Important issues relating to Social Security
United States Social security is arguably the largest employees’ retirement benefit fund as well as the largest government expenditure and investment program in the entire world. The retirement benefits expenditures for the year 2005 was statistically estimated at $822 billion with $299 billion being cover for the medical expenses for the elderly and Medicare. (Board of Trustees of Social Security and Medicare)
One of the burning issues regarding U.S. Social Security system is the government policy, which remains jargon to most contributors. It is critical for people to understand policy governing one of the most important schemes in their lives. It represents how well the people live but with terminologies such as, “unfunded liabilities, infinite and seventy-five-year time horizons, average indexed monthly earnings and primary insurance amounts,” then it would be almost impossible to appreciate the system.
Other used terms include, “trust funds and lockboxes, wage indexing versus price indexing of benefits, bend points in the benefit formula, carve-outs and add-ons, replacement rates, covered and uncovered earnings, and so on”, (Siegel, 13)
One unique aspect of the fund is the benefits for the elderly and the Medicare, which funded by taxes derived form workers’ salaries and wages. According to the Advisory Council on Social Security, the U. S Social funds transferred yearly from the current working class to fund the already retired or retiring workers thus referred to as the “Income transfer Program”. A retiree does not benefit from the amount deducted during their contribution tenure.
Unlike various trust funds which accumulate the taxed amount for later refunds, the U.S social security fund is an on-going program with as little as 16% per contribution remaining as running cost for the fund all the other potion funds the retiree. (Advisory Council on Social Security) The fund scheme does not invest the collected taxes but disbands them immediately.
The question people would ask is on the stability of the fund comparing it to other illegal pyramid schemes that collapse every now and then yet it utilizes similar operating concept. It is notable that the government is in a position to force current employees to invest through collection of taxes. This means the retirees remain constantly assured of benefits due to funds supplied by younger workers.
These fund referrers to as a system that enables citizens to share resources economically. These system workouts in a much better way for the early retirees since they get higher returns compared to later retirees. The outstanding issue relating to the U.S Social security is on its ability to base their benefits calculations on the egalitarian concept, where the families with greater needs receive higher benefits that the high-earning house holds.
Evidently, the scheme has seen reduced rates of returns over the years. This might not be a major blow to the scheme because the small differences on the rates of return make huge pension over the years, hence the current improvement on living standards of many retirees in the U.S. The goodness of the deal offered by social security fund drive depends on the type of family whether it is middle class or made of high earners.
Idea of privatizing the Social Security
Today people prefer to accumulate their assets and other resources in form or stocks and bonds, which have more stable and better rates of return than social security rates. They use the returns to co-sponsor the pension income since the amounts from social funds seem to be lowering day-in-day-out.
According to Siegel (2002), on the study of stock over the long run, the rate of stock had been stable at an average of 6.9% for almost two hundred years (1802-2001). Since the World War II, the rates have had a stable 7.1 percent rate of return and although they considered risky and easily fluctuate over short periods, this has not been the case. People invest in bond because of their guarantee over rates of returns.
The above phenomenon indicates that there is urgent need to consider the idea of privatizing the social security scheme because of its low returns. Most people are opting to risk their savings on various other investment schemes because they are giving back huge percentages above the social security funds over a short period.
The current rate of returns for the fund approximates it at an almost constant 1.5%. Why should an investor consider the scheme while they are able to have 7% or more returns on stocks and 4% or more on bonds, which are more safer just as security funds? The burning issue is competition.
By privatising and legalizing other competitive safe schemes, would this be achievable. How many people would wish to have a choice over investing their taxes? If this were possible then they would invest it in the most suitable and best returns giver. This would definitely force the retirement fund scheme to up its dealing to upbeat the competition. The private investment yields more and therefore people which they would be able to invest their taxes in stock.
Reforms required for the social security
The stability of U.S social security fund does not indicate it is the most desirable it needs many reforms to make it more effective and desirable. The retirees are able to get benefits that are higher than what they contributed only when the salaries and wages of current contributors remain high. This means that the government should have a mechanism of ensuring the salaries keep rising as per the economical growth.
The return directly depends on the growth of current earnings. As Siegel (19) puts it, in the long term, the Social Security is capable of providing an “annual rate of return on taxes which is equals to the annual rate of growth in taxable earnings and this means that all generations of workers can get back more than they paid in as long as earnings raise over time.”
The rates of return depend on the rate of economic growth, with the current trends of depreciating economies or low growing economies; the expected rates to continue the depreciation trend too. The early retirees benefited more because the rates were much better in comparison to those paying high taxes now, only to receive pensions at a lower rate.
