Social Security is something that Americans have come to rely upon heavily. It is widely understood that when a worker reaches the age of sixty-five, he can retire and live off of his social security, his pension plan, and whatever savings he has accumulated. This notion of living off of Social Security goes back to 1935 when the Social Security Act was passed. The program has always been considered a retirement program funded through payroll tax receipts. Today, Social Security is not only a pension program, which includes the OASI (Old-age and Survivors Insurance) and DI (Disability Insurance) funds, it has grown to include Medicare (Schieber 1993, p. 114).
Things have changed since 1935, now an increasing number of Americans are concerned about Social Security. With constant tax rates, the contributions of the baby boom generation will lead to a build up of Social Security reserves in their working years, but when they begin to retire after 2010, there will be a large rise in benefit payments. It is predicted that outlays will begin to exceed tax revenues in 2013. This problem has lead many people to question the long-term financial viability of Social Security. Also, it has caused the younger generations to believe that they will never collect any benefits (Bosworth 1996, p. 89).
In the articles by Barry Bosworth, “Fund Accumulation: How Much? How Managed?” (1996); Peter Diamond, “The Future of Social Security” (1996): and Sylvester Schieber, “Can Our Social Insurance Systems Survive the Demographic Shifts of the Twenty-First Century? (1993)”, one is given a range of possible solutions to the Social Security problem at hand. Through analyzing each of them, it becomes apparent that the best way to overcome the heavy burden placed upon younger generations in the near future is through increased savings. Even though increased savings, or investment, seems to be a viable solution, it is unclear at this time if Social Security will be able to provide for the baby boomers. In order to save enough to provide for the baby boomers, people need to sacrifice today for the future and that is not always an appealing choice. Also, beyond saving more, Medicare is a huge problem. The government can not control how much medical care will cost and in order for the baby boomers to have the health care that they need, major changes will need to be made in that arena (Diamond 1996, p. 226).
Before exploring the possible ways to overcome the Social Security problem, one needs to understand why America is even facing this problem to begin with. Given past and current population trends, specifically decreased birth rates and increased mortality rates, people are having fewer children and are living longer. This implies that as people have fewer children and live longer, the burden on younger generations to support older generations, or the dependency rate, is increasing (Bosworth 1996, p. 92). In other words, the ratio of retirees to workers is increasing more than ever before.
In the past, when there have been problems with Social Security, the government seems to go about solving them by passing amendments. There are two common ways that they seem to have attacked this problem, one is through payroll tax increases and the other is through benefit reduction.
In considering payroll tax increases first, one needs to understand that an extra dollar of benefits means an extra dollar of taxes (Schieber 1993, p. 120). Currently, in order for benefits to equal the amount of money entering the social security fund, taxes need to increase by at least two percent. If taxes increase by two percent right now, the system would be back in actuarial balance, but that balance will not last and more tax increases will be needed. If the system continues to operate on a pay-as-you-go basis, payroll taxes may increase up to eighteen percent by 2070 (Bosworth 1992, p. 94). It is possible that increased taxes could help solve the Social Security problem, but politicians are not in favor of raising taxes. They believe that there is an unspecified limit beyond which people will not be willing to pay payroll taxes.Because of this, politicians favor cutting benefits (Schieber 1993, p. 120).
When thinking about benefits, politicians think about “who will get them and how much (Diamond 1996, p. 226)”. There are many ways that Congress can go about benefit reduction. One such example would be to delay the retirement age. Delaying the retirement age does not mean that one has to wait longer to retire; a worker can retire at age sixty-two and still receive his benefits. It simply means that the longer one waits to retire, the greater the benefits. Thus, benefits have been reduced without explicitly saying that they have been reduced. There are many other ways that Congress can go about reducing benefits. Some other examples include changing the way that benefits are calculated by reducing average lifetime earnings, including workers who had previously been allowed to remain outside the Social Security system into the system, and reducing the measured rate of inflation used to determine COLA’s (cost of living adjustments) (Diamond 1996, p. 228).
Beyond the traditional ways as described above, there is another way to solve the Social Security problem, which is investment. First of all, there are two kinds of investment. The first being financial investment. Financial investment can be defined as investing ones assets in the market through things like portfolios. This same idea can be applied to Social Security investment. The first way that this can be done is by investing part of the trust fund in the private economy through stocks and corporate bonds (Diamond 1996, p. 229). This approach to managing Social Security is more attractive than the current approach. Currently, part of the trust fund is held in treasury bonds. These bonds have a smaller rate of return than private bonds and in the face of inflation; they can be very risky. So, by putting some of the trust fund into index funds, yes there will be a higher risk of losing, but the returns can be much greater (Diamond 1996, p. 230). Thus, the Social Security trust fund can grow at a more rapid rate than before and as a result, people will have the benefits that they need without incurring higher taxes.
