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The Financial Future of Social Security Program

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Free «The Financial Future of Social Security Program» Essay Sample

Social Security remains a major source of income for the retired Americans. The program has developed over the past years into one of the most popular government welfare programs.  For example, in 2014, 59 million people were receiving social security benefits. However, economic sustainability of the program is doubtful, particularly due to implications of various demographic changes. Two funds constitute Social Security Program – the Old Age and Survivors (OAS) fund as well as the Disability Insurance (DI) fund. They are both termed as OASDI funds although they operate separately. 6.2 percent of the payroll taxes of workers and their employers go to the fund. The mounting liability pressures the OASDI fund. Thus, certain measures should be taken to secure its future financial stability.

Causes of Social’s Security’s Financial Shortfall

The uncertainty of the future sustainability of the social security program is rooted in changes in America’s demographics. After the World War II, the nation’s lifetime births per woman rose sharply between 1947 and 1957. The people born around this period are now 67 to 68 years old. Over the next fifteen years or so, the people born between 1946 and 1965 (baby boom generation) will retire, thus, increasing the benefit liabilities that the social security has to pay. Fertility has since collapsed severely; moreover, this trend is also adverse to the financial strength of the social security program. When the baby boom generation is massively retiring, hence, increasing expenditures on benefits, the population of their children, who are essentially the taxpayers, is quite small, causing a serious shortfall in tax revenues required to provide financial help for the retired baby boomers (Ferrara 86). 

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Besides, life expectancy in the country has increased over the last few decades, which is good news to the country. Nevertheless, this is also another challenge to the financial stability of social security as well as other social welfare programs. In 1940, five years after the adoption of the program, the country’s life expectancy was 61.4 and 65.7 for men and women respectively (The 2015 Annual Report 89). Therefore, the financial burden was not so big at that time. However, life expectancy has dramatically risen to 75.5 years for males and 81.3 years for females, and it is supposed to soar in the future decades (Ferrara 87). 

The Current and Future Financial Status

The Social Security program’s current asset base is wide.  For the largest part of its history, the program was operated as system where present tax receipts were used to finance current benefits. However, the system was modified in 1983 when the Congress raised the payroll taxes to create a bulk of revenue for the social security program as a precaution against the baby boomer generation’s massive attainment of retirement age (DeSilver). For over thirty years, the program received more revenue that it paid in the form of benefits. The excess money was invested in special treasury bonds, and the interest was paid to two funds (OAS and DI). In this way, in July 2015, the funds held an aggregate of 2.83 trillion dollars in treasury bonds (Ferrara 86). Therefore, according to the expert estimation, the social security program has substantial amount of assets that can be redeemed to bring liquidity to finance benefits expenditure. However, the amount that would be generated would not be sufficient to sustain the program in the long run given that it costs a total of $ 848.5 billion as for the end of 2014.

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The cash expenditures of the program have increased more than its receipts since 2010.  In 2014, the program suffered a negative cash flow of about $ 74 billion as per the latest trustees report. The negative cash flows are projected to grow to about $ 84 billion for the current year. The interest generated from the investment in treasury bonds is assessed to be enough to cover the deficit for the next five years. Afterwards, the program could start redeeming its investments to obtain cash for paying the benefits (DeSilver). The problem is that the Treasury may not have enough money to facilitate such redemption. It can only obtain the money from borrowing or by raising taxes. Borrowing could be detrimental to the treasury as it would mean further increment of the already overwhelming debt; hence, raising taxes would be the most viable strategy (Ferrara 86)

If the tax strategy was adopted until the social security exhausted its treasury bonds, the American people would have to pay a hefty $ 7.3 trillion, starting from 2010 when the deficit began till 2033 when the treasury bonds would be exhausted. This tax would be an addition to the current payroll taxes returned to the program (Ferrara 86). This long-term fiscal problem is attributed to the fact that, contrary to the prior years, money paid by the employees today does not go to savings or investments that would cater for the future of retirees, but is rather used to immediately finance retirements benefits (Ferrara 86).

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Implications of Social’s Security’s Financial Shortfall

The 2014 trustee report forecast that social security fund, encompassing OAS and DI, would be exhausted by 2034. The DI fund could deplete as the OAS fund is expected to run dry in 2035 on the premise that it is not tapped to replenish the DI fund (a common practice).  After the funds are expended, social security will be receiving tax revenues that will be sufficient to pay only 75 percent of due benefits (DeSilver).

Therefore, it will be imperative to implement corrective reforms. As cited earlier, raising taxes would be the most available recourse, a suggestion that is contained in several bipartisan proposals (Goss 124-125). The second resort could be the reduction of future benefits so that the current workers and those near the retirement age should expect to receive fewer benefits in the future (Goss 124-125). Another option could be increasing the compulsory retirement age to above 67 in view that the American population is becoming healthier and able to work at an older age (Goss 124-125).

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