Is the Social Security System broken?
Problems with the Social Security System Intermediate Macroeconomics

Problems with the Social Security System

The Social Security System, created in 1935, is the one of the most costly items in the federal budget today. The program was created to provide old age, survivors’ and disability insurance to a large portion of Americans, mostly the elderly who are now out of the work force. The Social Security Act was a major turning point in American history (William, 2007). Today the U.S. Social Security system has been in the news a lot lately. While politicians throw around dramatic words like “crisis” and “bankrupt,” regular Americans have more mundane concerns. Social Security has assisted to defend millions of employees from scarcity in their elder years, but demographic truths have transformed over the last seventy years and are still altering. (Smith, 2010)
If Social Security does not transform with them, the system will be incapable to fulfill its guarantees to tomorrow’s retirees and will load the next generations, our children and grandchildren, with hard taxes. The President would let Americans save some of their Social Security taxes in personal retirement accounts that they own and that Congress can never legislate away. Personal retirement accounts would strengthen Social Security by assisting all US citizens to raise their retirement income and pass on a nest egg to construct a better fiscal future for their households. (Smith, 2010)

Several Social Security professionals think the system is in crisis because it will soon be incapable to fulfill its guaranteed distribution payments to qualified retirees (Koitz, 2003). Republicans and Democrats tend to have extremely different concepts not only about how the Social Security system should encounter this disaster, but they also vary considerably on how the regime should address personal retirement requirements.
Social Security is financed by the payroll taxes of existing employees to pay the advantages of current retirees (Smith, 2010). Projected long run project costs are not sustainable under new program parameters. Social Security’s yearly excesses of tax income over expenses are anticipated to fall sharply this year and to stay about stable in 2010 because of the financial depression, and to increase only briefly before declining and turning to stable cash shortfalls starting in 2017 that will increase as the baby boom generation retires. By 2046, the Social Security trust funds will be exhausted and advantages would need to be cut by about twenty-five percent (25%) across the board. (Smith, 2010)
Additionally, this excess is a product of an intergovernmental move system. The Social Security surplus is provided to the Treasury Department and restored with IOUs. This intergovernmental transfer is various type normal regime debts as we consider of it, because when a person purchases a regime bond, he or she has an economic claim against the regime. When the regime problems itself an IOU to one of its own accounts, it has not bought anything or established an accusation against another organization or individual. (Smith, 2010)
The major cause for the looming monetary crisis is that our community is aging. The “Baby Boom” generation has previously begun to gather their Social Security retirement benefits. As a consequence, there are fewer employees to support each retiree than when Social Security was made. Raising life expectation, and the approaching retirement of more Baby Boomers continues to put growing stress on Social Security every year. Over the next many years, the number of retirees is anticipated to grow more quickly than the number of people whose taxes will pay for future benefits. Because of this, the number of employees supporting each Social Security beneficiary is estimated to fall from 3.3 nowadays to 2.2 in 2041. When evaluating these figures with those from 1950 (when there were sixteen employees for every one beneficiary), the modifications in the program become obvious. (Smith, 2010)
This future is coming with steady speed. Social Security's annual cash surpluses will begin to fall in 2010, the same year that the first baby boomers reach early retirement age. Over roughly the next 10 years, those Social Security surpluses, about $100 billion a year at their peak will continue to shrink and then disappear completely. Without those surpluses to reduce the size of the federal deficit, Congress will have to raise taxes to bring in billions of dollars of new revenues, cut programs, or let annual deficits climb. (William, 2007)
And then the real problems will hit. Somewhere around 2017, on top of replacing Social Security's $100 billion annual surplus, Congress will have to find billions more so that Social Security can pay all of the benefits that it has promised. Within about five years, that additional money will reach $100 billion a year (not counting inflation). From there, the annual demands will reach first $200 billion a year, and soon $300 billion a year. (Zeleny, 2009)
Then there is Medicare. Together, Social Security and Medicare will consume an estimated 60 percent of income taxes collected by 2040. What's left would have to finance the entire rest of the government. Without reform, Social Security's future is inevitable, like it or not. We can either prepare now, or worry about what year it will happen (Zeleny, 2009). Wishful thinking did not stop the Romans, and it will not prevent Social Security's problems either. While there may not be an immediate crisis, there is certainly a problem. As both President Obama and former President Bush have said, it will be a lot easier to fix the problem now than it will be in 30 years, when the system is in imminent danger (Smith, 2010). The remaining question is what can be done to fix the problem?

Solving the Social Security Problem

In theory, there are two easy answers to any budget problem is increase income (in this case, raise the percentage taken out of workers' paychecks for Social Security) or reduce spending (in this case, cut the amount paid out in Social Security benefits). In reality, neither of those solutions is simple, since raising taxes is never a popular political decision, and cutting Social Security benefits will negatively affect millions of retirees. The raw numbers bring these potential changes into perspective: According to the Trustees' report, an increase of 1.89 percent in the Social Security payroll tax would keep the account full for the next 75 years. To achieve similar results, benefits would have to be cut 13 percent. (Smith, 2010)
President Obama has made a different proposal, one that has resulted in a great deal of controversy. He wants to allow people to put some of their Social Security payments (up to 4 percent) into privately held accounts that would be invested in the stock market (Zeleny, 2009). Supporters of this plan say that stock market gains will offset future deficiencies in the Social Security system. They also note that this privatization would give Americans more control over their earnings, as they would own their own retirement accounts instead of simply turning the money over to the government.
Opponents of privatizing Social Security list several reasons why they think it would do more harm than good:
• Social Security is efficient, spending slightly more than half a cent out of every dollar paid out on administrative costs. Private Social Security accounts used in other countries waste as much as 15 cents per dollar. (Zeleny, 2009)
• Taking money away from government-run Social Security would gradually weaken the system. Eventually, the benefits it would be able to provide would shrink tremendously. (Zeleny, 2009)
• Estimates of increased earnings from private accounts may be based on overly optimistic stock market projections. (Zeleny, 2009)

President Obama has also offered another plan which he calls “progressive indexing.” Under the current system, cost-of-living increases are tied to the CPI-W (Consumer Price Index for All Urban Workers). Progressive indexing would keep that system for workers making $30,000 per year or less. High-income workers would get increases tied to the CPI-U, which doesn't go up as fast as the wage index because it covers a larger percentage of the U.S. population. Workers earning an income in the middle of the two would get cost-of-living increases based on a formula that combines wage and price growth. The end result would be an overall cut in benefits, with higher-income workers bearing most of the cuts over time.
In conclusion, another proposal involves raising the $90,000 cap on income taxable for Social Security. Variations involve creating a new surtax on income above $90,000, usually between 2 and 6 percent. This would put more money into the system without increasing the tax burden on lower income workers. The government borrowed the surplus and paid the interest on the national debt. Now we face a double problem. The generations behind the baby boomers are smaller in size. This means that the money coming into social security is dropping. As the baby boomers retire, the outputs are going up. Combined, the annual surplus that social security had is now effectively gone. This means we are going to need to start paying money into social security and also find money to use to pay the interest on the national debt.