One Third Of Social Security Benefits example essay topic

Social Security Reform: Jeopardizing the Safety Net It is not difficult to understand why Social Security is our country's most popular government program. Prior to its inception in the 1930's, more than half the nation's elderly lived in poverty. The program was designed as a social (old-age) insurance plan which provides a guaranteed income to retired and disabled workers whose loss of wages promises an uncertain economic future. I emphasize the word guaranteed, as this is the issue in contention when considering reform propositions. Social Security, as we know it, ensures an acceptable standard of living for all citizens, and provides a safety net for those who, due to age or disability, are no longer able to support themselves by labor. It's benefits are, as stated by author Joseph White, "guaranteed, adjusted annually to account for inflation, paid for as long as the recipient lives, and based on collectively set standards of need and contribution, as opposed to returns and investments in markets" (White 43).

The entire concept of privatization distracts us from the reason behind Social Security - that ALL Americans would have the means to live in dignity. As such, to perform its proper role in the protection of our citizens, social insurance should be "national, compulsory, and contributory, and provide benefits as a matter of right" (Brown 10). Politicians argue that there is an emergency need for drastic reform, as the current system is facing collapse, but this is not necessarily the case. It is important that we, as taxpayers, are able to wade through the often party-prejudiced political jargon and arrive at an informed opinion. This essay is an attempt to dispel some of the myths surrounding the controversy, and offer an argument against the private market's ability to adequately protect individuals (and hence society) against risk and uncertainty. Social Security is a pay-as-you-go system, meaning that current payroll taxes are used to pay benefits to current retirees.

In 1983, Congress introduced an element of pre-funding by adopting an increase in payroll taxes that allowed the program to take in more tax revenue than it paid out, with the surplus dedicated to supplementing tax revenue when the baby boomers began to retire (Hill). Today, that excess revenue is spent on government programs and reduction of federal debt, and the trust fund is credited with bonds equal to those expenditures. By reducing the debt, the government saves BIG money on interest payments and enhances its ability to borrow in the future. Any diversion in contributions would reduce the surplus, and have a negative impact on the programs supported therewith. While political groups have charged each other with squandering / draining the surplus for their own party-affiliated ends, this is actually impossible, as the Social Security trust fund is separate from the federal budget. "By running a deficit or spending a surplus", Dean Baker tells us, "the government can no more drain Social Security than they can drain the bonds under [his] bed" (Baker).

Reformation advocates favor allowing workers to create private retirement accounts funded by the aforementioned 2 percent diversion of our Social Security taxes. They suggest that the emergency need for reform arises from the estimated population expansion and the increasing number of retirement-aged workers, and warn us that "inflation will push the current 12 percent contribution as high as 23 percent within the next 50 years" (Feldstein). Both sides agree there is a projected shortfall as the ratio of retirees to workers rise, however, these figures are as aggressive as the trustee's projected rate of productivity growth are conservative. The numbers show that "if we don't do anything, the system would pay all benefits to retirees right through the year 2038" (Baker). That is to say that if the government makes no changes whatsoever during the next 35 years, it could still pay every penny of benefits. After the year 2038, assuming the worst case scenario statistics are correct, Baker tells us there is still adequate funding to provide roughly three-quarters of the promised benefits.

The point being that the idea of a bankrupt system is groundless, and crisis not immediately impending. Allowing workers to divert 2 percent of the total employer / employee contribution of 12.4 percent would only serve to bring forward the date at which the program moves into an operating deficit. As with any insurance, "the value of the package depends not just on average benefits paid, but also on the value of the protection against risk" (White 39). Congressional supporters of privatization believe that individual investors could obtain a higher rate of return that the trust fund's investments now achieve.

While this is not unreasonable when based on upward market trends, it is unwise to ignore the negative effects of market fluctuation - past performance is not a reliable means of predicting future returns. Because investments are subject to major risk, people who retire during a stock market downturn could see very low or even negative returns. In her article with Advisor Today, columnist, Janet Arrowood explains that while economic growth would be stimulated by initial investments, eventually, the money that has been poured into equities will be withdrawn en masse as succeeding generations retire. Large capital outflows from equities have a tendency to depress prices in a very short time (Arrowood). Return rates are also diminished by administrative costs, which are especially high if workers are given lots of investment choices. If we look to other countries, we see how high those administrative costs can be.

Social Security expenses are about. 6 or /7 percent of what gets paid in each year. Conversely, Chile, who privatized in the 1980's, is about 15 percent. Britain, Argentina, and Mexico average around 15 to 20 percent. In dollars and cents, instead of the United States paying $7-8 billion in administrative expenses, you'd be paying $60-80 billion (Baker). Where's that money coming from?

I can only assume from tax increases. Who benefits from privatization and who does not? Obviously, financial institutions stand to make a fortune in fees and commissions. Higher-paid workers who can afford to "let the money ride" are more willing to take risks than average (lower income) individuals.

