Social Security is a hot topic of debate today, since most American's believe that the system is near collapse. The trust fund that Americans have been paying into for Social Security is likely to dry up in 2029 due to the large number of baby boomers heading into retirement. Franklin Roosevelt set up Social security to help the people that had worked and Struggled all their lives in honest toil. Social security was set up to accomplish two main goals.
The first goal of Social Security is to act as a disability or life insurance policy that protects almost all Americans. Currently, there are seven million survivors of deceased workers and four million disabled Americans that receive income support from Social Security. The second goal is to provide lifetime retirement benefits that rise with inflation. Social Security payments for retirees are needed to keep half of the elderly Americans above the poverty line. A large number of baby boomers believe that they won't see a dime's worth of Social Security benefits, and most younger people assume that once they have reached retirement the program will be gone. There have been many proposed solutions to the Social Security problem.
A first possible solution is to dramatically change the Social Security Payroll Tax. Another proposal is to change amount of benefits of the provided by Social Security. A third reform proposal includes investing Social Security money in stocks either by the government investing the money or by setting up mandatory IRA investing. Another major development in the future of Social Security is the recent proposals made by President Clinton's Advisory Committee on Social Security. In January of this year the Advisory Committee on Social Security presented a report of strategies to save Social Security. Shortly after the 261 page report was released there was a huge increase of debates and criticism over the future of Social Security.
The issue facing American today is when and how to reform Social Security. Although the American public and political groups are unwilling to accept the burdens of social security reform, extensive reform is needed soon to continue paying the current benefits to American citizens. A change in the Social Security tax is a possible factor of reform to bring the Social Security program back on track. Currently the Social Security tax is a flat-rate tax paid on all employment earnings up to a specified limit.
Due to inflation the limit is increased every year currently it is just over $60, 000. This tax is much harder on a lower income individual because the higher income individual is only taxed on their income that is below a certain amount set every year. It has been proposed that if the limit on the payroll tax were lifted, two-thirds of the projected Social Security deficit would be eliminated. Once the limit on the payroll tax is lifted a rise in the tax rate of the employers and the employees by 1.
1% is predicted to be enough to solve Social Security's problems. This is assuming that two evasive actions take place. First the government will have to keep its hands of this extra tax revenue gained by the tax increases. Second the proposed solution will only have a chance to work if it is started immediately while the baby boomers are still able to add a little more cash to the trust fund for there own retirement. This solution isn't likely to be implemented by today's political system.
The advisory council on Social Security would not pursue the lift of the limit because the support of the wealthy voters for Social Security reform would be lost. Americans are also weary of Social Security tax increases. The middle and lower class voters would also not support a Social Security tax increase. A recent poll by Money magazine found that 70% of the public is unwilling to pay more tax than the current 6. 2% rate. Another proposed solution to Social Security's problems is a to decrease the amount of benefits received by retirees.
The first way to reduce the amount of benefits that are being paid out is to adjust the CPI. Sen. Daniel Moynihan of New York (Dem. ) has proposed that a 1.
1% cut in annual cost-of-living adjustments for pensioners would be a reasonable solution to Social Securities problems. The adjustment of the CPI would reflect the belief by many economists that the CPI overstates current inflation. He claims that this would almost completely solve the problems in the Social Security program by insuring that the expected inflow of funds would equal the expected outflow of benefits for future decades. An alternate approach to lowering the amount of paid benefits is to raise the retirement age. Currently the retirement age is expected to rise from 65 to 67 in 2037. A recent poll taken by Money magazine found that 70% were in favor of raising the retirement age to 67 by 2016.
This would decrease the amount of benefits being paid out, and give two more years for these individuals to put money into the system. Another proposed solution that would also lower the amount of benefits paid out is to cut benefits for the prosperous retirees with incomes above $50, 000 dollars a year. The biggest problem with cutting benefits of any kind is that any politician that proposes cuts will instantly lose support by elderly that count for a major portion of the voters, so cutting benefits is almost impossible in our political system even if the cuts are very small. A politician would also be unwise to implement benefit cuts only for prosperous retirees because the support of the wealthy would also be lost. The third major reform proposal consists of investing the Social Security tax in the stock market.
The biggest question for this type of reform is whether taxpayers would decide where to invest there tax money or would the government choose for them. An individual on this type of plan would be required to invest a portion of there income in stocks, bonds, mutual funds, bank CDs, but not in gambling or other wild money making schemes. The tax payer on this type of program would then be able to withdraw their investments once there reach retirement age. The government would also insure that the retire still receive a minimum return even if their investments fail. The biggest advantage of this IRA style approach would be that Americans will finally be in control of their own retirement fund. This proposal has many advantages for politicians and voters of all ages.
