Legal and Ethical Issue
Retirement income in the United States (US) fundamentally comes from Social Security. More than a third of the elderly beneficiaries of Social Security rely almost entirely on it for their income (more than 90%), making up the total of two-thirds of them whose reliance on it accounts for more than half their income (Brossoie, 2010; NASI, 2014; Poterba, 2014). Having kept around 22 million Americans out of poverty, Social Security remains an integral program favorably viewed by many (Poterba, 2014). In fact, findings from a study gauging public opinion from different generations conducted by the National Academy of Social Insurance (NASI) reveal that a significantly large number of participants are in favor of the overall advantages of having Social Security around, so much to the point that many of them do not actually mind having to pay for it simply because they recognize “the value the security it provides” (NASI, 2014). Participants also show a remarkable preference for paying more for Social Security, if such would be necessary to keep it strong (NASI, 2014). Furthermore, participants largely consider adding more Social Security benefits as an agreeable move for the program (NASI, 2014). Such findings by the NASI are in consonance to the greater threat looming over Social Security – its forecasted depletion in 2033. The Washington Post (2014) reported that the shortfall leading to the depletion of Social Security in 2033 has started in 2010, when funds for the program taken from payroll taxes became insufficient in paying for benefits in 2010. To ensure that Social Security benefits are still paid in full in light of the foregoing, the program began to use interest from bonds coming from the Trust Fund established for it (The Washington Post, 2014). Forecast for 2020 indicates that the Trust Fund would start to become insufficient in paying for Social Security benefits, assuming no changes are made (The Washington Post, 2014). In 2033, again assuming no changes are made, the following are forecasted for Social Security: the full depletion of the Trust Fund and the further widening of the shortfall towards the full depletion of the program as it becomes limited to paying only 77 cents per every dollar paid (Brossoie, 2010; The Washington Post, 2014).
A further elaboration on the proven popularity of Social Security provides findings affirming that the program is favorably backed by most Republicans, Democrats and independents (NASI, 2014). The general expectation that Social Security would pay benefits upon retirement stand as the main reason why most Republicans, Democrats and independents do not mind paying for the program (NASI, 2014). Additionally, most Republicans, Democrats and independents view payroll taxes for Social Security with great worth because such would support their elderly relatives, particularly their parents, on their behalf (NASI, 2014). Furthermore, most Republicans, Democrats and independents greatly value Social Security for its role in securing and stabilizing millions of beneficiaries, specifically “retirees, disabled individuals, and children and widowed spouses of deceased workers” (Brossoie, 2010; NASI, 2014; Poterba, 2014).
Based on the foregoing, the fact that Social Security stands as a popular program that would benefit millions of Americans makes its forecasted depletion in 2033 - save for possible changes, a compelling legal and ethical issue that needs to be addressed. Understandably, if no changes are made for Social Security in time for 2033, the following scenarios may be expected: beneficiaries would receive inadequate amounts for benefits, workers would have to shoulder more costs for beneficiaries in their respective families and the general welfare of beneficiaries would be less secure and stable, henceforth putting them at greater risk of poverty and in times of medical emergencies (NASI, 2014; Reznik et al., 2005/2006). Therefore, to address the legal and ethical issue behind Social Security, two possible solutions are put on the table – cut benefits or raise revenue (The Washington Post, 2014). Understandably, both possible solutions may take place together in one way or another, but not abruptly as would provide perilous consequences to the very concept of Social Security - a program many expect would produce more benefits the greater the payroll taxes collected for it (The Washington Post, 2014; Reznik et al., 2005/2006).
Contrasting Views
Cut Benefits
The Washington Post (2014) detailed six ways in which benefits can be cut as a solution to prevent Social Security shortfall. The first way involves having to cut benefits on everyone immediately, which can reduce shortfall by 100%. For that, it is important to note that the financing problem of Social Security, specifically through the Trust Fund, lasts 75 years. Therefore, to make sure that the Trust Fund lasts 75 years, it is viable to consider benefit cuts on everyone by 17% for all beneficiaries – current and future ones. The burden, in effect, would be distributed across all generations, including those who are currently collecting benefits. However, one problem to consider on benefit cuts on everyone is the fact that it adversely affects current beneficiaries with low incomes. Current beneficiaries with middle incomes whose 401(k) plans are deemed inadequate would find benefit cuts on everyone unfavorable as well. Therefore, government programs that are means-tested would have to supplement Social Security for low and middle-income earners (The Washington Post, 2014).
