What Is the Future for Social Security?
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
What Is the Future for
Social Security?
- Social Security—the public retirement pension system administered by the federal government
- The largest domestic government program today
- Funded by a tax on earned wages during working years, which is then subsidized as a wage repayment during retirement
- Social Security retirement benefits average around $14,000 a year for a single individual
- Yet, Social Security was never meant to be used as the single source of income for people in retirement
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Main Features of Social Security
- More than just a retirement income program
- Also provides wage-earners with disability insurance and life insurance
- The Social Security payroll tax is a “regressive tax”—a person earning $20,000 a year and a person earning $106,000 a year both pay at the same 6.2% rate
- And people making more only pay 6.2% on the first $106,000 of income
- In 2011, the tax on individual wages was temporarily reduced to 4.2%; this “payroll tax holiday” was intended to stimulate the economy.
- Social Security is modestly progressive in its distribution of benefits because of the “replacement rate”—the proportion of wages replaced by Social Security at the point of retirement
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Success—and Doubt
- Social Security remains America’s most successful, and perhaps most popular, domestic government program
- There is debate over whether Social Security is:
- 1) a welfare program designed to prevent impoverishment in old age
- or
- 2) an annuity program that entitles everyone who pays into it to receive proportional benefits
- Any program that tries to accomplish such fundamentally different goals is bound to have both its challenges and its critics
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Pay As You Go
- Social Security is funded by payroll taxes that go into a large account called the Social Security Trust Fund
- Originally designed to operate as a modified “pay-as-you-go” system, where the money collected each year mostly pays for people who receive benefits in that same year
- If more money is collected from payroll taxes than is paid out that year, then the Trust Fund runs a “Social Security surplus”
- But the baby boom generation is much bigger than the cohort before or after it
- The generation following doesn’t have enough workers to contribute as much as will be needed under the pay-as-you-go system
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Eligibility
- To be eligible for Social Security benefits, a person must:
- Be age 65 (or age 62 for early retirement)
- Have worked for 10 years in a job where Social Security taxes were deducted
- The age of eligibility is set to slowly rise from 65 to 67 over the next few years
- Some people suggest raising the age of eligibility even higher
- But this could create more hardships for minority groups who have a lower life expectancy than Whites
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Eligibility (cont.)
- Others suggest reducing Social Security benefits to make them reflect the actual rate of inflation
- But an across-the-board reduction would result in more hardships for the poorest beneficiaries
- Others argue for making eligibility “means-tested,” or only available to people whose income falls below a certain threshold
- Another variation is an “affluence test” where benefits might be eliminated for people who are above some threshold
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Privatization
- Can mean several possible changes from the current system:
- Increase the level of funding—move from a pay-as-you-go system to a “funded system” that involves an increase in national savings
- e.g., investing part or all of the Trust Fund in private savings such as the stock market
- Accompany private investment with increased choice over the individual retirement savings
- Eliminate the way Social Security redistributes benefits either from one generation to another, or from high-wage earners to low-wage earners
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Privatization (cont.)
Some possible problems include:
- To finance the privatization of Social Security, the federal government would have to borrow money to make up for retirement benefits already promised to people now retired
- Investing the Trust Fund in the stock market would mean that, by 2015, Social Security would own $800 billion in shares—or 10% of the entire stock market
- This would be a big step toward national influence over the stock market
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Women and Social Security
- Married women are entitled to 50% of their husband’s Social Security benefits, and a higher amount if the husband dies
- Social Security was originally planned for a one-earner family, but more than 70% of women are in the labor force today
- Almost three-quarters of older people who live in poverty are women
- Today’s higher divorce rates, gender pay gap, and the fact that married women earn more from their husband’s benefits than their own work benefits are a few of the gender inequalities with Social Security
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Reading 38:
How to Save Social Security
What do Diamond and Orszag suggest are the two problems with the current Social Security system, and what solutions do they propose?
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Reading 39: The Necessity and Desirability of Social Security Reform
Ponnuru takes a more conservative approach to the issue of Social Security reform than do Diamond and Orszag. What are his main assertions and what solutions does he put forward?
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Reading 40: Social Security Reform and Benefit Adequacy
What are the contours of Thompson’s framing of “benefit adequacy” when it comes to Social Security benefits?
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Reading 41: Social Security for Yesterday’s Family?
Steuerle and Favreault remind us that Social Security was implemented during a very different historical time when Americans lived much shorter lives on average than they do today. What reforms are they suggesting need to be made to adjust to the changing modern family and its needs in later life?
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.
Reading 42: The Future of Social Security: Proposals You Should Know About, AARP
- What can be done to improve the financial health of Social Security? Describe the benefits and drawbacks of the major proposals to change Social Security as outlined in the reading.
(c) 2011, SAGE Publications, Inc.
(c) 2011, SAGE Publications, Inc.