Essay, Research Paper: Social Security Reform

Economics

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A little over 60 years ago the nation struggled through what was, up to then,
the most dramatic crisis since the Civil War. The economy was uprooted after the
crash of the stock market and the country's financial stability destroyed. One
of the many steps taken to alleviate the burden on the American people was that
of the passing of Social Security Act of 1935 and its amendments by Congress and
the President, Franklin D. Roosevelt. Under the provisions of the Act, the
government would take on the responsibility of taxing the income of all working
Americans and returning the money through numerous public benefits and programs.
Now the nation faces an economic and political problem with the program
instituted to earnestly help the people. In the first half of the next century
the government will face the task of paying benefits to a large generation with
funds it will not have. This year Social Security assistance accounts for over
20% of the federal budget and will make up even more for the years to follow.
Almost all political sides agree that Social Security must be reformed in some
way before the baby-boomer generation begins to retire and collect. Social
Security benefits refer to all those measures established by the government
through legislation that help an individual or household to maintain an income
of a certain level, insure income if one's employment is lost, provide other
assistance for disability, old age, survivors, and other forms of compensation.
Social Security may be defined through several characteristics: (1)
participation is mandatory. Everyone, including children age 5 or older, is
required to have a Social Security (2) Eligibility for benefits and levels of
benefits depends on past contributions made by earners. (3) Benefit payments
begin at a stipulated time such as at retirement from work, upon temporary
unemployment, or with disability (4) Social-insurance benefits are means-tested
- one's wealth or lack does not determine whether benefits are granted
(Compton's). (5) Currently SS funds are collected and distributed on a pay - as
- you -go (PAYG) system in which Social Security taxes from individuals are
immediately distributed by the means of the SS Administration as it sees best
fit. This means that taxes collected are not reserved for the individual who has
paid them: in Rose 2 the current state he or she must rely on those persons
paying SS taxes during the time of their retirement (Becker). For a number of
these characteristics and future issues, the Social Security System must be
reformed or completely abolished to meet the needs of tomorrow. The leading
concerns of Social Security that merits the immediate initiation of reform are
the demographic and economic circumstances in the coming century. Even though
"forecasting the economy and budget over such a long period is
uncertain" there remain many "certainties" regarding problems
facing Social Security in the first half of the 21st century (OMB, Budget
Perspectives 23). The Federal Government's responsibilities extend well beyond
"the five- or six-year window" that has restricted the focus of recent
budget analysis and debate. Of these "certainties" are the mounting
challenges posed from the baby-boomer generation. This generation, born in the
years after World War II, is aging and will "begin to retire around the
year 2005. By 2008, the first baby-boomers will become eligible for social
security"(OMB 23). With the increased expenditures for baby-boomer group
and pre-existing entitlements, a serious strain will be placed on the budget for
the majority of the next 100 years. As currently, the PAYG system has allowed
for four workers to pay for every retiree. "But, when the baby boom
generation retires, eventually only two workers will be paying for every
retiree"(OMB, 1998 Budget 195). Long range projections from research done
by the Congressional Budget Office last year observes that "Those fiscal
demands could produce unattainably high levels of federal debt and taxes unless
additional actions are taken to control federal spending" (OMB, Budget
Perspectives 25). The baby-boomer issue is not the only problem facing the
future of the budget regarding Social Security. The Social Security Trustees
Report projects that population growth is expected to slow over the next several
decades. This slowdown is expected to lower the rate of population growth making
older groups and retirees a very large percentage of the population. The labor
force participation (by percentage) will therefore decline as the average age
increases (OMB, 1998 Federal Budget 196). This decrease in the number of Social
Security paying workers will undoubtedly make for an abatement in the total
amount of Social Security taxes collected each year to be distributed in
services. As this occurs the Federal Government would have to borrow money to
pay its obligations to those with Social Security assisted living, increasing
the federal debt. Rose 3 Another criticism of social security is the attacks on
the fact that it pays Old Age, Survivors, and Disability Insurance (OASDI)+ to
those persons regardless of their wealth or lack of it thereof. This practice,
even though it was established to be non-discriminatory, has been rebuked by
many persons of poorer backgrounds because it takes away from the extra benefits
that they could be receiving and pay it to some persons who may not need it as
extremely (Samuelson). Retired workers account for 61% of all social security
recipients and of those 60% rely on it for half or more of their total income.
Because this total amount usually is not too great, they feel they should be
getting more by cutting the benefits paid to the other 40% that rely on it for
half or less of their total income (OMB, 1998 Budget 196). The criticisms of
Social Security, or "Insecurity" as some have labeled it, have been
discussed and now the issue about how to revise and fix these problems must be
firmly addressed by the Government in its all-knowing, all-powerful stature. The
Federal Budget for the US Government for the Fiscal Year of 1998 and it's
supplements address the aforementioned problems but state no incipient actions
to solve any grievances or future obstacles, as predicted by the Office of
Management and Budget, the Congressional Budget Office and many other private
organizations, including Dow Jones (OMB, Budget - Perspectives 23-31). The 1998
Budget section for Social Security reports that all of the segments of the OASDI
Trust Funds would be all be insolvent by 2029, "but it does not constitute
an imminent crisis" because the Social Security Trustees measure the
Administration's well-being for a period of 75 years. Obviously the baby-boomer
and generation-X generations are in danger of not receiving Social Security
benefits being paid in taxes right now. Unofficial proposals by legislators and
leading financial experts have been proposing solutions for many years now, but
