Social Security Reform: Increasing Taxes And The Retirement Age
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Social Security Reform: Increasing Taxes and the Retirement Age
Social Security reform is one of the leading topics of an ongoing discussion amongst our government leaders today. Among the many tasks up for considerations are: Personal saving accounts, Privatizing Social Security, Early retirement, Funding the Social Security trust fund, Funding the Medicare trust fund, Drug benefits, Disability benefits, Tax increases, Raising the retirement age and Steady GDP growth. The list is endless. How can keep Social Security solvent for future generations? For consideration, this discussion will be focused on the pros and cons of increasing social security taxes, increasing the retirement age and the potential effects on gross domestic product (GDP) in the U.S. economy.
Social security was created in 1935 as one of most costly item in the federal budget. The program provides old age, survivors and disability insurance to a healthy portion of Americans. Workers and their employers fund the system by each paying payroll taxes. The Internal Revenue Service collects the taxes and deposits the money in government-administrated accounts known as the Old Age and Survivors and Disability Insurance Trust Funds (OASDI). The payroll tax revenues are used to pay benefits to those people currently collecting Social Security pensions. Social Security taxes also pay for Medicare, the national health program for the elderly.
The gross domestic product is defined as the value of final goods and services produced in a specific time period. GDP values reflect the final market products. For example, GDP does not take into account the farmer who grew the wheat, but rather the consumer who purchased the final product of bread.
The Center on Budget and Policy Priorities reports that President Bush and his Social Security trustees will see a .65 percent shortfall of the GDP over the next 75 years. This figure in todays dollars value amounts to an estimated $3.7 trillion in deficit. (Greenstein, Kogan, February 11, 2005).
Social Security trustees each year forecast social security benefits 75 years in advance. The economist, for example in 1930 had to consider social security forecast benefits in 2005 and the effect on our current economy and GDP. Things that the economist could not possibly have been able to consider in his predictions 75 years later: The event of 9/11, computers, the internet, cell phones, The Vietnam War, polio vaccine, NASA and the space program, AIDS, oil, Iran, Iraq, and terrorism just to name a few. (Hiltzik, 2005).
The trustees have projected 75 years into the future that a $10.4 trillion figure that would be needed to sustain Social Security. Currently, this is a 1.2% increase of GDP. This 1.2% growth has been an increase in “funding for defense, homeland security and international affairs”. This figure should not be considered as a variable into Social Security solvency. (Greenstein, Kogan, February 11, 2005).
The Agencys actuaries poll statistics from the economy and deliver their forecasts to the Trustees yearly in March. The statisticians best guesses consider: fertility, mortality, productivity, unemployment, disability, interest rates and immigration. This sample list for consideration is quite lengthy. The projections are that social security benefits will increase $8 to $10 trillion within the next 50 years and stay there. Currently social security is at $1.5 trillion. The U.S. overall economic growth has remained steady; therefore the input to the current system remains steady. (Hiltzik, 2005).
The U.S. government uses excess social security reserves to purchase U.S. Treasury Bonds. In the future, these bonds will be cashed to pay for the baby boomers retirement benefits. This will allow the system to pay the promised benefits until 2042 to 2052. (Wessel, 2005, February 1). The FED, to control the money supply, issues U.S. Treasury bonds. The money supply in turn, slows or speeds up the macro economy. The FED also borrows money from the social security trust. Most of the arguments for reform are based around the assumption that given the current deficit, this money will never be repaid. (Salisbury, 1996, December 4). The money supply directly impacts GDP by allowing capital investments for business. In our economy, GDP requires this because stock market gain are equivalent to economic growth.
Bruce Barlett (2005, February, 10) in his article, “The Real Reason for Social Security Reform”, points out “social security tax begins falling as a net contributor to federal revenues in 2008, when the surplus of social security taxes over benefits will peak at 0.8 percent of the gross domestic product”. It then “falls to zero in 2019”, staying negative thereafter. Barletts states that in the 10-year time frame, 2008 to 2018, or surplus to zero, income taxes will have to increase. His figures are 2.5% of GDP, or a 35% income tax increase. Then in 2018, which is “zero year”, income tax could fall by 1.7 % percent of GDP.
The huge problem with the current situation facing Social Security is the increasing deduction of workers in the work force paying for workers retired. David Wessel (2005, February 01), in his article, “How big is the problem, and How Good are the Potential Solutions”, point solely to demographics. Wessel states that the ratio of workers to recipients in 1960 was 5:1, currently it is 3:1, and in 2035 it will be 2:1. The baby boomer generation is expected to retire within the next 5 to 10 years. This information gives an insight to his obvious opinion, whereby there will be fewer workers to fund the social security trust. Fewer workers means less productivity, goods, services and declining GDP. His projects a .65% increase is necessary. Baby boomers are having fewer children. Therefore, there are fewer workers to fund the social security trust. Our current retirement age is 62 for partial benefits and 65 years old for full benefits.
Michael Hiltzik (2005), in his book, “The Plot Against Social Security”, disagrees. Hiltzik believes that the current system is a good investment to our GDP. Hiltzik states that the “administrative cost of social security is less than 1%”. Other market investments through brokerage firms that manage our money have fees considerably above 1%. “Social security is not wasteful or inefficient in its operation”.
William Buckley Jr. (2005, June 06), in his article “What Was Lost at the Astor?” cites two things that social security does correctly. First of all, it is to “repay the American 65-year-old the money taken from him during his working life, plus