How Social Security insurance programs sustain benefits and finances

Social Security

How the Social Security Insurance Works

The Social Security is an organization is that is commonly known to anyone especially to those who are in the labor force. But how the Social Security works is not known to many. The Social Security has different programs such as the Retirement, Survivors, and Disability which provide the members or their family relatives, where applicable, lifetime monthly benefits should the members reach or qualify in what the programs state as beneficial period. For instance, in the retirement program, a Social Security member will start to receive his lifetime monthly benefits upon he reached a certain age. To apply for any Social Security program, there are also qualifications that the applicants must meet.

Social Security sustains from explicit taxes that the workers and the employers pay. Both the worker and employer each pay half of the tax. In the case of the worker, such taxes are added to the other income taxes that he pays. The explicit taxes are the sources of the Social Security to finance the Retirement, Survivor, and Disability Programs.

The Social Security earns money through Trust Funds. Following is a simple explanation on this, as extracted from an online article.

What happens to the extra money collected by the Social Security system? In effect, it is loaned to the Treasury, which is borrowing the money just as it borrows money when it sells Treasury securities to the public. In this sense, the surplus money collected by Social Security helps pay for the rest of the government.

In return for the surplus tax revenues it furnishes to the Treasury, the Social Security trust funds receive Treasury securities bearing a market rate of interest.

Problems With Social Security

The Social Security works in a simple structure as this: the current generation pays for the benefits of the current retirees, disabled, and survivors. With this system, the National Center for Policy Analysis sees the following as problems that can cause the bankruptcy of the organization.

Life expectancy is increasing faster than expected -- in 1940, a 65-year-old man could expect to live another 12 years, today it's 15 years, and by 2040 it will be 17 years.

The fertility rate is falling faster than expected -- from 3.6 children for a typical woman of child-bearing age in 1960 to just two today and a projected 1.9 by 2020 -- and is already less than the rate of 2.1 needed just to replace the existing population.

The elderly portion of the population is expected to rise from 12% today to 20% by 2050 -- increasing the number of retirees from 34 million to 80 million.

The smaller working-age population and larger elderly population means that where there were more than five workers for each retiree in 1960 and 3.3 workers per retiree today, by 2030 there will be just two workers to pay the taxes for the benefits of each retiree.

Proposed Changes

Several solutions are proposed to minimize or eliminate the problems in Social Security. Although there are no simple solutions in the issues and problems being faced by the Social Security, the proposed solutions are under extensive study where debates and arguments are presented. The American Academy of Actuaries list the following proposed solutions.

Increase payroll taxes.

This is seen to increase the cash-flows in the Social Security thus can lessen the cash needs of the organization to meet its services to its program members.

Increase the Limit on Taxable Earnings

Increasing the limit on taxable earnings could similarly increase payroll taxes that in turn will increase inbound cash flows in Social Security.

Increase Taxation of the Benefits

Again, this means that an increase in tax paid by the workers could increase the inbound cash-flows in Social Security, thus providing them with an increased cash sources.

Raise the Retirement Age.

Raising the retirement age would mean providing the Social Security with more period to use and grow its finances.

Change Investment Procedures

The way that the Social Security invests its finances may have flaws. Thus, changing and improving its investment procedures may provide better revenues.

What is your Opinion for Possible Solutions?

In my opinion, the possible solutions that the Social Security should consider should not cause the workers with barriers. I believe that the proposed solution of changing the investment procedures of the Social Security can be effective as long as the organization obtain and produce correct accounting of their finances and as long as they find better ways of investing their finances. Another possible solution may be changing the benefit formula; for instance, decreasing the amount of initial benefits received by program members. Although this will have a disadvantage to the program members, there must be another approach that can turn that disadvantage into an advantage, or into a better benefit, in the later part of benefits received by the workers. The solution of changing the initial benefit formula is only to provide the Social Security with more time to increase its revenues and finances.