Fatima Yousuf
Aug 2, 2017

Social Security: Costs and Benefits

5 comments

 

The Old Age, Survivors, and Disability Insurance Program, otherwise known as Social Security, was instituted by FDR in 1935, and is still implemented in the United States today. The program is completely universal, which means that any U.S citizens can reap its benefits regardless of financial standing. The system is funded through payroll taxes. This means that the younger, working classes pay payroll taxes (shared in an equal proportion by employers and employees) that are redistributed by the government to the older generations and to the disabled. Individuals that pay their payroll taxes for at least 10 years are guaranteed permanent benefits when they are older.

So far, the program has been relatively successful, having provided benefits to 2.3 million spouses and children of retired workers, 6.1 million surviving children and spouses of deceased workers, and 10.8 million disabled workers and their eligible dependents in December 2015. Furthermore, Social Security has provided monthly retirement benefits averaging $1,342 to 40 million retired workers in December 2015. In the United States, only 14% of its citizens live in poverty in 2015, and a large part of that is because of Social Security benefits provided to them! Compared to the fact that 24% of the UK lives in poverty, it is evident that Social Security has reaped great benefits to American society.

While Social Security certainly does much good, it is also very expensive. In 2015, Social Security cost 24% of the federal budget, roughly $888 billion dollars. Compare that to the fact that 16% of the budget (roughly $602 billion) goes towards the military, and it is apparent that Social Security is indeed a very expensive program.

Moreover, Social Security is an inter-generational program. As stated before, younger generations pay payroll taxes to provide for older generations and other dependents. While this system may function fine when a country has a large younger generation and a small older generation, it is not going to work if a country has a small working class and a large dependent class. In the United States, along with many other Western countries, people have noticed a “graying of the population”, meaning that the older population grows steadily while the young, working class stays stagnant. If this continues, it may contribute to the collapse of the Social Security system.

Due to this, as well as other factors, Social Security’s cash expenses have been exceeding its cash receipts since 2010, accumulating into a massive deficit. In 2014, this gap was at around $74 billion, and has been exponentially increasing since. While the Social Security program has credited interest on a previous surplus from over 3 decades ago (Pew Research), this will only be able to cover the severe debt until 2020. And after that, Social Security’s combined Treasury reserves are likely to be depleted by 2036. After the reserves are exhausted, the system still will be receiving tax revenue, but it will only be enough to pay about three-quarters of scheduled benefits. This will all occur unless Congress changes the benefit formula or raises payroll taxes, or perhaps creates a new benefit system altogether.

While Social Security certainly has its benefits, its massive costs, growing deficit, and reliance on a large, healthy working class may render it impractical in the long run.

Rachna Shah
Aug 2, 2017

Thank you for this thorough overview on Social Security in America, Fatima! What do you believe should be the next step re: Social Security?

Fatima Yousuf
Aug 2, 2017

There have been a lot of proposals for what to do with Social Security, and I think that many of them are worth trying out and having a debate over. I think that, for now, it would be better to reduce guaranteed benefits promised to future generations as they get older. While older generations of today certainly should receive the benefits that they were promised, in the long run, we really need to cut back guaranteed benefits to a more realistic level.

Also, I am also in favor of covering all the costs of Social Security by establishing a Personal Retirement Account (PRA) system. Unlike payroll taxes, the money payed by an individual through PRA taxes would be given back to him/her when they retire. The government should contract fund managers to invest PRA money into the individual's choice of a mix of stock index funds, government bonds, and other investments. If done right, this system could prove to be very beneficial towards covering deficits and making sure that everyone has money when they retire.

I have also heard arguments that we should raise taxes in order cover the Social Security deficit. However, taxes would need to be raised by a pretty large margin if we truly want to keep the program relatively the same. This also may disrupt the growth of the economy,which would really only create more poor people if anything.

I don't think we need to completely rid of the payroll tax system, because it does ensure that people living in extreme poverty have a safety net when they are older. However, we also need to be more realistic about the benefits given, and consider establishing PRAs and other solutions.

Rachna Shah
Aug 2, 2017

PRAs are definitely an interesting solution to the issue. Are you referring to IRAs as opposed to the employer-based 401(k)'s?

Fatima Yousuf
Aug 3, 2017

Sort of! PRAs differ from both in a way. Instead of offering tax breaks like an IRA does, a PRA is funded by directing a portion of their Social Security retirement payroll taxes into their PRAs (probably around 5% of a taxable income, but that can vary). PRAs would also be completely optional and would not affect those already nearing retirement. 401 (k)s are also dependent on the employer and are managed by their company, whereas people can benefit from PRAs regardless if they are going through a short period of unemployment or switching careers.

Of course, PRAs haven't actually ever been implemented in the US, so there is lots of flexibility on how they may actually work.

Rachna Shah
Aug 3, 2017

Oh, that's pretty interesting! It's also nice how it still involves Social Security, so people don't feel as though their money is being redirected in a negative manner. Which countries use/have used PRAs?

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    Dec 19, 2017

    With the recent tax plan controversy, lots of people or discussing whether it is more effective to lower taxes or increase welfare programs to provide a "leg up" to people in need. What do you think?
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    Nov 26, 2017

    This topic aligns with education as well, but what is your opinion on students receiving government vouchers to attend more expensive schools? Should this program be made available for all students or simply minors? Do the benefits exceed the costs? Personally, I am interested in seeing this program implemented. I think that it might be an interesting way to incentivize public schools to compete more with private schools, and I think it is worth trying.