Social Security as a tax-funded program providing retirement benefits

Social Security

It's been more than 70 years that Social Security became the part of American personnel administration policy. Today it has become the part of the social fabric of American society. The Social Security Act of 1935 included a broad range of initiatives: old age assistance, Federal-state public assistance, unemployment compensation, public health services, and vocational rehabilitation. Through these packages of retirement, disability and survivors insurance Social Security provides American public economic security for their future. Today many workers are earning Social Security protection, and millions receive retirement, survivors and disability benefits from Social Security.

Social Security has been implemented by using the contributions from both employer and employee. A special payroll tax was created to support Social Security so that people would be aware of it every time they received their wages. The Federal Insurance Contributions Act (FICA) tax was labeled a contribution from both employer and employee and people knew they had to work a certain period of time to become eligible.

The design of Social Security is made in a way that the contributions made and benefits received have a link between them. The benefits availed by the citizens are very important to them and therefore all American people consider the issues related to Social Security very important as this program is meant to secure their future financial needs.

Social Security as a Tax Not Insurance: Some people consider social security as kind of insurance. They have this misconception that it is a form of social insurance to which members add during their working lives, and then draw upon at retirement but that is not the way the system in fact works. From the beginning, Social Security was a 'pay-as-you-go' operation, as the money that was being paid in went right out in the form benefits. The fact is that Social Security is an intergenerational transfer of money from workers to non-workers. In fact, People paying Social Security tax have no property right to that money, as they would have if it were an insurance policy or retirement account. Once Americans accept that what is paid in is a tax and not their money, other myths automatically will be dispelled. For instance, people often compare the amount of money they paid in FICA tax during their work years with the amount they receive in benefits, as they would with an investment. However, it is not an investment it is a tax.

Benefits for Elderly: Senior citizens of United States become the biggest beneficiary of this system. This system ensures that elderly receive benefits after attaining the retirement age. It is this age and phase of life that people are generally more worried about. Since, Social Security is a way to ensure smooth earnings and benefits for the elderly, the program its changes and reforms are very important for those in the younger or middle age brackets as well. Elderly in America today depend on the benefits in the form of monthly income provided by the social security. Elderly have the option of retiring early that is at the age of 62 and get reduced benefits or they can choose to retire at the age of 67 and get full benefits. A majority of elderly in America today has Social Security as their main income source while some are absolutely dependent on Social Security in the absence of any other source of income. "We do not believe that an individual's obligation to work and to earn should be perpetual. As nature has decreed that our physical capacities decline as we age, however this decline is retarded by science, so do human societies now tend to believe that some respite is due in the twilight of life, during which it is understood that the material and emotional needs of the elderly will not be contingent upon continued labor. When the elderly are in poverty, we do not believe that this is because they are shiftless or worthless, but because the proper arrangements have not been made to provide for a period of retirement" (Blahous III, 2000).

Benefits for Those with Disability & Survivors: Generally, the perception is that the Social Security program is restricted to retirees only. However in reality it also covers those with disability & survivors. It is said that almost one third of beneficiary of Social Security program is not a retiree. Through its valuable disability and survivors insurance protection many young American and their families are also receiving the benefits. Just like retiree benefits Americans consider disability and survivors benefits equally important. For example, there is a worker with a steady job and it is expected that he would continue to hold this or a similar kind of job and receive regular income, then in the event of his becoming disabled he or she can get compensated with a certain amount from the Social Security. Similarly the same person with spouse and children could also get benefits through survivors program in the event of death.

History

The foundations of the Social Security program were laid during 1930s. Due to great depression many elderly were experiencing abject poverty. It was great depression that stirred the process faster for the social security program. Finally the Social Security Act was signed by the President Roosevelt in 1935. President Roosevelt's committee on economic security made the draft of this Act which was finally passed by the congress.

Ever since the Act was paassed, it has faced criticsms as well as attained immense popularity. The Act, however remained embroiled in various controvorsies. Initially, critcs argued that this program would result jobb losses and some even went on to say that that the recession period betewwn 1937 & 38 resulted because of this program. However, with the passage of time Act not only became accptable but also famous. Also known as the Old Age Pension Act, this program raised a new hope for retirees as they started getting payments financed by a payroll tax on current workers' wages, half directly as a payroll tax and half paid by the employer. 1937 was the year in which collection of payroll taxes was started and the very same years payments were made.

