Crisis Humanity Has Not Yet

Crisis

Humanity has not yet created a society model where there would be no poor or needy. So, who should be taking care of them - government, the rich or should they be trying to survive themselves?

The first President to have decided that government should be helping the poor was Franklin Roosevelt. Within his program of overcoming the Great Depression, the Social Security law was adopted. In January 1940, the monthly payments were started. The first check was written out in Ida May Fuller name, a secretary from Wermont. She worked for three years after the law was adopted and retired at the age of 65; during her work she transrfered to the social security system 24 dollars 75 cents. The sum on her first retirement check was 22 dollars 54 cents. Ida lived till 100 years and overall received 22888 dollars 92 cents.

The 2004 Social Security Trustees report shows that the future becomes more and more uncertain for the nation's government run pension system. The program's unfunded obligations grew by 200 billion dollars since the 2003 report. The Social Security Board of Trustees states that currently scheduled benefits cannot be sustainable and today's workers will not get the amount of pensions promised to them today. This led to numerous discussions on Security System collapse and the inevitable crisis. In this essay I will try to recapitulate the main pros and contras on this matter using the definition of crisis from Fern-Banks book (2002) which states that "a crisis is a major occurrence with a potentially negative outcome affecting the organization, company, or industry, as well as its publics, products, services, or good name." will analyze matching of this definition to the present occurances. In the case of pensionary system collapse, will it be a "major occurrence"? Obviously, it will, as this system concerns all of us. From the day we start to work, we start giving money to the retirees, while expecting to also get benefits from workers when we retire ourselves.

Will the present situation have "a potentially negative outcome"? Some mathematics of the "crisis" is as following. Today, reports claim that there will be not enough inflows in the fund to provide retirement payments in the year 2042. Different researches use different estimations of the economy, dollar exchange rate, retirement rates and so on, give different figures. Estimates suggest that these liabilities unfunded can climb as high as up to 10.4 trillion dollars, or 3.7 trillion of today dollars over the next 75 years.

In 2005, the surplus from the cash flows paid by currently working employees will account at about 180 million dollars, but will decrease gradually. At 2018, the social security benefits will start exceeding revenues, but using this built-up surplus, the situation will not be dramatical. So, the problems should not start until the year of 2042. The problems might occur when in about 2010-2015 the baby-boomers will start retire and the payments to provide decent living for them will be enormous. This problem is even worsened the by declining childbirth rate, increase in the average life expectancy, thus giving ground to predict that in some future the amount of people working will be much less than the number of people on retirement.

After the year of 2042, the Social Security Fund will not be bankrupt; it will still be able to pay out pensions to up to 75% of the promised liabilities. But of course, we cannot wait till 2042. If the proper actions are taken already now, this shortfall can be avoided. As the author of the article "Social Security Privatization as the Mother of All Con-Man Smoke-and-Mirrors Shell-Games," Nouriel Roubini, states "if we start today to increase payroll contributions (and/or reduce future benefits for current young workers and/(or change the retirement age) we need only a permanent adjustment equal increasing the payroll tax by 1,89% (i.e. An amount that is about 1% of GDP) to ensure that the current PAYGO system is solvent for the next 75 years. Thus, 10 trillion dollars problem is not as large and scary if we start acting today to fix the current system).

It is totally manageable."

But the official plan is somewhat different. Bush's administration is trying to introduce private account systems where a fraction of payroll tax will be transferred to private accounts and managed by the future retirees themselves, thus, giving them chance to invest this money into stocks, which have proven to give on average higher rates of return than the Treasury Bills which generate rather moderate income.

The opponents of this idea state that this is just a shell-game, where no capital is accumulated and investments are not increased. The overall national capital is not increased, but this plan will cause enormous transactions costs which are estimated to be 5 trillion dollars as well. Another contra for this idea is the volatility of the stock markets and unpredictability. Scientists argue that Social Security Foundation was never meant to be an investment fund, it was meant to be an insurance foundation which gave all the working and retiring Americans the feeling of stability and sound future.

The author of the article draws conclusion that the privatization will not be sufficient as the young generation will any way have to pay off the government debt which will occur to cover the extra 5 billions dollars (the costs of transactions if privatization is used). Ignoring these costs is like trying to ignore an elephant in your living room.

So, the overall opinion is that the system is in the crisis and is extremely vulnerable. It can be easily put into bankruptcy by the following factors: rise in unemployment, revenues from the payroll tax will fall from expected levels, if price inflation accelerates, indexed benefit payments will increase faster than expected, if retirees live longer than expected, benefit expenditures will again grow faster than projected. Another problem is that the Social Security Foundation is backed up by government bonds, so, there is no actual money behind the system, no money is accumulated. Thus, if government fails to pay off the debt, the pensioners will be without retirement benefits.