Taxation, Pensions, and the Issues Associated the Social Security Trust Fund - Research Paper Example

section/# Taxation, Pensions, and the Issues Associated the Social Security Trust Fund The issue of taxation and pensions is something that has caused a great deal of consternation within the world of finance. Certain types of pensions are heavily taxed whereas others are able to pay taxes as the money goes in so that when it is returned it is not taxed. Yet, these 401k alternatives only represent a small portion of pension plans; to gain a more in depth analysis of pensions throughout the United States, it is necessary to consider the case of Social Security (SS). A high amount of publicity has revolved around the Social Security Trust fund in the recent months and years. Much of this attention has been due to the politicization of the issue and the fact that even though a large number of individuals within the country may not understand the unique level for economic hardships that face the nation, they can however understand that a limited bank account that houses funding for one of the most important social safety nets that exists is soon to be depleted; becoming an “unfunded liability”. For this matter, understanding the Social Security Trust fund and the means by which it operates, manages debt, and has evolved over the past years to represent what we see today is extremely important facet of understanding the future of governmental finance, taxation and prospects for retirement both for the current generation of retirees as well as our own generation. When one discusses the Social Security Trust Fund, it is almost always assumed that this means the fund that is responsible for paying out benefits to those individuals who have paid into the system and are now drawing a form of retirement from it. However, this is only part of the equation. The fact of the matter is that the Social Security Trust Fund is comprised of two separate funds. The first of these is of course the OASI Trust Fund (Old Age and Survivors Insurance Fund); whereas the second is that of the DI Fund (Disability Fund) (Shelton, 2008). Whereas the first fund is the one that is of course the largest and is most referenced within the media and concerns over budgeting etc, the second one is lesser known and is primarily responsible for providing payments to those individuals who had been working at one point but due to injury or illness are no longer capable of performing work. Combined, both programs owe the American people approximately 2.93 trillion dollars as of the end of 2011 (Papps, 2012). The number in and of itself is but a snapshot of current obligations and as such cannot be viewed as a means of seeking to understand the level to which the program will be able to handle changes in economics or the retirement of subsequent generations. The unfortunate fact of the situation is that the social security program itself is suffering from what many have called an eventual and sustained death. Due to the fact that the government has mismanaged the situation with Social Security for such a longer period of time, short-sightedly borrowing from it at every available instance, the level to which the program can sustain itself and continue to cover the liabilities that it necessarily engenders is not projected to take place long after the year 2030 (Quirk, 2003). Although this number has oftentimes been stated, what should be understood is that when 2030 does come, Social Security will not just go away; rather, this is the point in time in which the fund will be depleted and liabilities against the program will far exceed the level of income that it generates (Zhu, 2012). Regardless of the runaway level of spending that this program will require, the tax income from social security taxation is not anywhere close to sufficient to fill the needs that Social Security will exhibit within the coming years. Moreover, increasing taxes on the primary worker, or upon the social security benefit earner, is not a defensible solution for resolving the situation that has thus far been described. There are a number of external factors that contribute to this however beyond mere government mismanagement. The first and most important of these is the demographic shift that has been ongoing and that continues to take place within the nation. Like any and all post-industrial nations, the rate population growth within the United States has slowed from the levels it experienced earlier within the past century since the Social Security Administration was established by Franklin Delano Roosevelt. Although not surprising, this demographic shift has had profound impacts on the way that the United States government will seek to fund programs such as Social Security both currently and within the future (Hokanson, 2012). The largest reason for this is due to the fact that Social Security works by levying a tax on all working citizens that are legally employed within the nation. A secondary means by which the government could and should seek to provide extra resources to the Social Security Fund is to increase withholding taxes on paychecks. Although raising taxes is never a popular choice among candidates that are seeking popularity with their constituents, the fact of the matter is that it is mathematically proven that the fund itself cannot continue to survive unless it receives an influx of new cash; whether as a function of increased government debt or by