Solvency of the social security program

Answer

Solvency of the social security program

There is a major social concern that the social security current path is not sustainable. The fund from which benefits are paid, the social security trust fund, has been the centre of a heated debate in the country.  Although the security fund has been solvent for the past two decades, the current situation indicates that it is already contributing to the national deficit. As a result, the fund will be cut across the board by upto23 percent by the year 2033 (Kashin, King, & Soneji, 2015). These statistics are an illustration for a need for action geared towards safeguarding the fun’s most vulnerable beneficiaries from the drastic cuts and without burdening the younger generations through tax increases. One suggestion is for lawmakers to replace the current cost-of-living adjustments with a more accurate one like the chained consumer price index. This should also involve raising the full and early retirement ages predictably and gradually as well as focusing the social security benefits on beneficiaries who need them most. However, proponents of the trust fund program claim that it benefits millions across the country. This paper champions the standpoint that the social security cannot sustain the projected long-run initiatives in full under the current scheduled financing.

The concepts of sustainability, solvency, and budget impact are very common in economic and social discussions of social security. However, these concepts are not well understood and as such often raise a lot of controversy and hype among the various stakeholders. The discussion in this paper will centre on four discussion points. First, the paper will seek to illustrate that the cost of the social security program is rising. Secondly, the discussion will analyze the capacity of the current financing system to sustain the program. The third point of discussion will centre on the effect of the current financing system on the sustainability of the program. The final discussion point will analyze the social effects of a failed social security program.

Currently, the social security board of trustees has projected that the cost of the program is likely to rise by 2035 in a manner that taxes will only be enough to pay 75 percent of the scheduled benefits (Crooks, Tully, & Burbridge, 2012). The dramatic rise in cost is a product of the rapidly aging population in the country. More importantly is the fact that the shortfall will be stable after 2035 with adjustments to taxes that offset the effects of the lower birth rate likely to restore solvency for the social security program on a more sustainable basis for the near future. As treasury debt securities are redeemed in the future, it is clear that they will be replaced with public debt. Exhaustion of the trust fund assets without reform will lower the benefit with no effect on budget deficits.

The main concern among individuals with the current financial status of the social security fund is whether they will actually get their benefits. The trust fund has no ability to borrow from other agencies in order to continue paying benefits when dedicated trust fund and tax reserves are not sufficient. Solvency of the social security program can be described as the ability of the trust at any given moment to pay the full scheduled benefits on a timely basis (Goss, 2010). The main challenge would occur if there is no change in the current law. The old-age and survivors insurance benefits have the important function that they can only be paid to the extent that the funds actually have assets that they can on in order to draw on in paying the benefits.

The ability of the social security fund to pay benefits is directly dependent on the availability of assets in trust funds. The critical indicator of solvency is the existence of assets over time. By and large, exhaustion of the social trust fund asset is expected to occur under the immediate basis because the program cost will start to exceed the tax revenues dedicated to the social security fund in the future. As a result, this will create a need for increasing the amounts of the net redemptions from the social security fund. The OASI trust fund has accumulated assets and these assets over the current tax income can be covered by the redemption of these assets in future years. Once the reserves in the trust funds have been exhausted, then timely payment of full scheduled benefits can become a challenge. With the time of projected exhaustion of the trust fund is 2037, continuing tax revenues could be sufficient to cover about 75 percent of the currently scheduled benefits (Jeszeck, 2009). Trust fund exhaustion implies a precipitous drop in the level of benefits available for payments. Sustainable solvency would require the trust fund to be positive throughout the projection time that the trust fund reserve level is stable. By meeting these conditions, program financing would be projected to be adequate at least for the near future.

Negative returns make the social security fund a bad deal for the existing and future retirees. In the past, the social security fund retirees received more in benefits than they were paying into the system. However, this might not be the case with the future retirees. For the recent and future retirees, the social and security fund will provide a negative rate return (Jeszeck, 2010). While the social security fund has changed from a program to protect the retirees from poverty, current workers and the younger generations are likely to inevitably bear the burden of the social security drain on the federal budget. Moreover, raising the payroll taxes on today’s and future’s workers in order to cover the social security funding shortfall can only add to their burden.

 There is need for action to preserve the social security especially by Congress. If action is not taken in time, it could result in an imminent failure with the only choices remaining being raising taxes or allowing the program to fail. Facing the challenge today allows for more options as opposed to waiting for longer. The current social security system of cost-of-living adjustment is based on an outdated measure where changes in cost of living are used (Smith & Couch, 2014). As Turner (2011) notes, this method fails to account for the way people react to price changes. The proposed index is for the social security current system to the chained consumer price index. This system acknowledges the people choose less expensive and different products in response to price changes. It would be a more accurate system to protect the value of benefits and enhance social security’s finances.

Another recommendation to safeguard the social security program is to increase the full and early retirement ages. Ever since the inception of the social security, life expectancy at birth in the US has increased by about 20 years while the life expectancy at 65 years has also increased by about seven years (Soneji & King, 2012). Likewise, jobs across the country have become less physically demanding with individuals becoming healthier. However, the social security early retirement age has not been increased at all and the full retirement age has only been increased by two years. The retirement age by the social security serves as the implicit guide or actual retirement with many of the eligible beneficiaries choosing to take the social security benefits between the full retirement and the early retirement age. For the social security, this implies a greater financial strain while for the economy it implies a smaller workforce, less retirement security, lower revenue, and lower economic growth. With these conditions it is clear that lawmakers ought to predictably and gradually increase the full and early retirement ages as they index these two to increases in life expectancy.

There is also need to focus the social security benefit on the beneficiaries who need them the most. The social security program was primarily created to protect the elderly from poverty. However, the program can be faulted to have failed in complying to this primary objective with over 40,000 millionaires who are beneficiaries and with so many low-income recipients in need of the additional welfare benefits (Martin, Rose, & Beach, 2012). The way forward in correcting this anomaly would for the lawmakers to phase out beneficiaries for the retirees in the high-level non-social security income in order to provide a true system of the social insurance focusing on those who need it the most. For instance, the lawmakers can consider a minimum flat benefit level for all the seniors from the poverty levels in retirement.

It is clear that the issue of the social security affects a vast majority and the economy. The social security issue is not just a problem of the elderly risking losing their benefits, but a society wide problem that affect the majority in the society. For instance, exhaustion of the social security assets implies that the younger generation could be forced to dig deeper into their pockets as higher taxes are introduced to cater for the imminent deficits. Consequently, the economy would also suffer a great deal with many people leaving the workforce and entering the dependent category of the population. It is a product of the baby boomers constituting the majority of the population entering the retirement age bracket. With many leaving the workforce and instead entering the beneficiary category, the economy would be greatly affected in terms of productivity and economic growth.

Many families would also be affected if the social security program’s solvency is compromised. With those who have been actively involved in contributing to the welfare of the family entering the dependent class, the family incomes would be greatly affected. The expectation is that at retirement, the social security benefits would play an important role in sustaining the retirees. However, failure of the program would cause a heavy burden on the family members having to care for the retiree. It would in turn the welfare of the older generation and cause social problems including stress and suicides. The foster home programs would also be affected with many not able to meet the cost of paying for these services.