How a nation responds to social conflicts can either be the hallmark or the failure of that nation. For 75 years the United States has addressed old age, retirement, and the problems associated therewith through Social Security, the largest government program in the world (Brown 1). Social Security, created by Franklin Delano Roosevelt’s administration and like minded congressmen of the time, was a program targeted at solving one of the nation’s most pressing social problems – the poverty of the elderly. Although originally designed to shelter the aged from living their twilight years in destitution, Social Security today potentially holds millions of so called Gen Xers and all post Gen X generations to the prospect of poverty. As currently legislated, Social Security will require these generations to pay trillions of dollars into the Social Security trust fund yet, they will likely never see the returns in benefits during their retirement years. Social Security as it currently exists has created large transaction costs and imposed negative implications for those that bare the burden of providing for the system. Serious reform or abandonment of the system is needed.
Social Security is not as some might think a tax policy to be, even though there are things like, “trust funds, specific benefit packages, federal administration (Graetz 7),” it is social insurance. Social insurance is a means for providing income security for a set of common risks that shift over a person’s life cycle and “that loom larger or smaller depending on the changing backdrop of general, social economic, and demographic developments (Graetz 56).” Social Security was designed to limit those life cycle risks. The program was developed by President Roosevelt as part of his New Deal legislation to provide income security for a group of people who no longer could be cared for in the traditional manners of family support, state pension plans, or the generosity of the occasional philanthropist. Even before the Great Depression, the primary catalyst to Social Security, conditions in America were changing to where the classical methods of elderly support could no longer be used. America had moved from the farm to the city. Families and clergy could no longer adequately support the aged. At the height of the Great Depression nearly 13 million Americans or 24.9 percent of the labor force were unemployed. Among nonfarm workers, unemployment was even worse, as high as 37.6 percent (Ferrara 18). Due to the increase in unemployment most state run pension and welfare systems were on the verge of collapse and the states were begging for federal help. As a result, a pay-as-you-go pyramid system was set up which; 1) Imposed a 1 percent tax on employees’ wages to be matched by a 1 percent tax on employers. The amount of wages subject to the tax was capped at $3,000; 2) Paid old-aged benefits effective January 1, 1942 upon reaching the age of 65 in the form of monthly benefits payable until death; 3) Where individuals who continued to work after age 65 would not be eligible so long as they continued to work; and 4) death benefits (Ferrara 24).
The program now provides retirement benefits, spousal benefits, disability, and survivors benefits. It has become the primary source of retirement income for Americans. Nearly 42 percent of income earned by American retirees over the age of 65 comes from Social Security because at least half of all elderly Americans have no private pensions and over a third have no income from personal assets (Ferrara 34).
This pay-as-you-go system can simply go no further; the formulas for arriving at current benefits can no longer be balanced because the number of workers per recipients has greatly decreased. Originally in 1945 there were 42 workers paying into the system per every one recipient – today there are about three per every one. The problem is inherent in the system itself. The system was based on demographics that no longer exist. Under the original system it was assumed that the population would continue to grow such that there would always be many more workers than there would be retirees. It was also assumed that real incomes would grow at a rate of at least 3 percent per year where the taxable base which benefits were gathered would be greater than the taxes paid by the generation now receiving those benefits (Samuelson 88). Due to the large number of births during the “Baby Boom” years and to the increase in life expectancy those assumptions no longer exist. Americans over the age of 65 have dramatically increased from 7 percent of the population in 1940 to around 12 percent in 2004. It is projected that by 2030 that the number of Americans over the age of 65 will equal more than 20 percent of the total population (Ferrera 38). Also, life expectancy at birth in 1940 was only 64 years (In other words Americans were not going to live long enough to collect social security) – life expectancy today is 78 years. Furthermore, the number of ex-workers has greatly increased as women are now beginning to retire from the work force.
These changes in demographics have created large negative implications for those who pay into the system. The burden placed on the working population has become too great to maintain the current system. Together, with the increase in life expectancy and the number of elderly a new system is needed. There have been several suggested solutions to reform Social Security that do not involve reduction in benefit, tax hikes, or redistributing of the federal budget, however, most politicians consider tackling Social Security as political suicide, so nothing has been truly attempted.
On such solution was proposed by Paul O’Neill, first treasury secretary under George W. Bush and a former chief executive officer of aluminum giant Alcoa, proposed having the government create every American baby at birth an investment savings account. By the time the child retires, the account would contain $1 million or more. To move away from the chronic funding problems of Social Security, O’Neill suggested that the government place $2,000 in a special investment account for every newborn American. The government would then invest $2,000 more each year until the child reaches 18. The money would be invested in a conservative index of stocks and bonds and couldn’t be touched until retirement. The investment would grow at a compounded rate, meaning that as the value of assets in the account grows, profit would be reinvested so the account would grow even more. Without adding a single cent beyond compounding after the child turns 18, he or she would retire at age 65 with $1,013,326 in the account. O’Neill reckons, “If you do the arithmetic, the $1 million would provide an annuity of $82,000 a year for 20 years (O’Neill).”
Whether it’s a private account determined once you enter the workforce or an investment savings account created at birth, these new ideas increase capital formation and they don’t induce early retirement like Social Security currently does. “The provision of Social Security reduces what individuals need to save for their retirement (Stiglitz 341).” As individuals reduce what they save due to their belief in Social Security the national savings rate is lowered. Reduction in savings causes less capital formation that in turn stifles productivity. A benefit of a private account is that it would encourage savings which increases the national savings rates. Either through personal or cooperative investments, productivity increases as well as the national economy; in-turn the money inside one’s private investment grows.
Many experts believe that the transaction costs in switching systems in the United States will be too high to abandon the old system. In the pay-as-you-go system there should be no waste. In affect all that is being done is transferring money from one individual to another. However, there is a hidden cost that must be paid. When Social Security began there was a full generation of individuals who paid nothing or nearly nothing into the system. Even though they paid nothing they received the first series of payments. Ida Mae Fuller, the first recipient of Social Security, paid 44 dollars into Social Security while she received over 20,000 dollars in benefits as she lived to be nearly 100 years old. That said, the trust fund must pay the benefits of all those who have long paid into the system. Therefore before the system is allowed to “privatize” or be dramatically altered the last generation of recipients must be paid.
Although there are many concerns about changing the current system of benefits, the potential for improved efficiency and growth could far surpass that of the current Social Security system. A new system could increase national savings, investment (which produces more jobs), and more economic growth. Martin Feldstein, a professor in Harvard’s Economics Department, estimates the U.S. economy would grow by 5 percent, a gain in $10 to $20 trillion if Social Security was done away with and a new system installed (Feldstein 22). This change would also allow the millions of U.S. workers who currently pay into the system to enjoy even more benefits than past generations did in their twilight years. Simply stated, Social Security no longer applies to today’s demographics. The program either needs to be reformed or eliminated and replaced with a system that meets the needs of today.
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