Is the US Social Security System in Trouble?
The Federal Insurance Contributions Act (FICA) is a payroll of tax finances the social security system. The employers and their workers make equal FICA payments. By the year 1950, the US’s total population’s 8% was 65 years old or more. In the year 2005, the percentage had risen to 12%. The elderly population percentage is expected to hit 23 by the year 2080. The increase means the working age population will reduce from 60% in the year 2005 to approximately 54% in 2080 (Butrica, Smith & Steuerle, 2006).
These population pattern alterations are a result of the fertility rate reduction and life expectancies’ elevation. These adjustments exert pressure on the social security system. The policy analysts and makers have noticed the hurdles posed by this population pattern trend. The aged population draws benefits for a longer duration. Currently, instead of sixteen workers catering payments for every social security beneficiary, three workers pay for one beneficiary. In a few decades, the ratio figure is expected to decrease to only two workers to one beneficiary. Over time, a lesser number of workers are burdened with the payment of an increasingly high benefit to a continually increasing number of retirees (White House, 2014).
Since 1983, the total tax received and the interest income has always been higher than the benefit payments including other expenses. However, with inadequate further legislation or modification in benefits, the yearly surplus will be altered for a deficit approximately by the year 2021, when the benefit payments will start to exceed the workers’ payments and interest. Contrary to this belief, other people disagree with the projections and believe that there is no need for the modification of the current social security system. In this discussion, there will be a description of both differing viewpoints and a position will be taken based on personal view.
The discussion will also focus on the rationale and recommendations.
Challenges Facing the Social Security System
The aging population and longer longevity rates pose a fiscal pressure on the social security system. The increasing life expectancy is a positive indication since it provides people more duration to enjoy life, but there is a need in modification and adaptations so that people acquire the means of still enjoying their extra years. The increasing life expectancy coupled with the decreasing fertility rates is a significant cause of the financial troubles that the social security systems experience in the US. Under the current legislation, the social security cost is bound to rise faster than the system’s income due to the advancement of the baby-boom generation, the projected continuing low fertility, and rising life expectancy.
The United States’ elderly demography has generated a circumstance in which relatively less workers will be obligated to provide support to the growing retired population. The past and the future projected ratios of the workers to the beneficiaries that are obtained by dividing the number of workers by the system beneficiaries are illustrated in the following chart.
The ratio patterns illustrate the boomer generation presence: the workers to the beneficiaries ratio is relatively stable in the durations that the boomers are in the labor force: that is 1980-2005. However, the ratio is significantly lower during the retirement duration of the boomers: that is 2020-2040.
Chart 1: Worker-to-beneficiary ratio, selected years 1960–2060
The ratio of the worker to beneficiary has decreased from 5.1 in the year 1960 to 3.3 in 2005. One of the declining trends is associated with the natural maturity of a pay-as-you-go system. However, the projected future decrease is attributed to the aging of the population in the US. The ratio provided above is essential to a long-run fiscal health status of the social security system. Currently, the legalized tax rates plus the benefits demand the worker-to-beneficiary ratio of an estimate of 2.8 to operate at a pay-as-you-go degree, which means that the tax income nearly equalizes the benefit contributions. The social security trustees predict that ratios will decrease below the level by the year 2020 and will reduce to only 2.1 workers per beneficiary by the year 2040 as illustrated in the chart above.
Currently, the social security system is a fairly lenient pay-as-you-go system due to the presence of a relatively sizeable trust fund. Future predictions indicate that this fund will be exhausted by the year 2040, and the reduced worker-to-beneficiary ratio is expected to present a fundamental challenge to the policymakers.
Opposing View Point of the Existence of Trouble in the Social Security System
There are opposing views concerning the social security system being in trouble. The United States of America is experiencing an increase in the aging population just like the other countries. A significant part of the US population is the elderly, but pretty much some countries Europe already possess a relatively higher percent of its population being more older than 65. An illustration, in the year 2000, the United Kingdom and Germany already had 16 and 16.4 percent respectively of the total population exceeding the age of 65. Therefore, other nations are already adapting to the aging population impact to a higher extent in comparison to the United States. Fundamentally, due to the increased fertility rates and immigration, the population of the USA is expected to continue being distinctively younger as compared to the developed nations regardless of aging.
However, of importance is that the future pressures on the aging population in the United States of America, does not derive much from the increasing trend of the elderly population. More significance is derived from the slow expected growth of the non-elderly working age population.
For the duration between the year 2000 and 2050, the population age of 16 to 64 is expected to increase by only 33%. The ratio of the population aged 16-64 compared to more than 65 years, which is the aged dependency ratio, is expected to decrease from 5.1% in the year 2000 to 2.9% in the year 2050.
The decrease translates to 43%. The slow increase of the working age population means that in the future, the paying tax population will be less, hence there will be limited support for the social security programs for the elderly (Butrica, Smith & Steuerle, 2006).
Based on the above two comparisons of the views on the social security system, a burden is experienced due to aging population and longevity age rates. The glaring trouble with the system is evident unless significant adjustments are made.