they either do not have the power to introduce them or are politically
apprehensive. These proposals include, but are not limited to, privatization of
social security in stocks, Personal Security Accounts (PSAs), raising taxes -
lowering benefits, Cost of Living Adjustments (COLAs), and abolishment of many
Social Security benefits. The most controversial and popular proposition offered
has been that of privatization of some parts of the social security system. By
this approach the government would invest 40% of the Social Security surplus
into Wall Street on numerous private and public stocks. This would give Rose 4
the Administration "a $1.3 trillion stake in Corporate America by
2020" (McNamee, How We Should...). This system would allow workers to also
invest at least 11% of payroll taxes in their own accounts. Under the boldest
plan, proposed by the Clinton Administration's Advisory Council on Social
Security, exactly 50% of the retirement fund would be "replaced with
mandatory personal security accounts", which would be invested in stocks or
bonds (McNamee). The other 50% would finance basic government benefits for all
retirees. The privatization of accounts could theoretically reduce the length of
time before the trusts go insolvent by substituting savings accounts for some
part of Social Security's PAYG system. This would ensure that the government
would have a surplus of funds for entitlement expenditures. By 2020, PSAs could
hold assets worth around $6.0 trillion dollars if put on the market within a few
years. "Such a huge balance [just for benefits] would give a kick to the
nation's capital stock and [spur] growth" (McNamee). But the Advisory
Council and others have come up with this plan not to balance the economy, just
fix Social Security. The Council and Social Security Trustees have concluded
that if nothing else is done to reserve funds for the upcoming insurgence of
retirees, Social Security will exhaust the trusts by 2029, and PAYG "taxes
will cover only 75% of promised benefits". To ensure solvency for another
75 years Congress would have to choose now to privatize, raise "the 12.4%
payroll tax, cut benefits", or all three (McNamee). The limitations of
privatization also come into play when considering the best reform platform.
Questions arise as to how the government could do this without taking over the
market and the consequences if there were a crash. Putting SS funds into the
stock market for higher returns is agreed to be a very likely idea, but would
individuals be willing to obey a compulsory law requiring letting the government
manage funds on the stick market? There is also no true way to insulate
investment planning from political pressures. If the market fell, the funds
invested would go down also, and if they succeeded too well the stocks would
raise interest rates on debt, hurting the economy (Business Week, How to
Resecure SOCIAL SECURITY.). Compulsory saving in stocks would also require tax
increases or cuts in government spending (Samuelson). Privatization, though, may
be worth a try. Currently, the US Government can afford to experiment as there
exists no immediate SS crisis, and if funds are not raised for saving the
benefits being paid after the trusts go bankrupt will not be at paid at 100%. A
small amount of investment therefore definitely seems worth a try. The next
practical solution is seen as the very risky, at least to politicians hoping for
reelection. That is the raising of the already high payroll tax at 12.4% and the
lowering of benefits Rose 5 to save for the coming tide of retirees and
entitlements. This controversial move would ensure that Social Security would be
paid in full for at least 75 years, but is challenged greatly by those already
on OASDI, who have strong political footholds. Interest-group politics can weigh
in greatly. The American Association of Retired Persons, for one, pledges to
keep Social Security as a government guaranteed plan. Labor, too, is opposed.
Free-market agencies and business would favor any change, however (McNamee).
Neither the Executive nor the Legislative Branches of the government are
anywhere near willing to make a move like raising taxes and/or lowering benefits
because of this. A very practical, and yet controversial, method being proposed
for saving is that of lowering the Cost Of Living, or making a Cost Of Living
Adjustment (COLA). Last year it was discovered that the consumer price index
(CPI) has been over-stating the annual cost of living by 1.1%. Social Security
payments are directly tied to the CPI and determine the annual payment amounts.
In other words, beneficiaries have been doing a little better than the true rate
of inflation. Simply by reducing the CPI by 1.1 percent a year the government
could save approximately $1 trillion in 12 years (Thomas 2). The benefit
payments would still rise with the true cost of living, but the Social Security
trust funds would be able to remain solvent well past the expectation dates
proposed by the trustees. This simple solution also has been thwarted by
political apprehension. US economist Daniel Patrick Moynihan states that
"politicians are scared of each other and the AARP" (Thomas 2). It may
be likely, though, that President Clinton will appoint a non-partisan committee
to review the Social Security Issues and lower the CPI, and thus benefits,
through protected legislative order, sparing any legislators. The final proposal
by radicals is to abolish many programs, including Medicare, which may not be
necessary to the substantial living of some individuals. They also feel that a
means test be established to decide who and who does not need assistance. These
ideas have been mostly shot-down due to a favorable opinion of the Social
Security system in general, and the fact that it requires more government
regulation to institute the means tests. All of the plans are impractical, if
implemented solely. Alone, each creates large practical risks for the system.
Perhaps the best plan is to drop economic ideals and to find a compromise in the
different economic fervors that put the idea people at each other's throats. A
solution may be found to solve the different aspects of Social Security by
combining different plans. The president needs to appoint an independent
(completely independent) and non-partisan committee to propose a Rose 6 total
solution that would ensure complete payment of all Social Security entitlements
for at least the next 75 years. Perhaps with this, a real fix can come about so
the up-coming generation (gen-X) will receive benefits that are currently being
paid from earnings.

Bibliography
Adde, Nick. "Nunn: Social Security Key to Cutting Deficit." Navy
Times 14 Apr. 1997: Issues. McNamee, Mike. "The Bullet not Bitten."
Commentary. Business Week 11 Nov. 1996; N/A . "Social Security: A Program's
Rise." Journal of Economic Perspectives 1995. "Social Security
Alternatives." New York: Capital Publishing Ltd., 1996. United States.
Office of Management and Budget. Implementing Welfare Reform. Washington: OMB,
1997.

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