increased tax burdens upon those individuals who will one day rely upon it. In this way, the reader can quickly see that there remain two options for keeping the current fund afloat past 2033; taxation or an increase in government debt. Due to the fact that government debt already surpasses 15 trillion US dollars, it is not advisable that the government should assume that it will continue to have the capacity or the option to borrow the funding necessary to provide Social Security past the time in which it will become insolvent. Instead, seeking to avert such a crisis now means that the best way to do that, along with the other policy functions that have been and will be mentioned, is to increase the burden on the taxpayer. Although unpopular, the shared burden within society will ensure that the mandated existence of Social Security is no longer in question. One of the means by which the government could and should seek to provide another source of income to the Social Security Trust Fund is to deal with the large number of undocumented immigrants within the country. Although many individuals do not think of such a problem within the context of Social Security and its longevity, the fact of the matter is that truly millions of individuals are being passed over for Social Security tax and being paid under the table and outside of the mechanisms that traditional taxation could benefit. By providing a path to citizenship and taxing wages for the millions of undocumented immigrants that currently reside within the nation, an entirely new funding stream of able-bodied hard working individuals would be made available to fill the demographic gap that has already been discussed. Thirdly, retirement age is another issue that is also highly unpopular but must be discussed. When Social Security itself was founded in 1935, the average life expectancy was approximately 60. As one is fully aware, the benefits of Social Security are not available to the individual until the age of 65. As such, many have argued as to whether or not FDR and others designed the system specifically so that individuals could not reap the rewards. Although most individuals agree that this is not the case, the fact remains that the majority of those individuals that were expected to avail themselves of Social Security within the future, at the time it was founded, were not expected to live much longer than the year that it was made available to them. However, average life expectancy has risen more than 17 years in the intervening decades since FDR signed Social Security into law. In this way, the burden upon the system has infinitely increased for longer periods of time as individuals have been living longer now than ever before. As a means to counteract this effect, it is the recommendation of this author that alongside tax increases, legislation to force congress to avoid borrowing from the fund, inclusion of undocumented immigrants into tax base, and raising taxes, raising age of eligibility is not only an option but a reasonable necessity. The fact of the matter is that demographically the nation itself has grown and developed in the 77 years since Social Security has been in place. Since individuals are now living longer healthier lives than ever before, it no longer makes logical sense to provide Social Security benefits to individuals who will have the possibility and likelihood of drawing these benefits for a period of 15 years. Although such a change to the eligibility requirements would be highly contested and ultimately unpopular, it remains an avenue by which the government could seek to ensure that the fund maintains solvency within the coming years; as life expectancy is only slated to rise within the intervening 2 decades until the fund itself becomes unable to fund its liabilities. As has been demonstrated within this analysis, the level to which the Social Security Fund is able to exist at the current and project rate of payouts is terminal. However, with the correct policy and some painful policy, legislation, and taxation mechanisms, the case for Social Security is not nearly so bleak. Of course the greatest difficulty with any of the issues that have been discussed is finding broad based support among politicians that only seek to maximize their own personal gain and do not have a thought for the best ways to ensure that the system continues to exist long after their term in office has expired. As a means of understanding this, it is with a level of apathy that most policy makers and citizens alike face the given situation; assuming that the next generation, next congressman, or the next taxpayer will have an ingenious scheme to fix some of the latent issues with Social Security. However, the fact of the matter is that there is no magic bullet and the only means whereby the given system may be rescued is by implementing several of the difficult policy changes that this analysis has indicated. References Hokanson, N. C. (2004). Social Security--the way out. Journal Of Financial Planning, 17(4), 1-2. Papps, K. L. (2012). The Effects of Social Security Taxes and Minimum Wages on Employment. Industrial & Labor Relations Review, 65(3), 686-707. Quirk, W. J. (2003). Social Security tax and Social Security. Society, 40(3), 49-56. Shelton, A. (2008). Reform options for Social Security. PPI Insight On The Issues, (3), 1-9. Zhu, H. (2012). Plan to Pay Taxes On Social Security. Kiplingers Retirement Report, 19(10), 7. Read More