Is Social Security going Bankrupt? Essay

Background of Research When the US Social security measure get laidment trunk was instituted in 1937, one major objective was to provide incentives for older head for the hillsers to retire so that much jobs would be available for younger proletarians. At that time, vivification expectancies were considerably lower, and in that location were far more(prenominal) working- grow adults than elderly. Now, however, continuation of upstart expediency levels has been submited as a major funding problem.2 In hunting lodge to increase the ratio of workers who carry Social aegis and Medicargon taxes to the number of tribe receiving Social Security retirement income and Medic atomic number 18 benefits, or at least to trend the rate of decline, public policy is turning toward encouraging plurality to tick score retirement. Similar changes in attitude ar apparent throughout the economy. In decades past, workers in the US were involve by many an some other(prenominal) emp loyers to retire at a certain age, usually 65, and seldom later than 70. Today authorisation retirement ages are rare.How does the Social Security retirement musical arrangement in the US work? All workers in the US are required to participate in the Social Security retirement program, regardless of citizenship. Currently, 6. 2 percent of a workers pay is withheld, up to a upper limit that is adjusted annually. An redundant 1. 45 percent (with no maximum) is withheld to tolerate Medicare, making a total of 7. 65 percent of earnings for close to workers. The employer contri furtheres the same amount. Self-employed workers must pay not only if their admit besides excessively the employers portion, a total of 15.3 percent up to the Social Security maximum for the year and then only the Medicare tax on any excess. To receive benefits upon retirement, one must induct received credit for working at least 40 quarters. ripe benefits pay long been available at age 65 reduced ben efits are available at 62 years of age, with increased benefits for those who detain to work up to age 70. In order to help keep an eye on the solvency of the system, the full retirement age (FRA) is gradually being increased to 67 years of age for those born in 1960 and later.4 Reduced benefits are still available at 62 years of age save allow be reduced proportionately more since they result in the end be available up to five years earlier than the FRA. The maximum age for earning increased benefits for delaying retirement will still be age 70. Most Ameri batchs bash that Social Security is headed toward bankruptcy. Nothing makes the point s jacket crown than the poll taken a couple of years ago in which young people said they had a better chance of contracting a UFO than receiving Social Security benefits. But many may not go to bed why the system is threatened.In order to break-dance a solution one that meets my goal of saving Social Security for todays retirees and those near retirement, the baby boomers and their children we need to understand the real difficulties facing Social Security. However, little research has been conducted on those who conserve to work beyond the traditional retirement age, sometimes for many years. Since this group is gaining in size we need to better understand the factors associated with the decisions these workers make about haveing their bail to the labor force (or, in some cases, beginning employment).Increased health care costs for the elderly, in particular the costs of prescription drugs not soon c everyplaceed by Medicare, have undoubtedly been a factor for many who have decided to continue working for pay. Employer-provided health insurance largely pays for most prescription drugs, minus a modest co-payment. Recent wearing away of the retirement savings of many Americans after a precipitous falloff in the US spud market during the first half of 2000 has also contributed to the reversal of the tr end towards earlier retirement that reached a low in 1993.By 2003, the overall labor force participation rates for those 65 years of age and over had increased to 18. 6 percent and 10. 8 percent of men and women, respectively, from lows of 15. 6 and 8. 2 percent. One important interrogate that has yet to be answered satisfactorily is what impact having to work long-term will have on the surfacehead-being of the oldest old. American policy-makers seem to assume that there will be little negative impact beca usage the elderly are, in general, healthier, and are living longer.In recent years there has been some(prenominal) alarmist talk of the impending bankruptcy of Social Security, but it is in the orphic sector that real dangers of default now loom. Social Security is base hit through 2041 or longer, but the bounty fund crisis is already mash corporate budgets, with disastrous consequences for jobs. If nothing is take overe, this pension-and-jobs crunch will intensify over the following(a) two years. piece of music many CEOs sold at the top of the market, the pension funds and holders of 401(k)s were left with depreciating paper.Swooning stock markets have caused the major pension funds to lose 40 percent or more of their value since March 2000. Even the well-stuffed 401(k) has become a 201(k). support funding has become so central to todays capitalism that these developments menace the financial good health of corporate giants as well as individual retirees. Most reports on the crisis have, understandably, focused on the affiance of the 42 million Americans who have 401(k)s or the equivalent. But the impact on corporate pension schemes, on which a similar number of people depend, has been just as bad.Many businesses must now forgo investing or face bankruptcy because they cannot meet their pension dutys. (Achenbaum, 1986) In a delineate benefit scheme (DB) the employer guarantees a pension calculated as a proportion of salary this can be an o nerous obligation for a company with many former employees. In a defined contribution scheme (DC), like the 401(k), only the contributions are defined, so benefits stand up and fall with the market. Public-sector DB schemes are generally well and cheaply run, and are anyway guaranteed by state or federal authorities.But balanced-budget rules frequently force those authorities to meet pension underfunding by cutting other programs. Most large private schemes are now badly underfunded, their attention deficit disorderition values low by stock declines and too many past-contribution holidays. We know this courtesy of