The following is a paper on understanding Social Security I wrote for a Business Law class while obtaining my MBA. The paper was written in 2004, but because it is more or less a “how does Social Security work and why is it important to me” type document, it is very relevant today — especially as we enter into the 2008 elections. While hope is wonderful, it is not a plan. Find out what your candidate’s PLAN is for Social Security. If you are yet to receive Social Security, this issue EFFECTS YOU!!! It effects all of us.
Understanding Social Security and the Concern for the Future
Created in 1935, the Social Security system was designed to provide the American workforce with an additional source of retirement income. For over 70 years, many of America’s elderly have relied on the benefits of this system to help meet their financial needs in their retirement years. With the demographics of the American workforce changing, can Americans continue to rely on Social Security for their future?
How Social Security Works
Whether self-employed, an employee, or an employer every person and employer of the legitimate American workforce pays into Social Security with each paycheck. The Social Security trust fund is financed by two sources. The first and largest is by the payroll taxes workers pay on their wages and self-employment income. The second and smaller source is by part of the income tax some recipients pay on their Social Security benefits. Once collected these taxes, along with other sources of revenue, make up the federal government’s operating cash or “checkbook.” This cash source is called the U.S. treasury.
A common misconception about Social Security is that the taxes collected are deposited directly into a special account to be used only for the payout of Social Security benefits. In truth, when Social Security taxes are collected they enter into the federal government’s general operating fund and become indistinguishable with other monies collected.
The amount of Social Security taxes collected is actually credited to the Social Security trust fund in the form of federal securities. Just as the money collected from worker’s taxes enters into the general fund, benefits paid to eligible recipients comes out of the general fund. In other words, today’s workers are paying for today’s beneficiaries. This process is similar to those attached to a regular bank checking account. Deposits made to one’s individual bank checking account are indistinguishable from all of the other individual or business deposits made at that bank. Once an individual or a business makes a deposit a credit is issued to the individual’s or business’s account. The cash actually deposited is used by the bank to make loans. As long as the individual or business account shows a credit, the checks written by the individual or business will be covered by the bank. As long as Social Security continues to show a credit, the federal government will continue to cover the checks written to the eligible recipients.
The Concern for the Future
The Social Security system is currently operating with a surplus. This means more money is being collected in Social Security taxes than is being paid out in benefits. While this is a good thing, the board of trustees of Social Security have great concerns for the future. The projected demographics for the future of the American workforce are at the center of their concern. According to the information posted on Social Security’s official web site, “when the Social Security program was created in 1935, a 65-year-old American had an average life expectancy of 12 ½ more years; today it is 17 ½ years and rising.” The board of trustees also projects that 79 million “baby boomers” will start to enter retirement in 2008. It is expected that the next 30 years will produce approximately twice as many older Americans than there are living today. In addition, the reduction in the American workforce paying into Social Security per beneficiary is expected to decrease from 3.3 as it is today to approximately 2 in 2030.
Information contained in the Congressional Research Service Issue Brief for Congress, Social Security Reform, states, “The trustees project that Social Security’s surplus of taxes and interest will cause the system’s trust funds, comprised exclusively of federal bonds, to grow to a peak of $7.5 trillion in 2027…However, the trustees project that the system’s taxes by themselves would fall below its outgo beginning in 2018.” If the taxes collected for Social Security are not enough to cover the benefits being paid out, the federal government will have three choices: raise taxes or other income, cut spending or borrow money.
Policymakers seem to be divided into two groups when it comes to the future of Social Security. One group perceives trouble ahead for Social Security and the other group suggests that the problems are not as serious as some critics would make them out to be. The first group believes the Social Security system needs to be revamped so that the system can meet its long-term commitments while the second group contends that Social Security is currently running surpluses and only moderate changes need to be made.
Suggestions for Social Security reform range from minimal changes to scraping the entire system and replacing it with a program modeled after IRAs or 401(k)s. While none of the ideas presented before today’s policymakers have received a majority’s endorsement, the debate continues. What the majority of policymakers have been able to agree upon is the fact that action to protect Social Security needs to be taken soon. However, what needs to be done and just how quickly a plan can be implemented is still up in question.