The Social Security Solvency Issue
The Social Security Solvency Issue
After its implementation in 1935, the Social Security Act formed the grounds for the current social security program which offers benefits for people over 65 years who have already retired. They enjoy the benefits in the course of their living after this age. This program offers benefits through a sub-program identified as OASI (Old age and Survivors Insurance). There is also another sub-program DI (Disability Insurance) that also benefits retired workers (Treasury 2). The combination of both programs, OASDI, has brought both benefits and challenges in the financial aspect of the country.
At the start of the social security program, the beneficiaries of the program got more than the proceeds made from their contributions. As an outcome the benefits were retrieved from the proceeds of the younger contributors. This approach is identified as the pay-as-you-go mode of financing (Treasury 4). Since there is a group that did not pay for its benefits, the program seems to be one step behind. There is some form of perceived debt as they always seem to “borrow” from the current generation in order to service the “debt” of the presiding generation.
Currently, the social security can be described as solvent. This is because there is a positive balance in the trust fund. However, it is anticipated that this will not be the case in the long-run. After the initiation of the pay-as-you-go mode of funding the social security, the baby-boom generation period followed. This period was characterized by finance reforms that caused tax surpluses in matters relating to financing the benefits of the workers of the previous generation (Treasury 5). Nevertheless, these surpluses will not be experienced in the long. Although different reports reveal differences in the years when the surplus will drop to zero and further into a deficit, it is clear that this scenario will eventually occur.
Reports from the treasury reveal that the annual cash surplus will reach zero in 2017 (Treasury 6). After this zero mark, the fund will be operating at a deficit. Even during this time, the beneficiaries will continue receiving their funds. In order to gain funds for the security benefits, the government will source from issuance of new public debt or receiving funds from non-Social Security taxes. These actions are meant to redeem the trust fund’s debt. It is estimated that the funds in the trust will be exhausted in 2037. After a while, a new date of year 2041 was given (Treasury 6).
The financial challenge bombarding this program will have a significant impact on the federal budget prior to the year of funds depletion. As indicated earlier, the trust fund will start operating on a negative balance after the year 2017. Due to this scenario, Social Security will continue making greater impact on the federal budget as the federal issue greater public debt or general revenues are retrieved in order to make the benefit payments fully as well as redeem bond holdings of the trust fund (Treasury 6).
This will go on until the year 2041, if everything remains constant.
The actual long-term solution to this problem would be to ensure than the insolvency problem is permanently handled. This means that the solution would have a sustainable solvency criterion. Additionally, there should be a mechanism, which will make sure that there will be sustenance of trends characterizing the end of the period projected (Editorial Board ph.3). For instance, making sure that the solvency of social security is permanently intact may mean considering some approaches. It should be considered that maximizing longevity may have an impact on increasing social security revenues and benefits unless tax rates, levels of benefit or both will be indexed to longevity in one way or another.
When critically considered, it means that when there is increased longevity, retired workers will collect benefits for extra years, which they will not have paid for during their working years (Editorial board ph.4). This is in the case of workers continuing to retire at a specific given age. Additionally, permanent solvency is not catered by sustainable solvency is some cases. For instance, if the population’s age distribution is made unstable at the period ending after 75 years due to changes in immigration rates, fertility or demographics, permanent solvency will not be provided.
One of the most popular measures of handling these long-term insolvency problems that have been cited is the 75-year actuarial deficit. It is 1.95% of the current payroll taxable value, which relates to the years between 2007 and 2081. When put in actual figures, it is currently 5.1 trillion in terms of present value (Treasury 8). According to the implementers of this measure, Social Security could attain actuarial balance if the 75-year net flow of the security’s present value is reduced by $5.1 trillion. The net flow indicated in this scenario relates to the benefits without the taxes. Reducing this present value can occur in two ways.
On one hand, the tax could be increased to 14.35 percentage points from 1.9 percent. On the other hand, the implementers could reduce the scheduled benefits by 13% (Treasury 8). This will take place with immediate effect. Although the mentioned steps cannot bring the situation in social Security to permanent solvency, they will bring it to 75-year balance.
The other solution that has been advocated, especially by president Obama relates to cutting costs through COLA (cost-of-living adjustment) (The Editorial Board ph.1). However, this solution is accompanied by increase of taxes, which led the Republicans to reject it. The democrats also rejected it because they felt that it was too harmful.
The advocated solution relates to spending tax increases and cuts so that they may have an impact on the country’s economy.
Others advocate for benefits cuts as compared to tax increases. Although cutting benefits may appear as one of the quickest solutions to this problem, it is quite risky. A significant share of the retirees has 40% of their monthly income as these benefits (Treasury 7). Majority of the retirees use these benefits for health related problems. Such problems do not offer other alternative solutions other than spending funds on drugs and hospitals. As an outcome, reducing the benefits risks driving the country’s older generation into poverty.
As indicated earlier, increasing taxes would be another way of controlling this insolvency challenge. However, the unstable economic situation and fluctuating inflation rates would only worsen the general economic situation of the country (Yavuz 844).
Increasing taxes would only put a strain on workers who are already strained by other issues such as high cost of living. The government would start progress on one problem (solving security insolvency), but start another greater problem (overall federal budget issues).
Analysts in fiscal policy state that the government has fiscal relates limits. As indicates previously, in their perception, the government gets funding from borrowing or taxing. They warn that spending on deficit must be eliminated or be kept at the minimum level because it contributes to public debt’s growth (The Editorial Board ph.4). This will lead to financial insolvency in the country as it causes bond markets to have rapidly growing interest rates. Consequently, the country will have a period where it will forego economic growth as it will implement extreme austerities on the people (The Editorial ph.4). This is caused by the government’s need decrease it public debt significantly. This should also happen in short order.
Hence, supporters of implementation of austerities dictate that rather than avoiding deficits in the latter period, they should be avoided during the prevailing period (now). This will be led by putting in place long-term plans for deficit reduction, which will also reduce entitlements. Unfortunately, there has been division between these “austerians” (The Editorial ph.5). While others advocate that deficit spending should be lowered to the extreme, others feel that deficits should be lowered in a gradual approach. However, the levels lowered with this gradual approach will be higher than the levels advocated by the former group.
In my opinion, this problem can be solved by raising the tax rate on the payroll. Currently, the tax has been raised to by 6.2 percent. This applies to both employers and workers. An increase by 1% can be phased in more than two decades, yet still raise enough funds to close the funding gap by half (The Editorial board ph.6).
Since raising taxes on the current salaries and wages will also strain the living conditions of the workers, wages should be raised for tax raise. The wages level would be raised on the face of the payroll tax of the social security. The current wages level is $113,700. It is advocated that this figure should be raised to $200,000 (The Editorial ph.6). As an outcome, the increasing income among the people earning the highest will be in line with taxable wage base.
Despite the approach used to rectify this long-term insolvency problem, it is clear that the government’s approach of reducing the problem is limited to two approaches. They relate to increasing taxes or cutting costs. Whether the government uses either of the approach, it is clear that the rectification measures should start as son as now rather than later.