Controversy 9

1. Controversy 9 What Is the Future for Social Security?

2. What Is the Future for Social Security? • Social Security – the public retirement pension system administered by the federal government • The largest domestic government program today • Funded by a tax on earned wages during working years, which is then subsidized as a wage repayment during retirement • Social Security retirement benefits average around $12,000 a year for a single individual • Yet, Social Security was never meant to be used as the single source of income for people in retirement

3. Main Features of Social Security • More than just a retirement income program • Also provides wage-earners with disability insurance and life insurance • The Social Security payroll tax is a “regressive tax” – a person earning $20,000 a year and a person earning $106,000 a year both pay at the same 6.2% rate • And people making more only pay 6.2% on the first $106,000 of income • Social Security is modestly progressive in its distribution of benefits because of the “replacement rate” – the proportion of wages replaced by Social Security at the point of retirement

4. Success – and Doubt • More than 70 years later, Social Security remains America’s most successful, and perhaps most popular, domestic government program • There is debate over whether Social Security is: • 1) a welfare program designed to prevent impoverishment in old age or • 2) an annuity program that entitles everyone who pays into it to receive proportional benefits • Any program that tries to accomplish such fundamentally different goals is bound to have both its challenges and its critics

5. Pay As You Go • Social Security is funded by payroll taxes that go into a large account called the Social Security Trust Fund • Originally designed to operate as a modified ‘pay-as-you-go’ system, where the money collected each year mostly pays for people who receive benefits in that same year • If more money is collected from payroll taxes than is paid out that year, then the Trust Fund runs a “Social Security surplus” • But the baby boom generation is much bigger than the cohort before or after it • The generation following doesn’t have enough workers to contribute as much as will be needed under the pay-as-you-go system

6. Eligibility • To be eligible for Social Security benefits, a person must: • Be age 65 (or age 62 for early retirement) • Have worked for 10 years in a job where Social Security taxes were deducted • The age of eligibility is set to slowly rise from 65 to 67 over the next few years • Some people suggest raising the age of eligibility • But this could create more hardships for minority groups who have a lower life expectancy than Whites

7. Eligibility (cont.) • Others suggest reducing Social Security benefits to make them reflect the actual rate of inflation • But an across-the-board reduction would result in more hardships for the poorest beneficiaries • Others argue for making eligibility ‘means-tested’, or only available to people whose income falls below a certain threshold • Another variation is an “affluence test” where benefits might be eliminated for people who are above some threshold

8. Privatization • Can mean several possible changes from the current system: • Increase the level of funding – move from a pay-as-you-go system to a “funded system” that involves an increase in national savings Ex., investing part or all of the Trust Fund in private savings such as the stock market • Accompany private investment with increased choice over the individual retirement savings • Eliminate the way Social Security redistributes benefits either from one generation to another, or from high-wage earners to low-wage earners

9. Privatization (cont.) Some possible problems include: • To finance the privatization of Social Security, the federal government would have to borrow money to make up for retirement benefits already promised to people now retired • Investing the Trust Fund in the stock market would mean that, by 2015, Social Security would own $800 billion in shares – or 10% of the entire stock market • This would be a big step toward national influence over the stock market

10. Women and Social Security • Married women are entitled to 50% of their husband’s Social Security benefits, and a higher amount if the husband dies • Social Security was originally planned for a one-earner family, but more than 70% of women are in the labor force today • Almost three-quarters of older people who live in poverty are women • Today’s higher divorce rates, gender pay gap, and the fact that married women earn more from their husband’s benefits than their own work benefits are a few of the gender inequalities with Social Security