The second way involves having to raise the Full Retirement Age (FRA), which has now increased from 65 to 67. The 75-year shortfall of the Trust Fund would be cut by 20% by raising the FRA, as it serves as a recognition that longer lives would entail longer time for working (The Washington Post, 2014). However, current and future Social Security beneficiaries would not have to work longer in order to counterbalance FRA rise and increases in income taxes and premiums for Medicare. Moreover, the claiming age may have to be raised alongside raising the FRA, since early claimers would be put at risk of having inadequate sources of income in later years, particularly those who start claiming at 62 years old. Nonetheless, such would burden those who need to claim Social Security benefits early (The Washington Post, 2014).
The third way involves having to freeze the purchasing power of benefits at current levels paid to future beneficiaries, a move that would reduce the 75-year shortfall of the Trust Fund by 95% (The Washington Post, 2014). The extra revenue earned from freezing the purchasing power of benefits can be mandated by Congress for use in other programs that could supplement Social Security or may serve as justification for lowering payroll tax. However, freezing the purchasing power of benefits could entail new beneficiaries to receive benefits lesser than Social Security could pay even following the depletion of the Trust Fund. Moreover, government programs that are means-tested would have to expand to cater to the elderly, who stand to be the most disadvantaged in freezing the purchasing power of benefits (Brossoie, 2010; The Washington Post, 2014; Poterba, 2014).
The fourth way to reduce Trust Fund shortfall for Social Security, by 55% to be exact, also involves freezing the purchasing power of benefits, this time just the maximum benefit in order to enable the adjustment of all middle benefits. Such would entail the protection of low-income earners from having their benefits lessened, henceforth limiting the need for expanding government programs that are means-tested (The Washington Post, 2014). Nonetheless, such manner of reducing Trust Fund shortfall still has its own disadvantages, as it stands to equalize the amount of benefits workers can claim at a given age in time, notwithstanding the fact that some have paid more in payroll tax. Income spreading throughout life, as a result, would be reduced under Social Security (NASI, 2014; The Washington Post, 2014).
Using a revised consumer price index (CPI), the fifth way under benefit cuts, can reduce Trust Fund shortfall by 20% (The Washington Post, 2014). Cost of living adjustments (COLAs) inherent in Social Security reliant on a revised CPI that provides greater accuracy on changes in cost of living would entail the program to work based on its original purpose, as it entails decreases in Trust Fund shortfall. However, a revised CPI can slow down benefits, which places long-term beneficiaries – typically those who are incapable of working for income such as the oldest elderly population and persons with disabilities (PWDs) in peril, given they depend on Social Security the most (Brossoie, 2010; Poterba, 2014). Spending shifting may not occur as much among long-term beneficiaries as well, hence rendering the revised CPI helpless in terms of enabling them to adjust to slowed-down benefits (NASI, 2014; The Washington Post, 2014).
The sixth, and final way, to introduce shortfall reduction for the Trust Fund of Social Security by way of benefit cuts, by 100% specifically, is to let the next generation bear the problem itself (The Washington Post, 2014). Such a move would entail no changes to Social Security at present, as benefit cuts would come only when the Trust Fund becomes depleted by 2033, as forecasted. However, such could terribly disadvantage low-income workers, understandably with lower benefits, and in turn would lead to the expansion of government programs that are means-tested (The Washington Post, 2014).
Raise Revenue
Raising revenue is the other solution provided by The Washington Post (2014) and it is also composed of six ways. The first way is through tax increase on all workers, where the 75-year shortfall of the Trust Fund would be reduced to 100%. Such can be done through a 15.3% increase in the payroll tax that is divided between workers and employers. However, low-income workers are at greater disadvantage under higher payroll taxes, given that they use their immediate income for spending on daily necessities (NASI, 2014; The Washington Post, 2014).
