Social Security - American businessSocial security is the general term used in the United States to refer to three major government-administered programs:
• Old Age and Survivors Income (OASI)
• SUPPLEMENTAL SECURITY INCOME (SSI)
The Social Security Act of 1935 was legislated in response to the GREAT DEPRESSION, during which millions of Americans lost their jobs and had few resources on which to fall back. In arguing for the act, President Franklin Roosevelt stated, “Security was attained in the earlier days through the interdependence of members of families upon each other and of the families within a small community upon each other. The complexities of great communities and of organized industry make less real these simple means of security.” Initially Social Security only included retirement benefits. Social Security taxes were first collected in 1937, and the first recipient, Ernest Ackerman, received a lump-sum payment of 17 cents that year. Social Security was intended to be a modest INCOME insurance program for retiring workers. In 1939 survivor benefits were added, and in 1940 the Social Security Administration (SSA) began paying monthly benefits. In 1956 disability benefits were added to the program, and in 1965 Medicaid, health benefits for poorer Americans were added to Social Security. The OASI program is funded through matching employer and employee contributions. In 2003 each contributed 6.2 percent of wages and salary income up to a maximum of $87,000 annual income. Income greater than $87,000 is not taxed for OASI. It is still taxed for Medicare (1.45 percent of income), and the maximum income taxed increases annually. Self-employed people pay both the employer and employee amounts, though they can deduct part of the payment from their federal income taxes. In 1999, the OASI program alone took in over $450 billion in taxes and paid out $340 billion to recipients. For many Americans, Social Security is a “social compact” —a promise to successive generations that they will be supported in their old age. To others Social Security is an intergenerational income-transfer program or a WELFARE program for the elderly. Many Social Security recipients, when asked whether they are getting welfare, will probably respond, “I paid into the system, and now I am getting back what I deserve.” Most recipients of OASI get back what they paid into the program in less than four years. Of course there are Americans who pay into the system but die before receiving any benefits, but then there are people like Ida Mae Fuller, the first American to receive regular monthly benefits. Her first check was for $22.45, and by the time she died just after her 100th birthday, she had received over $20,000 in benefits. Her total payment into the Social Security Trust Fund had been $22.00. Even today the Social Security Administration accounts are referred to as a TRUST fund, but as Americans learned in the 2000 presidential debates, the trust fund is an accounting illusion. Many Americans think their Social Security payments are gaining value in a trust account, like an insurance ANNUITY, but the difference between what the SSA takes in and pays out, about $124 billion in 1999, is deposited in the account of the U.S. Treasury Department. This adds to the federal government’s annual budget surplus (in previous years it reduced the government’s budget deficit) but is in fact “borrowed” by the federal government to fund current spending. This action changes Social Security from a prefunded system to a pay-as-you-go operation. As long as there are more funds coming into the system than payments made to recipients, the system will remain solvent, but with the pending retirement of “baby boomers,” the Social Security system will need to change. In the 1960s, the emergence of the baby-boom generation as workers contributing to the system resulted in a huge flow of payments into the system. Given the natural political propensity to spend tax revenue and the fact that older Americans are much more likely to vote than younger Americans, Congress readily agreed to link the level of OASI benefits to changes in INFLATION. Benefits began to grow annually, taxes were raised to match the increase, and Social Security changed from a modest retirement INSURANCE program to a major government allocation. To overcome the future problem of increasing numbers of recipients and smaller numbers of contributors to Social Security, Americans face four possibilities.
• Raise taxes.
• Reduce eligibility to the program.
• Reduce benefits to recipients.
• Change the funding basis for Social Security.
In the year 2000, Social Security was funded through a payroll tax of 15.3 percent of wage INCOME up to about $80,000, levied against both employer and employee. Eliminating or raising the maximum amount of wages taxed, a move opposed by upper-income Americans, could generate added revenue. Reducing eligibility for the Social Security system has already been planned. In 2000, workers had to be 65 years old to receive full benefits. By 2006 workers will have to be 66 years old, with the age for full benefits gradually rising for future generations. Reducing benefits could be accomplished by reducing benefits for nonworking spouses, using “means testing” to deny benefits to upper-income Americans, or by changing the costof- living allowance. In theory Social Security investing in better-returning securities could attain solvency. U.S. government securities are low-risk and low-return INVESTMENTs. Some argue that investing in the U.S. STOCK MARKET would yield higher returns. This assumes the stock market will continue to provide better returns and that a method can be developed to invest trust funds without political intervention. Investing Social Security funds in stocks would make the trust fund a major investor in the stock market and provide temptation for politicians to direct investment toward strategies that are politically based rather than financially based. Each part of the Social Security system is a complex and important consideration in American business. OASI is many workers’ primary retirement income. Depending on how OASI and medicare change, workers will push for changes in benefits from their employers. The system will likely change dramatically in future years, but how it will change is a hotly debated topic.