Social Security


Socialsecurity is a program adopted by many governments to give financialsecurity of its citizens who are faced with certain challenges suchas old age, disability, families of the retirees or deceased workers(Jasmine 12). About 150 million people in America contribute towardsthe social security kitty, which is received by approximately 58million people by the end of 2013.1The program today benefits at least a quarter of the households inAmerica. The social security program is taxed from the workers bothgovernment and private employees and then the money are channeled ona monthly basis to the beneficiaries.2This paper seeks to explore the economic impact of social security onthe financial market in the United States of America.

Thesocial security fund is rising following the high growth rate of thepopulation as well as the rising life expectancy. This trend projectsthat by the end of the year 2030 the social security funds mighthave run out completely.3To avert the looming danger, financial experts are advising on theneed to invest the social security funds in the stock market. Theimpacts of the social security fund on the financial market havealways generated heated debates among the economist. The problem asseen by many is that the program limits the individual savingsincentives as it increases the interest rates as well as crowding theinvestment (Rich 39). The advisory council on investment capital onthe stock market has on several occasions raised questions about theworkability and sustainability of the social security programfollowing its uncertainty. These queries point out at the risksinvolved in the allocation of the macroeconomic across thegenerations as well as the intergenerational risk sharing.4This is critical considering the consequential relationship betweenthe intergenerational sharing of resources as well as the insuranceis posting their economic value. A keen analysis of the issue pointsout at the interdependent aspect of the redistribution policy inrelation to the assessment of the risk sharing the consequences (Rich37).

Followingthe confusion on what reforms on the social security are possible,some comments about the nature of the social security funds are notrealistic. The basic principle of social security is to tax citizenwith the promise of offering financial aid at the retirement age withtheir families (Rich 39). If the funds were invested by thegovernment and paid back to the people with some interest, peoplewould perceive the latter as being forced by the federal governmentto make some personal savings. If the social security funds werededucted from the people’s earnings and then distributed to thebeneficiaries immediately, the private savings would not match thenational savings thus, the national savings would dwindle. Initially,the social security scheme was designed to be a fully funded programbut later converted into a pay as you go system (Rich 44). This ledto the excess contribution to the initial beneficiaries.

Theimpact of the pay as you go system is in a major way affected by themarket interest rates, population growth and wage growth. Thus, thecost of social security benefits relative to the cost rate is givenby the proportion of paybacks to wages divided by the percentage ofemployees to pensioners (Virgio 86). Returns on social security aremostly below the market interest rates making it worse than if theparticipants had saved as per the market rates.5This can only be different under extreme and practically irrelevantconditions. Due to the recurring nature of the social security inrelation to the government debt, there is a general perception thatthe future generations receipts are taken as current debt offset.This is projected to add financial obligations to the futuregenerations at the expense of the current generation. The fact thatthe future generation will be paying to offset debt burdens paid bythe past beneficiaries, bring many upsets and challenges inimplementing the social security reforms.6 This raises the moral question of whether some people should beliving from others sweat irrespective of their social relations,without considering other social and economic obligations.

Socialsecurity funds were intended to bring stability and financialsecurity to the socially disadvantaged and especially in their oldage. The financial implication brought about by the programchallenges the sustainability of the program following the publicuproar on the financial burden across the successive generations. According to the government advisory committee, since it calls for anon-uniform fragmentation of the wages transmitted from the young tothe old, the program is not projected to have any major implicationon the savings rates, interest rates or bond prices. There is also ageneral perception that the continuous transfer of debt across thegenerations will materialize to increased interest rate and put theper-capita income on the lower curve. Though a tough call, theoutcome could ease the debt burden on the current generation in abetter way than the alternative plan.


Jasmine,Tucker: ‘Giving Thanks: Key Programs Keep 26 Million out ofPoverty” (2012). Print.

Rich,Motoko. &quotForced to Early , Unemployed Pay a SteepPrice.&quot&nbspTheNew York


Virgio,Reno: “Building on ’s Success” (2007). Print.

11. Tucker Jasmine: ‘Giving Thanks: Key Programs Keep 26 Million out of Poverty” (2012). 13

22. Tucker Jasmine. Giving Thanks. 17

33. Ibid 22

4 4. Motoko Rich. &quotForced to Early , Unemployed Pay a Steep Price. 42

55. Reno Virgio. “Building on ’s Success” (2007). 91

66. Ibid. 92

Social Security

Last name 6


Benefitsof the Program

Socialsecurity in the US is a Federal program for the Old-Age, Survivors,and Disability Insurance (OASDI) (Galasso &amp Profeta 63). The Act includes numerous social insurance and welfareprograms. offers retirement benefits to more than 35million Americans (Goss 112). The working population also benefitsfrom Disability and Survivor Insurance in case of disability or deathof spouse or parent. Such benefits are provided in a just andprogressive manner. The system is effective while the administeringcosts are below 0.7 percent of a person’s yearly benefits. Thereare various programs that fall under . They encompass:

  • Medicare (Health Insurance for Aged and Disabled)


  • Supplementary Security Income (SSI)

  • Temporary Assistance for Needy Families (TANF)

  • Medicaid and

  • State Children`s Health Insurance Program for low income citizens (SCHIP) (Galasso &amp Profeta 64).

