Supply and demand imbalance in the U.S. Social Security system

U.S. Social Security System

Editorial: U.S. Social Security System

Precisely, Social Security is called Old Age, Survivors, and Disability Insurance (OASDI) government program that provide financial benefits to retirees, spouses/children of deceased workers, and disabled workers (Aaron 2011). This U.S. program is financed through a payroll deduction (FICA) tax imposed upon eligible workers. Interestingly, the first social security program originated in Germany in 1889 by Chancellor Otto von Bismarck (Kotlikoff 2011). Although 34 European nations operated similar retirement plans, the U.S. followed suit when President Franklin Delano Roosevelt signed the U.S. Social Security into law in 1935 (Saving 2008). Primarily, the program was to transfer funds from the workers to retirees for sustainability. From 1935 until 1957, the system remained a benefit program for retirees and survivors, in which Congress began to make critical changes that fueled programmatic issues. Subsequently, the program expanded to include the disability benefits for disabled workers, with automatic cost-of-living adjustments to the beneficiaries. In 1977, the benefit formula was changed to incorporate a constant percentage of work income. Shortly thereafter, the funding crisis began, prompting Congress to raise the payroll tax rate, to increase the retirement age, and to tax benefits. Hence, the economics of Social Security turmoil begins.

Supply & Demand

Cyclical in nature, the U.S. economy requires occasional manipulations from various variables. Such manipulations derive from the basic economic concepts of supply and demand. Insomuch, it is the main fiber of a market economy, whereby both consumers and suppliers drive demand and supply. For example, quantity demanded refers to the quantity of a product or service desired by consumers who are willing to buy at a certain price. With the Social Security program, the demand is represented by the retirees, survivors, and the disabled. Comparatively, the quantity supplied represents how much the suppliers or market can offer at a certain price. As an illustration with the Social Security program, supply represents the eligible workers contributing to the system and supporting the demand (retirees, survivors, and the disabled). In either case, the Social Security benefit represents the price: a reflection of supply and demand. When supply equals demand, market equilibrium exists, whereby the needs of suppliers and consumers are met. If supply exceeds demand or conversely, disequilibrium occurs in the market. With respect to Social Security, increased demand will surpass the quantity supplied.

As an example of the supply and demand relationship, in 1945, the United States had more than 40 workers per retiree. Minimally, workers were taxed, providing adequate support for the entire system. Retirement benefits are based on average indexed monthly earnings for the thirty-five highest earnings years before retirement (Saving 2008). The benefit formula favors lower-income workers. Conceivably, "if a worker earned an average monthly salary of $624, he or she would receive a benefit that replaced 90% of earnings. Someone whose average monthly earnings were $3,760 received a benefit that replaced 42% of earnings, while someone with monthly earnings at the then-taxable maximum of $7,325 received a benefit that replaced only 28% of earnings" (Saving 2008).

Problematic System

At the age of 62, workers may opt for early retirement, resulting in a deduction from full benefits based on the actuarial assumption that they will collect benefits longer. The full-benefit age was sixty-five until 2000, when it began a two-month-a-year rise. It reached sixty-six in 2005, where it will remain until 2017; it will then rise by two months each year until it reaches sixty-seven in 2022 (Kotlikoff 2011). With the life expectancy rising, benefits increasing, and falling birthrates, these factors resulted in only three (3) workers per retiree, thus burdening the system. By 2030, only two workers will be available to support each retiree. Accordingly, increased demand far surpasses the quantity supplied. In reality, many people believe that the personal FICA taxes paid are allocated in a separate account in his or her name at the Social Security Administration. Unfortunately, this is not the case. In fact, funds arrive at the U.S. Treasury and used for current retirees' benefits and other government expenditures (Aaron 2011). Annually, if revenue from FICA taxes exceeds total benefits paid, which it has every year since 1983, the Treasury issues special government bonds (IOU) to the Social Security Administration that denotes the Treasury is using Social Security's money for other purposes.

Effects of Economic Controls

With respect to price floors, price controlling creates a surplus. Quantity demanded is less than quantity supplied. With respect to price ceilings, price controlling creates a shortage. Quantity demanded is more than quantity supplied. Regardless of the type of control mandated, both situations create Deadweight Welfare Loss (DWL), whereby a gap exists between the marginal cost and the marginal benefit (California n.d.). If the surplus remains in the market, then the price would actually drop below the equilibrium. To prevent this, the government must step in by either buying the surplus or subsidizing costs (taxation) to suppliers (workers), by diverting allocated funds into the Social Security system. If shortages remain in the system, then beneficiaries and future retirees will resort to personal investment efforts.

Conclusion

Unfortunately, the economics of Social Security turmoil continues. In analyzing the Social Security system with basic economic theory, a real solution to a growing problem still looms. Since 1935, the program has served many and has transformed into a broken system that is doomed unless major changes are imposed. Certainly, both supply and demand have a direct correlation to economic controls. Its effects shift some of the burden of the broken Social Security system to the government, whereby both the U.S. government and taxpayers should share in a social system in which all may benefit. Government subsidy could occur by diverting funds from other usages, but perhaps, creating a shortage in other areas. Additionally, privatization with individual accounts would place the burden of retirement on the current generation, as opposed to future generations supporting the system. Inherently, inequitable situations will occur with any adjustments, thus affecting current and future generations.