Proposed Adjustments to the Social Security Systems
Social Security Solvency Policy Options
In the United States of America, most policy analysts believe that there should be an adjustment of the retirement benefits so as to reflect the reality that the people have a longer longevity rate. A slight reduction in the future benefits growth is an impartial means of tackling the reality that the retirees have a higher likelihood of living more and collecting more benefits. Since people are living for longer periods, the annual benefits can be decreased in the proportion that is equivalent to the increasing life expectancy, and this means that lifetime benefits will be distinctively constant.
I. Longevity Indexing Proposal
Reforms are important in achieving the aim of the adjustment of the annual benefits in relation to the increasing life expectancy. An option of narrowing the deficit gaps would be to index the initial benefits annually starting in the year 2018 by utilizing the dynamics in the life expectancy at the age of 67. This proposal would produce savings of 0.45% of the patrolling in the next 75 years, which translates to 1.77% of the payroll by the 75th year. Another reform proposal involves the additional life expectancy indexing means that would aid in the calculation of the proportions. The existing anticipated value of the lifetime benefits for the retirees in a single year is divided by the value of the same for the following year. This procedure is aimed at generating savings of 0.55% of payroll for the 75 years (Orszag & Diamond, 2003). The significant difference with this proposal is that the indexing would be a divide between the benefit cuts and payroll tax elevations.
The impact of the longevity indexing proposal reforms on financing system is the same as the impact of reform proposals to increase the ordinary retirement age. For example, an alternative to facilitate the common retirement age’s increase to 67 and then subsequently elevate it 1 month after every two years until the age of 68 is attained. The growth is projected to generate a 75-year savings that is corresponding to the 0.52% of the payroll. Intensifying the standard retirement age to 70 years instead, would give way to savings of 0.69% of payroll. A direct link of the possible explanation for longevity indexing or the same alterations to the normal retirement age between the alternative and the associated demographic situations exists. The direct association makes the alternative easier to understand and be accepted by the general public.
II. Progressive Price Indexing
The options are tightly connected to the adjustments in life expectancy. The alterations in the common retirement age, as well as the longevity indexing are not the only alternatives in the reform debate consideration. There is a prominent kind of reform proposal known as progressive price indexing that exclusively protects the retirees’ benefits for the lifetime low income-earners. Various analysts, including President Bush, have endorsed the concept. One proposal for the progressive price indexing would make the retired people in the 30th percentile or below in career mean earnings (Butrica, Smith & Steuerle, 2006). The system would continue providing the successive generations with the earlier benefits that rise with an increase in wage for these workers. However, for the career maximum earners, the initial benefits would rise over time in relation to increasing in price. The workers who are in the middle level of the career mean earnings distribution, increase in the initial benefits is expected to be at a degree between the wage growth and price growth. This reform suggestion for the progressive price indexing would create savings equivalent to 1.21% of the payroll over the following 75 years and 3.97% by the 75th year. This type is the most preferable due to the protection accorded to the low-income earners. Keeping other influences constant, the improvements in the longevity and the decrease in fertility worsen the solvency outlook for the social security. The improvement of the social security solvency demands decreasing benefits or elevating revenues. Therefore, the option to benefit reduction as a result of solvency strains is generated by demographic modifications to increase revenue via tax raises or other ways. It is worthy to note that there are several proposals to raise the social security systems (OCACT, 2006b).
Work and Retirement Policy Adjustments
Even though solvency has been the pivotal point of the reform debate, the extensive discussion on the impact of longevity on the aged wellbeing cannot be ignored. Specifically, the policy makers have suggested an encouragement of late retirement, hoping that the trend will offer better preparation for the future retirees for a relatively longer duration (Butrica, Smith & Steuerle, 2006). The workers averagely would have a yearly income, which is 55% more if they went for retirement five years later than the normal age. The raise would save some of the extra earnings and subsequently delay the receipt of the social security system benefits.
A section of the policymakers concerns the work and retirement source from a long-term decrease in the workforce participation among the older males (Social Security Administration., 2005). In the year 1965, approximately three-quarters of the males of the age of 62-64 were in the workforce. This information is shown in the table below. By the year 1995, this number had reduced to only 45%. Regardless of the promising recent improvements, such as a modest reversal of the reduction in the participation rates for the past decade, the participation rates among the male are still squarely below the pre-1970 degrees.
The portion of the workers rooting for an early retirement benefits under the social security scheme has also elevated since the 1960s. This information is available in Table 2. Currently, nearly 58% of the retiree receives benefits at the earliest possible age of around 62. The major concern among most policymakers is that the early retirement permanently reduces the benefits. The monthly benefit for the current new retirees is decreased by 25% if demanded in the early age of 62, which is legible.
In conclusion, there is undoubtedly evidence of the existence of trouble in the social security systems due to the aging population and longer longevity rates. The policymakers, analysts, and researchers have had responses to the looming challenge by provision of suggestions that directly address the underlying population patterns and those that indirectly focus on the impact of the patterns. The first set of suggestions includes those that would connect the benefits alterations exclusively to the alterations in the life expectancy pattern. The second set of suggestions includes suggestions such as progressive price indexing that would focus the deficit in system financing, but would not depend on specific demographic developments. In reality, combinations of both suggestions and other proposals need to be taken into consideration.