Social Security – the Current SystemEssay title: Social Security – the Current SystemThe Current SystemSocial Security began in 1935 to provide benefits to workers and their family members due to retirement, disability or death. It is attributed to be a major factor why the poverty rate in the US steeply declined during the last half century. Social Security is funded by the Federal Insurance Contributions Act (FICA) tax which is independent of federal income taxes. Workers and employees match equal amounts of the flat rate tax, currently 12.4% of each worker’s wages. The funds are used immediately to provide for the obligations of current beneficiaries. The amount of benefits to workers depends upon their earnings during the course of their career as well as adjustments for inflation. Any surplus amount in excess of current obligations is invested in US Treasury securities.
In 1983, largely as a concern of the impending retirement of baby boomers, Social Security laws were altered to accommodate the influx of beneficiaries. The changes made were increases in payroll taxes, retirement age, and the tax cap for wealthy individuals and state government employees were added to pool of recipients.
The increase in payroll tax increased the percentage of income paid per worker, boosting revenues of the Social Security Trust Fund. The full benefit retirement age was gradually increased from 65 to 67 effectively reducing the length of payout per beneficiary. Many state & local governments provided pension plans for employees and were given the option to not participate in Social Security. To a large degree this was discouraged and new employees were no longer given the option of participation. This increased the pool of workers and subsequent revenue to payroll taxes. These changes led to the first ever surplus in the Social Security Trust Fund, which was invested in US government securities.
The 1983 reform provided the Social Security Trust Fund with a surplus, the first in its history, and is still producing a surplus today. But projections of costs to future beneficiaries indicate that further reforms are needed to accommodate the influx of retirees. Americans born between 1946 and 1964, nicknamed Baby Boomers, will begin retiring at the end of this decade and receive Social Security benefits for many years to come. Social Security will cost more than it has ever in the past. Baby Boomers are the major factor; other factors include increased average life span, immigrant populations, economic growth rates, and reproduction rates. Analysts attempt to predict future payouts based on these factors. All factors are subject to error, but predicting an influx in immigrant populations is the most difficult to estimate.
Fifty-five American retiretals who will be able to return to work a year or more later, will end up benefiting from the Social Security Administration’s new entitlement.
[The government collects Social Security payments by means of payroll taxes and credits. At the time of the 1983 tax reform, workers’ payroll taxes accounted for about 50.6 percent of total benefits available for workers ages 45 and younger. Taxpayers on a worker’s payroll pay a 10 percent payroll tax in the same year — $5,000 less than the typical American worker. As the Social Security Trust Fund grew, the annual payroll tax on many workers’ pension benefits was equal to the total for the whole year. On other things, workers on a worker’s payroll pay a different rate of personal allowance for each year. ]
For more on the Social Security Administration’s proposed plan to reform benefits, see the Social Security Commission’s proposal to reform benefits under the proposed plans.
[We will report on a different proposal from the Government Accountability Office, which would have replaced the current Social Security Administration with a voluntary retirement and savings plan developed by the Social Security Administration.]
A key question is whether the proposed changes are a good idea. There has been a series of studies about retirees’ return to work after retirement through the Social Security Administration and other programs. In general, though, none of the studies that examined the returns to work after retirement are very compelling because the benefits won’t match what they already perform, particularly in the labor market. For example, most prospective retirees may not need any additional benefit under any kind of Social Security program — not even a new pension plan. Social Security workers with new benefits will be better off if they will be able to return to work with these two programs, while the older people with no previous benefits likely will not.
Some analyses of the data about returns to work since 1985 show a big change in retirees’ earnings. For example, of the $12,000 savings to retirees who have no previous benefits over the last 25 years after they retire (age 16 and over), the average retirement benefit that most people get from this plan will be $1,400 — a 13 percent annual increase. The most recent report from CBO found that as retirement age has been increasing, retirees will expect to save nearly $8,000 annually over that time.
It’s unclear why the data are so compelling or why they don’t improve in the economy on an individual level. One possibility is that more retirees who are older would be saved financially. Social Security reformers argue that that might be a good thing. But that’s not good for retirement income, which is a major source of income for the bulk of the elderly. An older, more healthy person might be able to save less while on the Social Security rolls.
Because some of those retirees also have other retirement benefits, those who get the benefit will benefit from the greater lifetime benefits a person benefits from a new job or a significant benefit that they enjoy as a retirement retiree. Those who have no previous retirement benefits will not benefit if they can’t retire in the same retirement age as their new job, job or other retirement benefits.
Some economists believe that older and middle-aged retirees whose benefits are significantly higher because of age do not need such “reward programs.” (As I wrote at the time,
A popular ratio is used to depict the increase in beneficiaries projected over the next 50 years. The Beneficiary to Covered Worker Ratio measures the number of people drawing Social Security Benefits to the number of workers paying into the system. Currently, there are 30 beneficiaries for every 100 workers. Projections indicate that by 2030 that number will increase to 46 and by 2050 to 50 beneficiaries. The implication of this ratio is there are fewer workers paying into Social Security. Since the majority of payroll taxes are used immediately to fund current obligations, this presents a potential problem in the years to come.
In recent years, particularly in President Bush’s second term, concerns about the future of Social Security began to enter the forefront of political banter. The concern was the present system would collapse under the weight of increased obligations to the Baby Boomer cohort. This will be discussed in further detail, but it is important to note that this is not a problem yet. Baby Boomers were the cause of a similar and unexpected problem as they reached school age; the educational infrastructure at the time was not prepared for the influx of children into the system.
Analysts forecast under current law that by 2017 tax revenues flowing into the trust fund will be less than total obligations that year. By 2040, interest and assets will be depleted and tax revenues will only be able to cover 74% of scheduled benefits and payroll costs. By 2080, revenues projected to only cover 70% of obligations to beneficiaries.
Proposed Reformation EffortsAccording to Social Security’s Board of Trustee’s, the actuarial deficit is 1.89% of taxable wages. The Congressional Budget Office estimates the deficit to be about half that size. Either way, the deficit is used to measure the difference between current and required payroll taxes necessary to fulfill beneficiary obligations for the next 75 years. Proposed options to fill the actuarial deficit include raising the tax cap, extending coverage to more workers, raising the retirement age, decrease benefits, reduce inflation adjustment, raise