ReviewEssays.com - Term Papers, Book Reports, Research Papers and College Essays
Search

Social Security Reform: Jeopardizing the Safety Net

Essay by   •  November 29, 2010  •  Research Paper  •  2,126 Words (9 Pages)  •  1,711 Views

Essay Preview: Social Security Reform: Jeopardizing the Safety Net

Report this essay
Page 1 of 9

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 enmasse 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

...

...

Download as:   txt (12.4 Kb)   pdf (142.3 Kb)   docx (14.2 Kb)  
Continue for 8 more pages »
Only available on ReviewEssays.com