There would no longer be debates about retirement ages and you could make your own choice on when to retire. The debates on the how to measure the rate of inflation with the CPI to would no longer affect benefit payments. The stock market could flourish from the added revenue of future retirees. The increase in investing also could improve the state of the American economy. There are a few drawbacks for this type of reform.
The biggest is deciding how to finance Social Security for people retiring before this reform, since Social Security is run as a pay as you go system. Social Security is considered a pay as you go system because people paying Social Security now are paying for the already retired citizens. Financing the retirement for people before the reform isn't a problem, since the baby boomer generation is creating a $50 billion a year surplus. The baby boomer generation has also created a $500 billion surplus from recent years which will be enough to finance the their retirements. The other option is for the government to invest Social Security trust funds in the stock market.
The advantage of this is that if market trends continue the government will generate gain an additional after inflation interest rate of about 7%. Although this option has many problems that will keep it from being a solution. This option would give the government a massive control of the private economy. It is hard to believe that the government will be able to keep a hands off approach when it controls huge blocks of stock in companies. The American public doesn't have enough faith in the government to trust that it will be able to invest such a large sum of money without being swayed by political pressures. The new demand for the stocks will decrease the demand for bonds thus raising bond interest rates which could hurt the economy.
This approach also doesn't have a plan of action for slumps in today's volatile market. Recently, the White House's 13 member Social Security Advisory Council released three reform approaches. These reform proposals are different variations of investing Social Security taxes in the stock market and the use of private savings accounts. In each proposal by the Advisory Council on Social Security the benefits of retirees are maintained and tax are also held at the same rate. The most popular of these approaches was supported by six of the members. This plan would keep Social Security a government-run retirement system.
It calls for a study of investing up to 40% of Social Security surpluses in the stock market. This plan is strongly backed by labor and retiree groups, but it may not be accepted because of fears of government ownership of the stock in private companies. The least favorite proposal among the council is only supported by two members. It would require all workers to put 1. 6% of pay into mandatory government-run individual accounts that offer a choice of stock and bond investments.
At retirement, account balances would be paid out as annuities for the life of the employee. Few people are strong supporters of this variation, but it could be come a model for compromise among the councils three proposals. The final approach is supported by five of the council's members. This plan would divert into savings accounts 5 percentage points of the 12. 4% payroll tax paid by workers 54 or younger and employers. The remaining 7.
4 percentage points of tax would help fund a the basic Social Security plan. This plan could become the standard plan for radical reformers, but it is likely that it will not be supported by congress. The private savings accounts could be good for the economy. Instead of spending almost all taxes from today's workers immediately as retiree benefits, the money will be placed in savings accounts that will grow by 2.
5% of the GDP every year. This rate will be maintained as long as stocks and bonds maintain the returns they have generated in the past century. My own proposal under ideal conditions would not use the approach of investing in the stock market. I am not that excited about investing in the stock market because I don't believe that today's bull market will last. Although in order for my most aggressive type of approach to work there would have to be a substantial tax increase and an adjustment of the CPI, and I could never get enough support for my proposal from the wealthy or the retired citizens. In order to make a proposal that would have any chance of making it through the house and the senate I have already compromised on investing in the stock market to reduce the increase in taxes and to keep from decreasing benefits substantially.
I propose that to begin reforming Social Security we need to first adjust the CPI. This would cut down on the benefits for those receiving Social Security payments. Then I would propose that a law be passed to keep the governments hands off this money so we can gradually work our way away from the pay as you go system into a system that would insure everyone over 35 would be receive benefits under the traditional system. Everyone under 35 would start having by having 4 percentage points of there Social Security tax put into individual IRA's. The percentage of the Social Security tax that is put in the IRA's would be gradually increased until the benefits for everyone over 35 have been paid for. After everyone over 35 have had there benefits accounted for in the budget the amount of the Social Security tax invested in IRA's will stop at 8.
5 percentage points of the 12. 4% rate. The left over Social Security tax will then be invested in government Treasuries, or it would pay for a basic insurance plan that would be provided to the public. The amount of the tax invested in either of these areas would completely depend on America's demand for benefits from the insurance.
This insurance would cover the same goals of the current system, and it would provide an allowance to anyone that doesn't meet a minimum benefit level from their IRA's.