Social Security Retirement System bankruptcy and solvency concerns

Public Finance and Legislative Procedures: The Social Security Retirement System

Can the Social Security Retirement System be declared bankrupt?

When Franklin D. Roosevelt approved the Social Security Act in 1935, he intended to rid American citizens of the burden of catastrophic wage loss that would arise from the disability, death or retirement of a member. The privatization of social security, however, allows workers to handle their retirement money via personal accounts. In essence, the underlying notion is that retirees are given the liberty to put their retirement money into the financial markets, which will earn them higher returns than with government invested funds. Private pension sponsorship significantly reduces the amount of retiree incomes that Security Systems receive (Schieber, 2012).

It is, however, impossible for Social Security to go bankrupt. This idea mostly arises from a major misconception about how Social Security Retirement Systems work. Each person contributing taxes to Social Security does not have an account holding their money until they retire. Taxes paid when an individual is in employment are used to pay benefits to those currently receiving benefits and after retirement their benefits come from the taxes paid by those employed at the time. Social Security should be interpreted by a look at the entire economy, rather than a single individual. The nation cannot run out of money for retirement because it does not depend on financing and savings, rather, it utilizes the salaries of productive workers and remits it directly to those retiring at the time. Redistributing existing output will make it possible to support a variety of retirees. The system is coordinated such that the Social Security Trust Fund contains revenues that change as the state of the economy changes. They rise and fall during expansions and recessions and the fund holds excess revenues when taxes become more than the expenditures. Payments to retirees can never be more than the tax returns since increased productivity will increase the wages and salaries and deficits in the fund can always be addressed by increasing taxes or reducing the benefits receivable.

The recent increase in Social Security tax rates

For much of its history, the Social Security System has funded benefits with money received from taxes. A complete overhaul of the Social program in 1983, however, increased payroll taxes to protect the fund against a new phase of retirees (Schieber, 2012). In the next decades, more revenue was accumulated than was paid out in benefits and the surplus was invested in Treasury bonds. A large number of unfunded pension liabilities make it impossible to manage resource allocation and requires tax increases in order to avoid huge budget deficits. The situation continues to deteriorate because a large percentage of revenue collected from tax increases goes towards settling accumulated payments and debt services, hence the cycle continues in subsequent years.

What measures could be taken to reduce the Social Security payroll tax?

Changing the cost of living adjustment

Since Social Security benefits are adjusted according to the level of inflation, which is highly dependent on the consumer price index in a given year, use of a slower measure of inflation would boost Social Security benefits in small amounts until the increments add up over time.

Reducing retirement funds paid to high income earners

Reducing retirement payouts for high income earners will also reduce the Social security shortfall. The payroll tax imposes the heaviest burden on low income earners which is driven by lack of impact on the upper and middle income distribution in the society (Schieber, 2012).