There might be some government trends of trying to increase taxes to cover such holes instead of finding ways of maintaining better pension pays through an improved economy. Internationally, people feel and wish that their pension would be three or more times better than it is today.
The social security scheme make workers to save less or nothing on their own for retirement because they feel reduced to nothing by the contributions rather than not because they are satisfied with their contributions. The second reason why the social security contribution discourages more savings is psychologically connected.
Once a person knows they will have a pension when they retire, then they seem not to worry over maintaining their current living standards or making it better during the retirement years. Absence of security catalyzes accumulation of current assets efficiently to provide the required retirement package or even a much better one than anticipated.
This is the main reason why people in the private sector retire to a better lifestyle than majority of their government employed counterparts. They know the personal efforts and choices determines the future, and therefore start getting ready for it well in advance while the counterparts relax waiting for support from the government.
The social security fund scheme does not intend to reduce the personal retirement cutbacks to zero but it does not have any mechanism of promoting personal saving either, which probably would exist if privatized.
In any existing economical sense, the government saves no taxes but are directly transfers funds. The scheme is highly influencing the saving trends of individuals, than the economy degrades. Direct savings are in form of purchased bonds or shares. The money that individuals invest in used shares for acquiring resources such as assets, probably buildings, equipments or vehicles. These are real productive benefits commonly referred to as “real capital” economically. Productivity of real capital increases the economic output of a country. Greater production brought about by better facilities in a company with the same labour force as before.
The personal savings finances capital accumulation of a company, which leads to over-time economic growth and this growth of a country in turn, causes the growth in Gross Domestic Product (GDP) that translates to personal income growth. Economic output generates the societal income and therefore, when the social security discourages or reduces personal savings it causes negative outcome to the general economy.
It might not be possible to note the connection easily, because the wages are never lower than they were before and probably they keep on rising. The vision is that the rise in wages supported by the marginal economic growth due to the limited savings present. The rates of increase are very low than they would probably be.
There is ample need to control or reduce the rate of taxation for retirement funds.
In recent years, people lack proper decision-making procedures. They do not know whether to work overtime to cover the over 15% deductions on their wages or even do not know how to make the decision over time for retirement. They force bad feeling on people who feel the need for working more years over the retirement level to ensure better living standards. This is a big negative effect over effectiveness of labour.
Less saving means less investment that translates to low output afterwards hence low stock or real capital and subsequently less personal capital and for this reason, poor productivity and wages is experienced.
According to Siegel (2002), the social security and other government managed security funding are the current causes of lowered quantity of produce thus affecting real capital and lowering amount of industry input employed in search for a better economy. Lowered output means lowered income for the Americans.
Which would be the most successful savings system today?
Today the blame seems to be more than appreciation for the social security. Most people will argue that political forces have all along managed the program. As much as people continue to squabble over political gimmicks, in some cases the truth remains to be that politically instigated policies can as well have deleterious consequences. The social security system of the U.S. has a combination of features that make it an apparent examination that accounts for the political appeals.
The splitting of payroll rates on tax for the employer and the employees is one such factor. Most employees would not be aware of the split, which in real sense falls on the employee. Economically the employee is supposed to bear all the cost for the levy. This means that people pay taxes twice as much without much of their consent may be due to ignorance or lack of proper transparency measures by the government.
Secondly, there seem to be more severing of taxes imposed on the private sector’s returns and savings. This forces many to understate the gains. Thirdly, the returns for the early retirees were much better as opposed to now. They would state the security fund is excellent but there is ample need to understand the system’s policies well before basing this argument on temporary basis.
Lastly, the issue of the hidden costs on savings and supply of labour makes the system more mischievous. The GDP decreases because of depreciation of savings, assets accumulation and labour. Economists are mostly able to note these costs but majority do not. It is easy to believe in non-existence of the costs.
It is extremely difficult for the common citizen to note these loopholes. The misconceptions make many politicians to find a perfect basis for politicking other than enlighten and guide people and thus the difficulties experienced in trying to reform the sector. Probably people need a government-funded system other than the transfer system.
Advisory Council on Social Security. Report of the 1994–1996 Advisory Council on Social Security. Washington, D.C.: U.S. Government Printing Office.
“Are We There Yet?” August 5 2002. Wall Street Journal, 1997 Board of Trustees of Social Security and Medicare.A Summary of the 2007 Annual
Reports. 2007accessed from http://www.ssa.gov/OACT/TRSUM/trsummary.html. November 10 2009
Siegel, Jeremy J. Stocks for the Long Run. 3rd Ed. New York: McGraw-Hill. 2002