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The impact of social Security

Updated on January 8, 2010

Planning for Retirement-The Impact of Social Security

Social Security, Public programs designed to provide income and services to individual in event of retirement, disability, death or unemployment. It was originally designed to provide one leg of a “three-legged stool” for retirement security, backed up with personal saving and employer pension program. Increasingly, Americans have come to depend on Social Security. Federal statistics show that 40 percent of seniors would fall below the poverty line without Social Security check. It is one of the most popular government programs in U.S. history and nearly everyone supports keeping it solvent.

The program established in 1935 under the social security Act. In particular, it refers to the social insurance portion of that Act. Which uses contributions made by workers and employer to provide income to people and their families during retirement or in the case of unemployment, disability or death. Social Security is pay-as-you-go program. This means that today’s tax payments are used to pay benefits to today’s retirees. When today’s workers retire, their benefits will be fully paid only if the government is able to collect enough in taxes from future workers. In 2001, there were an estimated 3.4 workers paying social security payroll taxes for the benefit of each retiree; by 2030, the ratio will fall to an estimated 2.1 workers per retiree. Since the program began, the number of workers has substantially outnumbered retirees, producing surpluses that have been used to buy Treasury bonds in “Trust Fund”. That ratio will change rapidly, beginning in 2011, when the first baby boomers reach the age of 65. By the time the entire baby boom generation retires, America’s elderly population will double from its current size to 80 million.

People are living longer and collecting more Social Security benefit checks. In 1940, life expectancy was 61.4 for men and 65.7 for women. By 2000, life expectancy was 75.2 for men and 79.5 for women; by 2050, life expectancy will be 79.2 for men and 83.4 for women.

The trustee of social Security system project that expenditures will exceed income in 2017, and the trust fund will be exhausted by 2042. The trustees’ report predicted that maintaining the program in its current form would mean cutting benefits by 13 percent, or raising the payroll tax by 15 percent. Other experts say even more drastic changes could be needed, depending on the economy and the state of the federal budget. Ensuring the sustainability of the system beyond 2077 would require even larger changes. Advisory groups and public official have repeatedly warned that ‘hard choices” and realistic measures are needed to ensure the long-term stability of Social Security.

On Feb. 27, 2003, Federal Reserve Chairman Alan Greenspan warned that delays in making necessary changes in Social Security and Medicare to handle the impending retirement of baby boomers could mean "abrupt and painful" adjustments later on. Greenspan told the Senate's Special Committee on Aging that at some point policy-makers will have to face up the fact that as the baby boom generation begins to retire in 10 years, there will not be enough workers paying into the Social Security system to support the current level of benefits. Greenspan said policy-makers face a range of options such as raising the retirement age or cutting benefits to fix the funding problems for Social Security and Medicare. He said that early decisions on these choices would help prepare future retirees for changes in the system.

Social Security faces benefit cuts, tax increases, a higher retirement age or a combination of those steps over the long term, regardless of President Bush's idea for personal investment accounts, the head of a congressional agency said on Jan. 15, 2002. The fund would need several trillion dollars - sooner if the accounts become law, later if no changes are made to the system, said Comptroller General David Walker, head of the General Accounting Office. Bush favors letting younger workers invest a portion of their payroll taxes in the stock market as a way to secure future funds.

There are several proposals submitted that claim to have the solution to the Social Security problem. The proposals for Social Security reform are listed as follows: Privatization, Investment in stock market, Tax and payment reform, Increasing retirement age, Adjusting the consumer price index, and finally extend Social security to those who are currently excluded. The economic implications of these proposals must be analyzed carefully to predict their impact on economy.

Privatization could have the largest impact on the economy. The investment of part of the Social Security Trust Fund could increase the money available in the economy by sixty billion dollars per year. This increase in the supply of money will tend to cause interest rates to decrease. Which in turn will cause an increase in capital spending that will cause an increased production, which lowers unit cost. That increases demand that… in other words the cycle of economic growth has been stimulated. Therefore, the projected Real Gross National product will increase by five percent. This translates to an estimate ten to twenty trillion dollars.

Investment in stock market with Social Security Funds could affect consumer spending in the economy. If Social Security funds are entered into the stock Market system with its financial fluctuation, retirees who are uneducated or unlucky in its financial trading system could have financial return that prove to be far more negative than current system. The result would be decrease in the real gross domestic product by cutting consumer spending.

Another option for Social Security is Tax and Payment reform. The first proposal is change in the way the Social Security benefits are taxed. This proposal will make any benefits a retiree receives beyond what was contributed to the system, as wage earner would be taxed as income. Currently, retiree’s with income above a certain amount pay taxes on their benefits. There would also be an increase in the social Security tax by almost two percent. The economic effect of these policy changes would be a decrease in consumer spending caused by decreasing the amount of money retirees and workers have to spend. This could cause Real Gross Domestic product to decrease and higher unemployment.

Another method of reform could be increasing the retirement age from sixty-two so that it is sixty-seven by the year twenty-eleven, then the retirement age would be indexed to longevity thereafter. This proposal is due to the fact that Americans are living longer and are able to work longer. Increasing the retirement age extends the working life of American, which should increase Real Gross Domestic product because of the money generated during these years of working.

Adjusting the consumer price Index so it does not overstate inflation by as much has been purposed as a way to Reform Social Security. By adjusting the consumer price Index to show less inflation the Social Security rate of increase can be decreased because it is indexed to inflation. This reform would be plausible if the inflation of consumer goods used by the elderly was the same as average Americans; cost of hospitalization and medicine, which the elderly use at a higher rate than any other group in America. There for, by decreasing the consumer price Index so a retiree would get less might cause hardship, which would induce a reduction in consumer spending and Real Gross Domestic Product.

Finally, the proposal of extending Social Security to those who are currently excluded, State and local Government employees, will increase revenue in the social Security system by about ten percent. This would seem to have little or no effect on the economy because retirement pensions are not counted as a part of Real Gross Domestic product. One plan would simply replace the other However, if the number of people who will continue to work after retiring from State and local Government jobs and who will pay local government workers to Social Security a decrease in the net benefits paid would be possible. This would decrease the money the elderly had to spend thereby decreasing consumer spending and the Gross Domestic Product.

Approximately two-thirds of voters would support privatization of Social Security, transforming the program into a privatized mandatory savings program. More than three-quarters of younger voters support privatization. This proposal strongly resembles the privatized system that has been successfully implemented in Chile.Privatization is far more popular than other proposals for reform. When offered a choice between a plan of small reforms (such as raising the retirement age, increasing payroll taxes, trimming COLAs, and means testing) and privatization, voters overwhelmingly supported privatization



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    • OpinionDuck profile image

      OpinionDuck 8 years ago


      The democrats of congress and FDR created the Social Security System and they bled it till it hurts the intended class it was supposedly created for. I dangled the sentence, just like they dangled Social Security and left the people hanging.

      At the same time, Congress excluded themselves from the system that they created for the people, I wonder why?

    • profile image

      Amy 8 years ago

      I do agree that threis a change needed in current system .It looks like there is problem in current social security system and it will be a big problem if not fixed properly on time. I think government should take some initiative to modify current social security system.

    • Sam13207 profile image

      Sam13207 8 years ago from Dallas, Texas

      Hello OpinionDuck , not sure if you had chance to read through all paragraph…. Basically this article talks about current social security system, changed needed in current system and finally talks about different option for resolution.

    • OpinionDuck profile image

      OpinionDuck 8 years ago

      I don't understand your point, if any was made by this hub.