Another way, to financially invest the Social Security trust fund, would be to give control to individuals. Specifically, with this approach, it is possible that individuals can manage their own retirement funds. If this approach were to be taken, Social Security would need to be shrunk so that part of the payroll tax could be put into private, individual accounts, like IRA’s. This is a radical approach that does not seem very likely to succeed because another form of revenue would need to be generated in order to keep the Social Security trust fund in actuarial balance (Diamond 1996, p. 231). It seems that with this approach, it is possible for individuals to save a lot for their retirement, but at the same time they would probably be responsible for the extra revenue needed to keep the fund in balance.
The other form of investment is economic investment. With economic investment, a country is able to develop through capital deepening. In this scenario, the Social Security surplus, which is the excess of its tax and interest income above outlays, adds to national savings. Because the surplus is added to national savings, it can be used to finance an increase in physical capital (Bosworth 1996, p. 98). In a closed economy, an increase in capital will raise the productivity of workers as a whole and as a result they will receive higher real wages. There are two effects on the Social Security fund caused by this increased investment or savings, one is that the fund will be growing based on the interest earned on the investment and two the amount of tax receipts will increase due to the increased real wage (Bosworth 1996, p. 99). Essentially, what has happened is that the pie has grown, so there is a larger base to support the growing elderly population from.
As described above, there are many ways to overcome Social Security problems, which range from tax increases to planned financial investment. The point of all of these solutions is that no matter what, there are different policies that the government can pursue, which will make it possible to provide for the elderly. But, there is one issue of Social Security that is not easily overcome by policy changes and that is Medicare.
Medicare is a harder problem to deal with than Social Security. Due to an increase in the old age population, “the costs of Medicare for taxpayers are projected to increase twice as fast as the costs of paying Social Security’s cash benefits between now and the time the baby boom gets to retirement (Schieber 1993, p. 132)”.
Why is Medicare such a big problem? The answer to this question is quite complicated. First of all, the government cannot control the costs of medical expenses. If the government tries to control the inflationary pressures on Medicare, without curtailing the inflation rate on the rest of the medical market place, there will be hyperinflation in some areas. In even attempting to do this, costs have been shifted to other payers and as a result people are unhappy because they cannot survive the inflationary forces they face (Schieber 1993, p. 132).
Another reason that Medicare is a huge problem is that with longer life spans, there is a growing need for long-term health care. That is, the elderly need health care benefits for a longer period of time. Typically, as people grow older, they incur health problems, some of which may be more serious than others. Given the changing family structure, families on a whole are less willing to take care of the elderly with serious health care problems and therefore they have to receive institutional care (Schieber 1993, p. 134-5). This can become quite expensive.
Yet another reason as to why Medicare is posing a bigger problem than Social Security is that it is difficult for policy members to choose how to spend on this program. The bottom line here is that it is too expensive to do everything, which may be medically useful and needed. Therefore, it is necessary to decide what medical services are worth the cost (Diamond 1996, p. 226). Overall, Medicare is a complex issue that requires policy makers to make decisions that may not seem fair to everyone.
In conclusion, the nation does face a problem when thinking about Social Security. The baby boomers will greatly deplete the trust fund as they move into retirement, but there are many ways that we can prepare for their retirement as well as support them during their retirement. In order for Social Security to survive the challenges imposed by this generation, changes in Social Security need to happen whether it be in the form of increased payroll taxes, reduced benefits, or increased savings. Either way, Social Security will be able to support the baby boomers. Medicare, on the other hand, is an issue that needs to be taken more seriously. With an increasing elderly population as well as longer mortality, it is not clear if Medicare will be able to provide properly for the baby boomers.
Sylvester J. Schieber, "Can Our Social Insurance Systems Survive the Demographic Shifts of the Twenty-First Century?" in Anna M. Rappaport and Sylvester J. Schreiber, (editors) Demography and Retirement: the Twenty-first Century, Praeger, Westport, Conn., 1993, pp. 111-173.
Barry P. Bosworth, "Fund Accumulation: How Much? How Managed?", in Social Security What Role for the Future?, edited by Peter A. Diamond, David C. Lindeman and Howard Young, National Academy of Social Insurance, Washington, D.C., 1996, Chapter 2, pp.89-113.
Peter A. Diamond, "The Future of Social Security" in Social Security What Role for the Future?, edited by Peter A. Diamond, David C. Lindeman and Howard Young, National Academy of Social Insurance, Washington, D.C., 1996, Chapter 7, pp.225-233.