Social Security Reform Term Paper

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Social Security Reform

Can Social Security Be Reformed?

Doing nothing to fix our Social Security system will cost us, as well as our children and grandchildren, an estimated $10.4 trillion, according to the Social Security Trustees. The longer we wait to take action, the more difficult and expensive the changes will be. -- White House Press Release, January 11, 2005

Today, Social Security is the largest of all government programs and has represented the primary basis of economic support for millions of Americans, including retired persons, disabled persons, and family members of workers who have retired, become disabled or who died for 70 years (What is Social Security? 2005). The programs administered by the Social Security Administration have unquestionably contributed to the economic well-being of the United States in the past, but many observers are questioning whether there will be anything left in the system after the baby boomers get through with it in the coming years. Reformers caution that the longer policymakers wait to fix the problems facing Social Security today, the more expensive it will be for future generations. Others suggest that the entire system should be done away with entirely, or modified to allow for private investment accounts of some type. Everyone seems to agree that something should be done, and the sooner the better, but no consensus has emerged to date. To this end, this paper provides the background and an overview of the Social Security Administration and its programs, followed by an examination of the importance of these programs to the nation's economic well-being. A review of some of the current reform initiatives and an analysis of the viability of Social Security to meet its obligations in the coming years is followed by a summary of the research in the conclusion.

Review and Discussion

Background and Overview. On August 14, 1935, President Franklin D. Roosevelt signed the Social Security Act and payroll taxes were first collected in January 1937; the president also signed legislation in 1939 that provided benefits for survivors and dependents (What is Social Security? 2005). Today, "Social Security" is actually an umbrella term for several programs, including Old-Age and Survivors Insurance, Disability Insurance Supplemental Security Income administered by the Social Security Administration (SSA) (SSA Strategic Plan 2003-2008, 2003).

According to Diamond, Lindeman and Young (1996), reports from the Old Age, Survivors', and Disability Insurance (OASDI) trustees indicate an increasing deficiency in the program's long-term financing. "From the perspective of annual flow," they say, "the reports project that the deficiency will grow to between 3 and 5% of annual payroll after the year 2020 and will amount to approximately 15% of program spending over the next seventy-five years" (1). Even more importantly, though, these reports estimate that unless corrective action is taken now, the Social Security program will be insolvent by the year 2030, a range entirely within the retirement years of the baby boom generation. More disturbing for these soon-to-be-retirees, the date at which the Social Security trust fund stops being a net contributor and becomes a net claimant on the federal budget has advanced to the year 2013 in these projections (Diamond et al. 1996). These reports are especially troubling for many older people today who firmly believed that the 1983 Social Security amendments had completely "fixed" the Social Security program, at least through the imminent onset of the baby boomers' retirement in the year few years. Finally, and perhaps most troubling of all for the younger generations of Americans, reports in the news media have assumed new dimensions of skepticism concerning whether Social Security will be able to pay out anything at all when they reach retirement age (Diamond et al. 1996).

Importance of Social Security Programs to the Nation's Economic Well-Being. According to the SSA's "The Future of Social Security" (January 2005), "Social Security provides older Americans with a dependable monthly income with automatic increases tied to increases in the cost of living. . . . It provides a base of economic security in today's society through a valuable package of retirement, disability and survivors insurance" (2). In a recent press release from the White House (January 5, 2005), the point is made that "Social Security provides a critical foundation of income for retired and disabled workers. For one-third of Americans over 65, Social Security benefits constitute 90% of their total income. Hispanics, African-Americans, and unmarried elderly women are even more reliant on Social Security" (Social Security 3).

Today, more than 156 million workers are protected by the various programs administered by the Social Security Administration, and more than 47 million people are recipients of retirement, survivors and disability benefits from Social Security. In fact, by all accounts, the entire elderly population (defined as people aged 65 years or older) in the United States has benefited from the programs administered by the SSA in substantive ways, with the sole exception of the Hispanic segment (Hungerford, Iams, Koenig & Rassette 2002). In fact, Social Security has been credited with decreasing poverty rates for the elderly since 1976, a point in time from which median real income has increased (median income relative to that of the working-age population has remained relatively stable since that time) (Hungerford et al. 2002). The program was designed, though, at a time when most people were not expected to live long enough to collect any benefits (Bolter 2005).

According to Hungerford, Iams, Koenig and Rassette (2002), "Of the five sources of income for the elderly, Social Security remains the most prevalent and important. While both the rate of receipt and the share of aggregate income from Social Security benefits stayed relatively steady over the past 25 years, the average real Social Security benefit increased because of rising wages" (12). The second most important source of income for the elderly in America is income from assets; during the same 25-year period, this source of income tended to fluctuate. Hungerford and his associates point out that asset income for the elderly is more responsive to minor changes in nominal interest rates and bond yields because this segment of the population is more likely to hold interest-bearing assets such as bonds rather than stocks (Hungerford et al. 2002).

Current Reform Initiatives. A wide range of political, consumer and business interest groups, as well as the executive branch of the U.S. government have all proposed fundamental changes in the structure of the Social Security system (Niggle 2000). The majority of these reform proposals have involved some type of privatization of the system. According to Niggle, the term privatization in this context means some combination of:


Transforming the system from a pay-as-you-go (PAYGO) system into a prefunded system;


Changing the asset composition of the system's portfolio from special issue, nonmarketable U.S. Treasury securities toward a heterogeneous portfolio including private securities (corporate equities and bonds); and (3)

Allowing private management of at least part of the asset portfolio by either individual participants, their chosen representatives, or a quasi-public board of portfolio administrators (790).

In its most radical approaches (what Niggle terms "strong" and "pure" privatization), the existing system would be gradually phased out and replaced with private contributions into retirement accounts that were individually managed; account-holders would enjoy complete freedom in choosing their portfolios and would not be provided with any state-guaranteed social insurance or guaranteed retirement income. The advocates of these proposals cite the increasingly gloomy deficit projections for Social Security funds in the future, combined with the relatively low projected rates of return on contributions to current and future system participants as the primary reasons for adopting these alternatives. Other arguments for this type of reform have included an expected increase in the rates of saving and investment resulting from privatization, and in some cases, approval of the resulting decline in the relative size and power of the national government (Niggle 2000).

In a special to the Washington Times, Peter Ferrara (2003) points out that for a number of years now, official government reports from the Board of Trustees have made a powerful case for pursuing fundamental Social Security reform. Despite the consistently (and increasingly) grim nature of these reports, Ferrara emphasizes that the reality of the situation is even worse: "These reports do not adequately take into account the prospects for much longer life expectancies during the next century due to advanced, high-tech medicine. Substantially increasing the number of retirement years will greatly increase the program's benefit obligations and long-term deficit" (A15). According to SSA's "Frequently Asked Questions about Social Security's Future" (2005), "Many reform plans, including those put forth by the President's Commission to Strengthen Social Security, preserve scheduled benefits, including cost- of-living increases, for near-retirees" (depending on the proposal, a "near-retiree" is defined as ages 50 to 55 years and older) (2).

The most recent White House press release on the president's position on Social Security (January 11, 2005) reports that the president does not want to increase payroll taxes, and is in favor of voluntary personal accounts as part of a comprehensive solution to…[continue]

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