Social Security Is Financed With the Idea

Social security is financed with the idea that those people currently working, along with their employers, can donate enough money to pay the benefits to those currently getting them: not only retired people but some people with disabilities, and some widows with young children. When Social Security first began, this system worked well. The problem facing Social security is that the numbers of retirees are going to increase at the same time the numbers of workers will decrease. When Social Security began, there were five workers for every one person receiving benefits. Current projections, however, suggest that by 2030 that ratio will be three to one. By 2080, it is expected to shrink to two to one (Reynolds, PAGE). This system, called "Pay as You Go," will eventually be unable to provide all the funds needed to make payouts to individuals, and will essentially be bankrupt.

Several solutions have been proposed. President Bush would like to see younger workers take some of the money they would have paid into Social Security and invest it themselves. The idea behind this approach is that in 2005, most people are more sophisticated investors than most were when Social Security was begun. However, critics point out that this approach will not increase funds to Social Security, is likely to weaken it further and will shift more retirement burden to the workers without any guarantee that those workers' investments will in fact perform well over time (O'Neil, PAGE).

Another choice would be to increase the money workers and employees pay as FICA, or social security, taxes. This could counteract the effects of the shrinking number of contributors and increasing amount of payments. However, it seems likely that workers who pay more into the system would expect to receive more when they retire (Reynolds, Page), and might well resent having to pay twice as much as those currently retired. In addition, some worry that the increased taxes could slow the economy, shrinking any benefit from raising the tax (Reynolds, PAGE).

A third option would be to keep FICA taxes at the level they are but raise the amount of earnings taxed under that law. Right now, only the first $90,000 an employee earns has FICA taxes applied. If that amount was raised to $140,000, then workers making that much would contribute considerably more. However, it seems likely that workers would only agree to such a system if their retirement check increased, so such a gain might be an artificial one (Reynolds, PAGE).

A fourth option would be to reduce the benefits paid out to those receiving social security benefits. This approach is particularly problematical for those who are approaching retirement, because they factored in the amount they would get in Social Security when they were deciding how else to financially prepare for retirement. This suggests a criticism to Bush's approach: those who can afford to do so already are making investments. The amount of social security most people would receive would be hard to live on by itself, and most people who can save other funds as well (O'Neill, PAGE).