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Social Security was instituted with the passage of the Social Security Act of 1935. It was signed into law by President Roosevelt as a means of providing a social safety net for retirees. The passage of Social Security occurred during the depths of the Great Depression. Prior to this, the concept of social security did not exist in the U.S. -- you either worked until you died, or you retired when you were wealthy enough to do so. Social Security is run by the Social Security Administration, which also administers Medicare as part of the system. Social Security is theoretically self-funding. In 1937, the first taxes were collected to finance the Social Security system. Workers pay into the Social Security system via a payroll tax. According to the SSA's website, general tax revenues have never funded Social Security to any meaningful extent, implying that the program is self-funding through these payroll taxes (SSA.gov, 2014). Social Security has a pending funding crisis, however, but there are no politically viable solutions available, so the do-nothing option looks to prevail.
Prior to the existence of Social Security, there was no social safety net. People retired if they could afford to, otherwise they were not able to retire. This created a problem for people who were no longer fit to work, but were poor, which in those days was a lot of people. Prior to the Great Depression, people were generally able to find some sort of work, but the Depression left America with high unemployment. The result was that many people were not in a position to take care of themselves or their families. This spurred the need for a social safety net, in particular for those who were considered to be beyond working age. The age 65 was considered to be a typical retirement age at the time, and was therefore chosen as the starting point for Social Security benefits. Social Security was one of many programs instituted in the 1930s to offer greater security for Americans.
The program had a financing issue in the late 1970s, but payroll tax rates were raised in the 1980s to account for this, and Social Security since that point has been collecting more money than it pays. There is a concern in some circles that the pending retirement of the baby boomers is going to represent something of a drain on the system, but they have been paying into the system at high rates since 1983. However, by 2023, Social Security payments will dip into the trust fund that has been built up, with projections for the trust fund to be exhausted by 2036. Thus, there is a pending long-run problem with funding Social Security (Vernon, 2011). There is also a potential funding issue emerging with another aspect of Social Security, the Disability Insurance, as payments under that system are increasing, and it tends to cover people who did not pay much into the system.
Addressing this shortfall raises other problems. Cutting Social Security benefits is bad politics -- seniors vote. It is also bad optics, as people feel that since they have paid into the system their entire lives they are entitled to a certain level of benefits. However, raising the payroll tax to fund the system is also problematic. That basically means a wealth transfer from younger generations to the baby boomers, a generation that already holds most of the country's wealth, already has an entitled attitude (just try cutting their benefits) and enjoyed opportunities for good jobs, affordable housing and affordable education that today's young people simply do not have. Raising the burden on young people who need the money to pay Social Security entitlements to old people who don't need the money is fraught with moral hazard. So Social Security is effectively left with an impasse.
Level of Government and Intergovernmental Structure
Social Security is under federal mandate. While the Social Security Administration is responsible for the implementation of law regarding Social Security, Congress is responsible for the drafting and passing of such laws. Thus, changes to Social Security, either benefits or funding, needs to come from Congress. As noted, this presents a challenge because current and pending recipients of Social Security are a large part of the population and they tend to vote. Younger people may vote less and typically are not represented in Congress, but they also have limited means to absorb further tax increases, given youth unemployment rates, average youth wages and high student debt burden. Politically, making changes to Social Security is a major problem.
The only positive is that the Social Security system is relatively simple. Any new laws that are passed are implemented within the context of the Social Security Administration, which is a fairly simple structure for a government program. There is also another 20 years before the Social Security trust fund runs dry, so there is time to craft solutions, to get the millennials better-involved in the workforce and generally establish better conditions for change.
As noted, one of the major barriers to change with Social Security is public opinion. Old people vote, and AARP is a powerful lobbyist. Restoring balance to the system by cutting benefits is a non-starter for anybody hoping to get elected. Increasing the payroll tax is almost futile, however, and would damage the economy. Herein lies the problem. There is inadequate public sentiment for change. There are even bad optics. When Social Security protected people during the Depression, and the generation that went to war in Europe, it was horrible optics to consider cutting benefits to the people that made this country what it is. For some reason, those optics have transferred to the pending baby boom generation, one that simply did not face the same kind of hardships, and indeed benefitted from better opportunity and government investment in their lives than any generation before or after. While that's a little strange, the optics nonetheless, are of a poor senior eating cat food and living in a shack, when you try to curtail benefits. Even means-testing benefits seems to be off the table as far as public policy discussion, the idea often mocked as "punishing those who have worked the hardest" (Biggs, 2011) or some other such entitled drivel. At the end of the day, public policy on something that affects all Americans over 65 is going to be driven by public opinion, and taking entitlements away from people is not easy, especially when those people have the highest voting rates and a few thousand votes swing elections.
Approaches to Policy Formulation
The current dilemma with respect to social security is not a priority for current government. It probably should be, because we still have time to deal with it effectively, but Social Security is a political landmine. While there are clear pathways to addressing the Social Security problem, there is very little political will. Even when the issue is addressed by politicians, it basically kicks the can down the road so as to maintain entitlements for the foreseeable future.
There are some minor changes that can be made. One such change is that the disability insurance can be reformed. One of the problems there is that one can receive Social Security benefits for minor ailments like back pain, which has significantly increased the number of people receiving these benefits without fully paying into the system (Autor & Duggan, 2006). Further, social security needs to be means-tested. This is political suicide, because politicians and rich old people have a pretty cozy relationship, but it needs to be done. It is absurd that government would rather raise taxes on struggling young people to buy rich old people a new set of golf clubs.
There are different funding options that have been proposed, such as full funding. The current system has today's generation of workers financing today's retirees, which is where the funding gap lies, whereas a fully-funded system would invest payroll taxes so that today's generation is effectively funding its own retirement, given positive returns on the social security portfolio. This option still creates a funding gap, because dramatically more funds would need to be raised in the short run, but it also makes the system much more sustainable in the long run (Templin, 2006).
The other option, which seems to be the default today, is to do nothing. In the future, the situation may change and a solution may not seem as challenging. It is not known if a solution will be easier in the future, but the major solutions bandied about in the media are not politically palatable, so it is likely that the do-nothing option will prevail for the time being. The result is that by 2036, Social Security will no longer be self-funded and general taxes may be considered to help fund the system.
Social Security faces a funding crisis, but that crisis is down the road. This means that the do-nothing option is likely to prevail. The major…[continue]
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