It is of common knowledge that social security, one of the most persistent and politically significant governance policies of President Franklin D. Roosevelt, is facing long run solvency problems. Policy makers are extensively acknowledging the crisis of social security system and are analytically assessing these problems along with proposing plausible solutions. This system holds an immense importance in the income structure of various economies.
As per a book written by Break (1977), the biggest threats to the social security system are demographic changes, inflation and double inflation adjustments. The demographic changes highlights the falling birthrate, which means that fewer people will be a part of the workforce and the tax collection will reduce, leading to a reduction in the finances to support the social security system. He further illustrates that the declining birthrate will increase the number of social security receivers for every hundred workers paying social security taxes, from 31 in 1976 to beyond 50 by the middle of twenty first century. Inflation is also working a caveat eating up the whole system rigorously. Due to various reasons inflation has been climbing up since 1973 way beyond the prediction of most financial analysts. In the start of 1976 though the inflation rate was decelerating, the administrators of the social security system thought that they had to forecast an average rise in the wages to be at 5.75% and the Consumer Price Index was estimated to rise at 4%. However these figure were merely a controversial estimates. Lastly according to author the 1972 amendment was a threat for the system, which provided for an automatic increase in the benefits as per the inflation rate. Though this was favorable for the retire personals but placed a burden on the taxpayers to provide more revenue in order to support the increasing benefits. Another reason highlighted by Campbell and Feldstein (2001) is the increasing life expectancy in in the advance-developed economies, which is also a major hurdle for the social security pension programs. They also state that U.S. social security trustees estimate that the cost of offering the benefits implied by the current social security formula will increase from about 12% of covered payroll earnings beyond 17% by 2030 and will further increase to 20% by 2070. These problems are forcing the social security system into the devastating long-term deficit.
The possible solutions under discussion by the trustees include the possibility of paying this deficit out of the general revenues of the treasury, increasing the social security tax revenue, prefunding, reducing benefits and diminishing expenditures (Break 1977). These solutions can be used either separately or can be complemented with each other. Campbell and Feldstein (2001) discuss these remedies for long-term solvency problem in detail. They state that some professionals suggest reducing future benefits so that there is no further increase future tax rates to increase the revenue. Suggestions for these benefit cuts maybe in the form of modifications within the present structure of social security system (increasing the age of retirement, regulating the current post- retirement inflation adjustment, or more ambiguous changes in rules) or drafting a more equal benefit system as compared to the traditional one. Some propose to sustain the current level of benefits and raise the tax levels to finance these benefits. However complete dependence on either of the two suggestions is politically unpopular hence the most reasonable solution is prefunding by conserving resources now so that the government can finance this system in future. This includes reduction in benefits, increasing revenue, allocations of existing funds that would have been deployed to facilitate additional government spending and investing these particular funds either mutually or individually.
The plan that I am proposing as a credible solution to this grave problem recommends the government to prepare a prefunding budget. The authorities can raise the level of current national saving that can be used to facilitate the future social security benefits. The current funds of the social security system can also be invested into bonds and stock for further income generation. Rather then keeping idle funds in the system, it can be utilized to generate more income as to further support the benefits in the future. As per my analysis, the most appropriate solution amongst all the suggested ones is to maintain a prefunding and then invest it in various profitable ventures, which can maintain and generate more funds for future benefits of social security system.
Break, George Farrington. The crisis in Social Security: Problems and prospects. Ed. Michael J. Boskin. Transaction Publishers, 1977.
Campbell, John Y., and Martin Feldstein. "Introduction to" Risk Aspects of Investment-Based Social Security Reform"." Risk Aspects of Investment-Based Social Security Reform. University of Chicago Press, 2001. 1-10
MaCurdy, Thomas E., and John B. Shoven. "Asset Allocation and Risk Allocation: Can Social Security Improve Its Future Solvency Problem by Investing in Private Securities?." Risk Aspects of Investment-Based Social Security Reform. University of Chicago Press, 2001. 11-40.