Social Security Trust Fund and Its Structure - Research Paper Example

Social Security Trust Fund 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 fo 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). 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 2011.1 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. 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.2 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. 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. However, the fact of the matter is that in order to fund a single Social Security recipient, it requires several payees due to the fact that but a small percentage of the salary is deducted and earmarked for Social Security taxes.3 Such an eventuality is one of the reasons that the death of Social Security, at least under the given constructs, is all but assured. Due to the fact that the need that Social Security seeks to provide is virtually unchanging, a safety net for retirement-aged individuals who have paid into the system their entire lives and have planned their financial affairs in later life on the premise that Social Security will at least supplement the other forms of retirement they may have, the need is unaltered. However, the fact that ultimately changes Social Security and the level to which it can continue to be provided for is the shift in the demographic alongside the high liabilities and level of borrowing that the federal government has already engaged upon with respect to funding other programs from the seeming largesse that the Social Security Trust Fund represented. The issue of intra-governmental borrowing is also a reason why Social Security is estimated to run out ahead of schedule. These different forms of borrowing cannot be blamed on any one particular president or particular party. The fact of the matter is that Social Security has been viewed by both parties and many different congresses as a means to rapidly provide a level of funding to any number of pet projects or current goals that exist. Naturally, such a practice has been short sighted to say the least. The end result has been that due to the fact that such a high level of borrowing from the fund has taken place, no project or governmental action is necessarily better off. The level of intra-governmental debt has remained the same. Moreover, the worst part of this type of borrowing is the fact that due to the way in which the laws that govern the use and utilization of Social Security “surplus” has meant that no meaningful level of surplus has been allowed to accrue. With respect to the way that Social Security surplus funds are allocated and distributed, the government considers a surplus as anything over current liabilities.4 However, the problem comes when actors within the government purposefully target these surpluses as a means to fund a variety of projects that would otherwise need to traditionally borrow funds from other funding sources. In effect, what has taken place with borrowing from the Social Security Fund is actually just a very advanced form of shifting debt from one part of the government budget to another. Obviously, although a great deal of damage has already been effected on the Social Security Trust Fund, one of the means by which the level longevity of the fund could be preserved would be to place a legislative lock on the funds; meaning that no money could be borrowed from the fund for whatever reason that might present itself. Although the combined effect of such a plan has already lost a great deal of effectiveness, it would nonetheless at least help to preserve the fund for a much longer period of time than current projections see as feasible. A further unfortunate fact is that if the surpluses that have existed for several decades already had been saved in such a manner and left untouched, the level to which the Social Security Trust Fund could hope to fund the liabilities it engenders would necessarily greatly exceed the level of funding that is currently available within the fund. As the previous section of this analysis has dealt with the level to which the Social Security Fund represents a liability that the government does not currently gain revenue sufficient to perpetuate into the distant future, the second part of this analysis will seek to detail some of the ways in which the government can seek to correct the slow but steady ebb of funds that are exhibited within the current system. Within the prompt for this analysis, it was asked to provide what the student believes would be the best way to ensure that the Social Security Trust Fund remains solvent into the future. As a means of doing this, it is the belief of this student that no single fix will be sufficient to deal with the unique problems and economic concerns that face the fund within the current system.5 Rather, a multi layer approach that factors in as many policy, taxation, legislation, and systems to impose a level of reduction as possible must be used. However, if one was forced to rank these previously mentioned tools on overall importance, the first would necessarily have to be emplacing a legislative restriction on any further borrowing from the Social Security Trust Fund. By refusing the government the ability to borrow against its own liabilities, the future of the fund would become more secure and the level of faith that the end user would have in it would also increase. As individuals began to see that the fund was a priority for the government, this would have a level of benefits elsewhere in the economy as it would reinstitute a degree of trust within the system as well as seek to safeguard the funds that are already within the fund. 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.6 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.7 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. 8 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.9 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 2011. "INTRODUCTION AND OVERVIEW OF THE 2011 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL THE 2011 ANNUAL REPORT OF THE BOARD OF DISABILITY INSURANCE TRUSTEES OF THE FEDERAL OLD-AGE AND TRUST FUNDS." Social Security Bulletin 71, no. 3: 133-148. Academic Search Complete, EBSCOhost (accessed January 27, 2013). Aaron, Henry J. 2011. "SOCIAL SECURITY RECONSIDERED." National Tax Journal 64, no. 2: 385-414. Business Source Premier, EBSCOhost (accessed January 27, 2013). Goss, Stephen C. 2010. "THE FUTURE FINANCIAL STATUS OF THE SOCIAL SECURITY PROGRAM." Social Security Bulletin 70, no. 3: 111-125. Academic Search Complete, EBSCOhost (accessed January 27, 2013). Hines Jr., James R., and Timothy Taylor. 2005. "Shortfalls in the Long Run: Predictions about the Social Security Trust Fund." Journal Of Economic Perspectives 19, no. 2: 3-9. Business Source Premier, EBSCOhost (accessed January 27, 2013). Hungerford, Thomas. "A Better Way to Invest the Social Security Trust Fund." Challenge (05775132) 49, no. 3 (May 2006): 90-104. Business Source Premier, EBSCOhost (accessed January 27, 2013). Morse, David E. 2011. "Social Security Is in the Red." Benefits Law Journal 24, no. 2: 1-3. Business Source Premier, EBSCOhost (accessed January 27, 2013). Social Security Administration. "Social Security Administration Overview of Program." US Government. Last modified October 12, 2012. Accessed January 27, 2013. http://www.ssa.gov/redbook/eng/overview. Social Security Administration. "Social Security Forecast and Budget." US Government. Last modified October 19, 2012. Accessed January 27, 2013. www.ssa.gov/budget/ Read More