Social Security program is not fixed now, the only possible solutions will be significantly higher taxes, mass amounts of borrowing from new sources, of sudden and severe cuts in other government programs or Social Security itself. In only 10 years the Social Security system will begin to pay out more in benefits than it collects in payroll taxes. At this time, shortfalls will grow larger with each passing year. It is estimated that the government will somehow have to come up with and extra $200 billion a year by 2027, to continue the system. Then, only 6 years later in 2033, this shortfall will have risen to more than $300 billion a year. Finally, by 2041 when workers in their mid-20s begin to retire, the system will be bankrupt, that is if it continues on its current course (2).
Although it is clear that reform within the system will need to take place, President Bush “has assured Americans that he will not change the Social Security system in an way for those born before 1950.” In part, this is because Social Security benefits constitute 90% of the total income for one-third of Americans over age 65 (2).
The question of whether or not the Social Security system as it exists now will fail, no longer exists. The question now is exactly when the system will fail; it is what can be done to avoid this crisis?
“President Bush has pledged to work with Congress to find the most effective combination of reforms. He will listen to any good idea that does not include raising payroll taxes.” It is well understood by those in power that fixing the Social Security program permanently requires “a candid review of options”. The most popular suggestions now—that have been offered by both political parties—are as follows:
In addition, an increasingly favored idea is allowing younger workers to put part of their payroll taxes into personal retirement accounts. This act would be voluntary and the money would be saved in a sort of conservative manner—a mix of bond and stock funds—that would create the opportunity for these younger persons to earn a higher rate of return than is provided them currently. If such a reform were to be adopted it is estimated that a person who earns an average of $35,000 a year would have saved in his or her personal account, nearly a quarter million dollars upon retirement. This savings would provide additional support to supplement that worker’s traditional Social Security check. Otherwise this savings could be passed on to his or her children. Perhaps the best reason for considering this option is for the mental security that would be provided with real assets of ownership, which is missing from the existing system (2).
Footnotes:
1. “How Does the Social Security System Work?” Howstuffworks. 2007. How Stuff Words, Inc. 5 Feb. 2007 <http://people.howstuffworks.com/question385.htm>.
2.“Strengthening Social Security for Future Gernerations.” The White House: President George W. Bush. 5 Feb. 2007 <http://www.whitehouse.gov/infocus/social-security/>.
Social Security