Because most households have not taken advantage of the existing tax breaks for private savings, it stands to reason that affordability is off issue. Many Americans cannot afford to save and invest on their own, as evidenced by tax return statistics. According to Dean Baker and Mark Weisbrot's statistics, "of the 68 million taxpayers with adjusted gross incomes of $30,000 or less, fewer than 3 percent contributed to an individual retirement account" (Baker, Weisbrot). Low earners, women, and the disabled are particularly vulnerable to benefit reduction under privatization. Those with less to invest will obviously have lower investment yields, and will not reap the benefits of higher risk equities. Any annuity resulting from the private savings of women would likely have to stretch over a longer period of time, due to longer life-spans, thus would pay less per month than the same annuity held by a man.

Currently, one-third of Social Security benefits are paid to disabled workers. Privatization advocates have not explained how skimming FICA by 2 percent would benefit these workers and their families, or how they could be expected to invest in private accounts with reduced income. Also, as Catherine Hill points out "private insurers may not offer policies to people whom they consider "high risk" for disability or death, and premiums, when available, may be prohibitively expensive for many low income workers" (Hill). All of these considerations significantly reduce the bottom line when it comes to profiting from private investing. Some privatization advocates, including economist-attorney Peter J. Ferrara, suggest that Social Security withholding restricts individual liberty, and is, therefore, unjust. He addresses the compulsory (coercive) aspects of the Social Security program by suggesting that "the government forbids us, by penalty of law, to enjoy the fruits of our labor by confiscating 12.4 percent of our income without our consent".

He further goes on to state that Social Security forces us to "enter into contracts, exchanges, and associations with the government that we should have the right to refuse" (Ferrara 275). While I found his book extremely thought provoking and his argument logical, I have to counter by pointing out that Mr. Ferrara does not represent the minority groups who would suffer under the proposed changes. Again, he is an extremely successful New York city attorney, a published author, and an associate scholar of the Cato Institute, whose sole purpose of existence seems to me to be the undertaking and distribution of absurdly long studies validating their inherent mistrust of government. Mr. Ferrara (as well as the majority of Cato Institute scholars, I'll wager) does not represent the average American. I believe that those who can afford to invest their earnings privately are already taking advantage of the programs / tax benefits available to them.

I believe that the 2 percent diversion of FICA funds would definitely jeopardize the people who depend on Social Security as a source of dependable income. No one is suggesting that Social Security should be the only means of retirement income, but let's face the facts: it's all some people have. I compare Social Security withholding to overpayment of income taxes - it's a forced savings plan. While it makes little sense to me at times, as a tax preparer, to allow the government to borrow my money interest free throughout the year, I can understand why sometimes it is the only savings option available.

If they " re already taking it, I can learn to live without it. Social Security, like overpaid taxes, cannot be borrowed against, and can be counted on to be available at a specified time. For those working Americans who bring home next to nothing in their paychecks, 2 percent of their FICA contribution gives them no real investment purchasing power. Before Social Security, those who did not have family support lived a sub-standard existence.

No amount of arguing over details can change the fact that for many Americans, the checks are now due and deserved. The diversion of even a minimum amount of these contributions will make a difference in how much and how long the benefit. "Unless", as health care policy expert and author Ted Marm or suggests, "we are prepared to permit Americans to starve, we must make everyone contribute to a collective pot" (Alexa nian). And unless we plan on either eliminating or overburdening the rest of the social service programs, and succumbing to a depression-like welfare state, it is in the best interest of all concerned that no alterations be made to until equally beneficial means of improving the current system have been introduced.

Bibliography

Alexanian, Shaken. "Social security expert argues against privatizing program" Yale Daily News. 13 Feb 1997.
21 June 2003.
Arrowood, Janet. "Managing Money: Privatized Social Security?" Advisor Today. December, 2000.
23 Jun 2003.
Baker, Dean. "Undermining Security: A Warning Against Social Security Privatization" Multinational Monitor. January / February, 2002.
21 Jun 2003.
Baker, Dean., and Weisbrot, Mark. Social Security: The Phony Crisis. Chicago: University of Chicago Press, 1999.
Brown, J. Douglas. An American Philosophy of Social Security. Princeton, New Jersey: Princeton University Press, 1972.
Bude tti, Peter., et al. Ensuring Health and Income Security for an Aging Workforce. Kalamazoo, MI: W.E. Upjohn Institute, 2001.
Feldstein, Martin. "Privatizing Social Security: The $10 Trillian Opportunity" 31 Jan 1998.
Ferrara, Peter J. Social Security: The Inherent Contradiction. San Francisco, CA: Cato Institute, 1980.
Hill, Catherine. "Why Privatizing Social Security Would Hurt Women: A Response to the Cato Institute's Proposal For Individual Accounts" February, 2002.
White, Joseph. False Alarm: Why the greatest threat to Social Security and Medicare is the campaign to "save" them. Baltimore: Johns Hopkins University Press, 2001.