The second way to reduce the Trust Fund shortfall by raising revenue is through raising the earnings cap for taxation from 83% to 90%. The current earnings cap for Social Security, $117,000, is originally designed to cover up to 90% of earnings, but the increase in inequality in recent years have decreased coverage to 83% of earnings. Thus, resetting the earnings cap to 90% stands as a viable solution, as such would affect workers whose incomes can handle the burden of such a move. Yet, one disadvantage is that higher-income workers would not be able to get higher benefits in return, alongside the risk of weak political support from people whose higher incomes could enable influence against Social Security. In other words, workers earning more than $117,000, who are more economically well-off, can affect the reputation of Social Security among them (NASI, 2014; The Washington Post, 2014).
The third way involves taxing healthcare, which can reduce the Trust Fund shortfall to 35% (The Washington Post, 2014). The increase in costs of healthcare arising from the removal of tax preference for it could encourage people to lower their consumption on less important commodities. Yet, higher-income workers would not be affected by healthcare taxation unless the earnings cap are raised and employers may be urged to lessen their healthcare coverage for their workers (NASI, 2014; The Washington Post, 2014).
The fourth way revolves around the start-up costs of Social Security, which can be transferred to general government revenue and may reduce Trust Fund shortfall to 100% (The Washington Post, 2014). Such would strengthen the correlation between payroll taxes paid by every generation for Social Security and the benefits they receive. However, such a move would endanger the support given by taxpayers with higher income to Social Security, since they would have to shoulder much of the start-up costs of the program transferred to general government revenue through their contribution to federal taxes (The Washington Post, 2014).
Raising revenue as a solution to reducing shortfall of the Trust Fund, 20% in this case, is also possible through investing 40% of its assets in equities. Such would entail greater diversification of the funding base of Social Security, although the riskiness of stocks would entail adjustments to payroll taxes and benefits based on trends in the market. The involvement of the government in the economy is also imminent in investing Trust Fund assets into equities – one that can be limited by introducing a cap to holdings and utilizing index funds managed privately. Whereas stocks may produce higher returns, its inherently fluctuating nature puts Social Security at greater risk, both in financial and political terms (The Washington Post, 2014).
The sixth way of reducing Trust Fund shortfall via raising revenue, which can amount to 100%, involves, again as in the case of cutting benefits, passing the problem onto the next generation. Under such a scheme, it is only when the Trust Fund is depleted when raising revenue for Social Security would be prompted. However, such a move would be abrupt in nature and can destabilize the welfare of low-income earners, given their immediate use of their income for daily necessities (The Washington Post, 2014).
Conclusion: Cut Benefits or Raise Revenue?
The impending problem of financing Social Security involves a multitude of possible solutions. However, several of the proposed ways grouped into two solutions – cut benefits or raise revenue, have their respective advantages and disadvantages. Yet, regardless of the case, it is essential to keep Social Security within the purpose for which it is intended – to provide beneficiaries with lesser or no capacity to produce income with benefits accrued from payroll tax paid by them in their years of working or their dependents. To cut benefits would, in turn, disadvantage future generations as against the dangers of higher costs of living, inflation and other economic uncertainties, yet the same effects are possible when revenues are raised. Thus, a prudent application of both possible solutions, involving of course the careful application of their respective ways, would stand as a favorable approach to solving the financing problem of Social Security. Prudent, in this case, would mean the application of adequate safeguards that would minimize or eliminate all perceived disadvantages to beneficiaries – the elderly, in particular, arising from adjustments to Social Security. In such a case, it is important to think of the respective concerns of all income earners at different levels – low, middle and high, in introducing viable compromises that would eventually fix Social Security towards making it a more financially viable program in the years to come. After all, everyone stands to benefit from Social Security, as it is designed to financially cover, apart from uncertainties hindering income generation, the inevitability of retirement and becoming among the elderly.
References
Brossoie, N. (2010). Social gerontology. In R. Robnett & W. Chop (Eds.), Gerontology for the health care professional, 2nd ed. (19-52). Canada: Jones and Bartlett Publishers.
How would you fix social security? (2008, May 6). The Washington Post. Retrieved from http://www.washingtonpost.com/wp-srv/special/business/get-there/social-security-fix/
National Academy of Social Insurance (NASI). (2014). Americans make hard choices on social security: A survey with trade-off analysis. Washington, DC: National Academy of Social Insurance.
Poterba, J. (2014). Retirement security in an aging population. The American Economic Review, 104(5), 1-30.
Reznik, G., Shoffner, D., and Weaver, D. (2005/2006). Coping with the demographic challenge: Fewer children and living longer. Social Security Bulletin, 66(4), 37-45.