As mentioned earlier critics of the Act and program made several allegation and some cases were also filed in the Court to determine the constitutionality of the Act. Even Supreme Court in such cases ruled in favor of Social Security Act vouchinf for its constitutionality. However, ther were some flaws in the law in terms of distribution of benefits to all and sundry as it paid retirement benefits only to the primary worker. Initially tax rate was set at 2.0% of the first $3,000 of the employee's earnings, shared equally between the employee and the employer. Also some new people were included in the list of beneficiaries. The Act was expanded in 1939 to include the widowed, nonworking spouse of someone entitled to an old-age benefit, survivors (widows and orphans), and even retirees who had never paid any FICA taxes. After the inclusion of these new gruoup of people in the security benfits this program became even more popular. As years passed the tax rate was increased gradually. In the middle of the 50s the tax rate was raised to 4% and this rate reached to 6% by the decade of 60s.

By the year 1965 Medicare also became part of the Social Security Act while 1975 saw the inclusion of cost of living allowances (COLA) into the program. Later amendments were also made regarding the age limit for availing retiement benefits. The retirement

Age or eligibility for old age bensfits age was raised from 65 to 67 for all those born after 1959.

Future

Under the Social Security plan government is collecting more money today then it is paying out as benefits to citizens. The surplus money remains safe in trust fund. However, the future situation seems troublesome due to various issues and reasons. "Social Security gradually expanded from its inception through the early 1980s by increasing benefits and coverage for various groups. To pay for those modifications, payroll tax rates and the maximum earnings ceiling have been steadily raised. Now the Social Security trust funds are in long-term financial imbalance, and benefit cuts and more payroll tax rate increases seem inevitable if Americans are to retain the important social protections that Social Security currently offers" (Tanner, 2004)

Issue of Demographics: The fundamental issue is one of demographics. As an intergenerational transfer of money from those who are working to those who are retired, there must be enough people employed to provide sufficient benefits. The large baby boom generation will be retiring after the turn of the century, when the numbers in the workforce will be declining. In 1950, there were 16 workers for each individual receiving benefit. Today, there are just over three. By the end of the second decade of the 21st century, when the baby boomers are into retirement, there will be two workers for each recipient.

In fact the demographics of the Baby Boom have very little to do with the long-range problems of Social Security. The main reason the fund will run into deficits in future years is that people are living longer. If people continue to retire at the same age but live longer, then a larger percentage of their lives will be spent in retirement. If people want to spend a larger portion of their lives in retirement, either they will have to accept lower incomes (reduced benefits) in their retirement years relative to those of their working years, or they will have to increase the portion of their incomes (higher taxes) that they put aside during their working years for retirement. These are the issues that are currently being debated to reform the Social Security program in order to make it useful and effective for future generations to come.

Options for Future

There are different options and choices suggested for the policy makers to address the future needs of the Social Security program.

Reduction in Benefits: Some people suggest that the benefits given to the citizens should be curtailed in order to sustain the future needs. Some also suggest increasing the retirement age further as Americans are living longer and healthier. Critics on the other hand argue that increasing the retirement age would not work as most elderly will not be able to work beyond the current retirement age and some people are still opting to retire early.

Increasing the Taxes: For some people the solution of the problem lies in increasing the current tax rates for Social Security program so that future needs can be met easily. Again, critics argue that current tax rates can be considered highest as they have been raised many times over the years and increasing them further will cause more problems in terms of public personnel administration.

Privatizing Social Security: Many consider privatizing social security as a viable option like many other features like correctional facilities were privatized. However, critics argue that privatizing Social Security would not create a penny of additional savings. All the privatization plans call for the government to continue to pay Social Security benefits to current recipients and those about to retire; therefore spending would be exactly the same after privatization as it was before privatization. Yet the government would no longer be collecting Social Security taxes. Each dollar an individual puts into a private retirement account rather than paying it to the government in Social Security taxes would still be a dollar the government must borrow. Individuals would be saving more, but the government would have reduced its saving while increasing its borrowing by exactly the same amount. Most of the privatization schemes being put forward call for additional taxes and additional borrowing to finance a transition while benefits were being paid out under the old system.

Alternative Private Investment: Finally, there is this opt-out proposal whereby workers could invest part of their contributions in alternative private investments. The fact that individuals might put their savings in the stock market or in other private assets, whereas the Social Security Trust Fund buys government bonds, also doesn't affect the level of saving at all. If it did, the government could increase the level of saving in the economy by borrowing money and then investing it in the stock market, or by borrowing money and giving it to individuals with the requirement that they invest it in the stock market. If either step could increase the level of saving in the economy, the government should take it independent of any changes in the Social Security system. There also other differences in the private investment and government system. For example, it is easy to see why costs in the private financial sector are so much higher. The private sector pays hundreds of thousands of insurance agents and brokers to solicit business. It also incurs enormous costs in television, radio, newspaper, and magazine advertising. In addition, many executives and brokers in the financial industry receive huge salaries. Million-dollar salaries are not uncommon, and some executives earn salaries in the tens of millions. Privatization would add these expenses, which are currently absent from the Social Security system.