SocialSecurity is financed by Self-Employed Contributions Act Tax (SECA)and the Federal Insurance Contributions Act Tax (FICA) (Brooks 24).Such funds are collected and entrusted to the Trust Funds preservedby the US Treasury. Retirement benefits are paid at the age of 62, ata reduced level. However, full benefits rely on the year a retireewas born. Children aged below 18 years receive survivor benefitsincase of death, disability or retirement of their working parents.Those aged up to 19 years must be enrolled in a primary or secondaryinstitution, or be disabled prior to turning 22 years (Altman,Kingson &amp Johnston 42). The modifying needs, as well asindividuals’ preferences has made people seek employment afterretirement. In such as case, survivor or retirements benefits arepaid at the same time the person is working. Spouses of workingpeople benefit from spousal retirement that is one and half the PIAamount of their benefit or their spouse’s, whichever is high. Thenon-working spouse can only request for retirement benefits aftertheir working spouse has applied for the same. Widows and widowersbenefit from survivors benefits, if their spouse, who was abeneficiary of , passes away. In some cases, divorcedspouses may also benefit.

Beneficiariesare required to have a social security number (SSN) foridentification (Altman, Kingson &amp Johnston 44). Many US entitiesare using the SSN for personal identification. They encompassgovernment agencies, private agencies and the military.

Anumber of policies have been put in place to address the projected deficit. They encompass lifting the payroll ceiling,rising retirement age, increasing taxes, reducingbenefits given to novel retirees and tightening disability rules(Brooks 24). However, some of these proposals are estimated to dolittle in solving the issue, implying the need for more effectivestrategies.

Delayed Benefits

Socialsecurity benefits amplify by a certain percentage if workingbeneficiaries wait until they attain their retirement age. However,such an increase relies on the year of birth, and is eligible forworkers aged 70 years and below (Brown, Liebman&amp Wise 16). Whatthis means is that amplifications in retirement benefits are notpermitted after this age. The increase is prorated using an averagesurvival rate, ensuring that total benefits are approximately similarin spite of the retirement age. The delayed benefit increment is morebeneficial to women compared to men. The reason is that women have alonger life expectancy than their counterparts.

Online Estimator

Anonline benefits estimator was launched by the Administration in 2008 (Goss 112). It is used by workers withsufficient credits to be eligible for benefits.However, such workers are not able to acquire benefits on theirrecord, or may not be beneficiaries of Medicare. Through theestimator, they are able to get an approximation of their retirementbenefits, based on the retirement age. Workers are required to open aprotected online account referred to as my in orderto access the service.

Proposalfor Reform

Proposalsto reform program in the US have persisted largely asa result of the continuing financial challenge. From 2011, theoperating expense of the program was projected to surpass cashrevenues. It is contributed by the increased baby-boom aging, leadingto a high proportion of those who are retiring compared to payingworkers. Other factors include high life expectancy, low birth rateand increased borrowing by the government from the Trust Fund (Brown,Liebman&amp Wise 16). institutions have gone throughintense revolution from community risk-pooling schemes to personalmarket-founded designs (Galasso &amp Profeta 68).Inreforming in the US, George Bush proposed asuggestion in 2005 that would combine the government-financed programwith individual accounts to allow for partial privatization. Thelatter would encompass private or personal accounts. Nevertheless,the proposal was strongly rejected by the current president, BarackObama. As an alternative, Obama proposes for an increment of theyearly maximum compensation amount with the purpose of assistingfinancing the program.

Thosewho support the privatization of the program argue that private plansprovide enhanced returns compared to the conventional socialsecurity. Nevertheless, privatization exposes contributors toadditional perils linked to the instability of the financial markets.Such risks have major impacts on private plans. Public systems arebeneficial over private plans in that the former is supported by thestate through taxation and borrowing. It means that risks are spreadover potential contributors as well as beneficiaries (Brown, Liebman&ampWise 16).

Privatizationof would also increase economic growth of thecountry. Such growth is estimated to be 3 percent of annual GrossDomestic Product (GDP) (Brooks 28). The claim that privatizationwould lead to a “clawback” mechanism has been countered bysupporters. It means that proceeds accrued in private accounts wouldbe liable for taxation followed by benefit reduction. It is arguedthat beneficiaries would obtain amplified benefits despite theunderperformance of their accounts in the market.

Thoseagainst privatization of argue that such a move woulddo nothing in addressing the issue of lasting funding problems.Redirecting money into private accounts signifies a reduction ofaccessible funds to compensate present retirees. This is turn wouldresult in considerable borrowing. According to the Center on Budgetand Policy Priorities, the privatization proposal by Bush in 2005 wasestimated to 1 trillion US dollars in novel federal debt in theinitial implementation phase (Altman, Kingson &amp Johnston 42).This would be followed by 3.5 trillion US dollars in the followingdecade. The result was an increase in debt burden among Americans.When borrowing costs, risks and overheads costs of privatization areintegrated, it leads to a lower projected rate of return compared tothe existing “pay as you go” scheme (Galasso &amp Profeta 70).


Altman,Nancy Kingson, Eric &amp Johnston, David Cay. SocialSecurity Works!: Why Isn’t Going Broke and HowExpanding It Will Help Us All.New York: The New Press, 2015. Print.

Brooks,Sarah M. SocialProtection and the Market in Latin America: The Transformation of Institutions. New York: Cengage, 2008. Print.

Brown,Jeffrey R. Liebman, Jeffrey B. Wise, David A. SocialSecurity Policy in a Changing Environment.Chicago: University of Chicago Press, 2008. Print.

Galasso,Vincenzo &amp Profeta, Paola. Lessons for an Aging Society: ThePolitical Sustainability of Systems. EconomicPolicy19(38), 2004: 63–115. Web. April 28, 2015.

Goss,Stephen C. The Future Financial Status of the Program. SocialSecurity Bulletin70(3), 2010: 111-125. Web. April 28, 2015.