recent reports from analysts at Merrill Lynch and UBS Warburg. Adrian Redlich of Merrill has undertaken massive research into the 348 companies in the Standard & Poors 500 with a DB scheme. He warned in November that these schemes would end the year with a pension famine of $300 billion, and this is still the best estimate.If underfunded nonpension benefits are inc luded, an even scarier deficit looms. (Hudson, 1999) The pension crunch is not barely a result of CEO misdeed its also rooted in a flawed social structure that aggravates the boom-and-bust cycle. During a boom, the pension fund soars and no contributions are needful to maintain fund solvency. But when times are bad and the employer faces cash ebb, the actuaries verify there must be more dough on the table. Companies overcloud the unpleasant truth by fancy accounting. When they can no longer do this, they cut investment programs.This financing regime is dangerously pro-cyclicalthat is, it encourages booms and aggravates recessions. modernistic laws could enhance the rights of those in pension plans, but last years House and Senate approaches to reform of DC schemes offered the wounded patient a Band-Aid, when what is needed is a blood transfusion. (Achenbaum, 1986) The House bill was quite gentle on corporations. It reduced the time employees have to wait forwards their pensi on holdings are vested, but it allowed employers to continue contributing to 401(k)s with matching company stock.Ted Kennedys Senate intent limited the amount of their own stock employers can contribute and gives employees more say in how their retirement fund is invested. But Kennedy didnt jut obliging employers to offer a contribution. More robust proposals are not yet in sight. In addition to reliable regulatory structures, more resources are needed. The pension-jobs squeeze has only just begun. For individuals its reality has been softened thus far by house price inflation and earnings that continue to rise slowly.But while many investors prefer not to know about it, the goosing of the DB pension numbers by unreal assumptions could well prove as dangerous to economic health as the Nipponese banks huge inventory of nonperforming loans. Will the Bush institution stand by and do nothing as this time bomb ticks away? If the Administration simply wished to help the corporations out of a tight spot, they could be de jure released from their obligations to retirees. This would allow them to resume investing. But it would be grossly unfair and provocative. another(prenominal) solution baron be to pump money into the PBGC.But to use taxpayers money to bail out pension funds in the current deflationary situation would be a dangerous exercise. And the PBGC arrives on the stab too late anyway It only kicks in once Chapter 11 is staring a company in the face. The DB funds might be rescued by imposing on employees compulsory additional contributions. But this would weaken demand and could spark a firestorm of resentment. The most belike outcome is one that would allow employers to convert DB schemes to a DC logic, using cash balance or some kindred formula, but shortchanging employees in this way would create legal as well as political difficulties.A determined plan could address the pension crisis before it gets any worse. Corporations should be obliged to mak e up for their past and present derelictions by replenishing their employees retirement funds. However, simply forcing employers to contribute cash to every workers pot or company scheme is not the answer. Opponents would right warn that this would raise labor costs, drain cash flow, undercut investment and reduce demand. Applied anytime soon, it would mug an ailing economy and send unemployment skyrocketing. It would aggravate, not solve, the pension crisis.There is one approach that would shore up depleted savings without threatening a shaky economy The funding gaps could be plugged by obliging all corporations to issue new stock or bonds each year equivalent to, say, 10 percent of their profits. This part levy, or stakeholder premium, would be calculated like a corporate tax, but unlike such a tax, it would not be a synthetic thinking from cash flow, nor would it be passed on to consumers. And unlike payroll taxes, it would not add to labor costs, thus giving no reason to lay off workers.A great advantage of the share levy is that unlike an habitual tax, it would not exacerbate the problems of an economy threatened by recession. The issuing of new shares does not oblige companies to pay out more in dividendsit simply adds to those who will receive such dividends in the future. The levy should be adjust to insure that all retirement funds gain more than they lose. While it would act in some respects like a wealthiness tax, it would not take demand out of the economy. And its revenues and payments could be adjusted to take hold the swings of the business cycle.(Kingston, Schulz, 1997) Defining the Problem Believe it or not, in 1945 there were about 42 workers for each person receiving Social Security benefits. By 1960, that ratio had shrunk to about 5 to 1. Today, its 3. 4 to one and by 2030, there will be just 2. 1 workers for each beneficiary. At the same time, Americans are living longer. Thats good news. But it operator retirees will receive benef its for a longer period. Americans are also having less children, which mean relatively fewer workers paying Social Security payroll taxes. It is those taxes that finance current benefits.(Buell, 1999) Aside from these demographic trends, first-time Social Security benefits are growing far faster than inflation. These benefits now rise with overall hire growth, and wages are rising faster than prices. The result over the next 75 years, benefits will increase more than 20 times, while prices will go up at half that rate. A retiree in 2060, for example, has been promised annual benefits starting at over $140,000. The result is a system that would require people in the future to work longer hours and pay more in taxes to support retirees.By 2034, payroll taxes would need to be increased by 50% to pay promised benefits or benefits would need to be slashed. Between now and 2070, benefits will exceed payroll taxes by a cumulative $120 trillion. Is it any wonder young people dont expect to receive their Social Security? Something better can be done and is happening. Every generation of Americans has left a bequest of prosperity for its children. We cannot let our legacy be a Social Security system drowning in a sea of red ink.