[TYPE THE COMPANY NAME]

Social Security Problems & Solutions

Problem based learning project

Ron Moore 10/4/2011

The topic my group and I found essential to the national deficit crisis was, the current social security problem. The current social security problem is that the combined assets of the old-age and survivors insurance, and disability insurance (OASDI) trust funds will be exhausted in the year 2036, one year sooner than projected last year. The DI trust fund is expected to runout in the year 2018 in which legislative action will be needed. The social security board of trustees also projected that OASDI program costs will exceed non-interest income in 2011 and will remain higher throughout the remainder of the 75-year period. Social security is important because its beneficiaries 65 and older derive more than half their income from the program and third of beneficiaries derive 90 percent or more of their income from the program. Most of the elderly U.S. citizens that are 65-years-old and up depend on social security as an essential part of their income. If social security was to run-out as projected it would be devastating to the people who depend on social security as their base income and the economy. The current problem with social security is that the number of workers per retiree is set to decline from 3.2 workers per retiree now to about 2 workers per retiree by 2030. The retirement of the baby-boom generation will put an exceptional strain on the current system, which is mainly a pay-as-you-go system. That means the current payroll taxes paid by workers go to meeting current liabilities of the social security system, rather than building up assets which can be used in the future to pay benefits. The projected actuarial deficit over the 75-year long-range period is 2.22 percent of taxable payroll, .30 percentage point larger than in last years report. In addition, over the 75-year period, the trust funds would require additional revenue equivalent to $6.5 trillion in present value dollars to pay all scheduled benefits. The board of trustees also stated that income including interest to the combined OASDI trust funds amounted to $781

billion ($637 billion in net contributions, $24billion from taxation of benefits, $117 billion in interest, and $2 billion in reimbursements from the general fund of the treasury) in 2011. Some solutions for this problem are raise payroll taxes, lower benefits, increase the retirement age, etc President Bush established a bipartisan commission on social security reform back in 2001. It was composed of leading members of congress, along with distinguished scholars and financial market experts. They issued their final report, plus amendments, in mid2002. They came up with alternative models for social security reforms that were faithful to President Bushs principles. All three alternatives featured personal accounts as a central component. President Bushs reform principles were that the reform must not change social security benefits for current retirees or near-retirees. It also states that the entire social security surplus must be dedicated to social security only and that means the funds wouldnt be used to cover federal budget deficits. The principles also state that payroll taxes must not be increased and that the government must not invest social security funds in the stock market. Otherwise there would be a danger of politics intruding into the economic system; the reform must preserve social securitys disability and survivors components. Most widows outlive their husbands by a considerable period of time. Many never worked outside the home. They depend on survivor benefits to survive. The reform must also include individually controlled, voluntary personal retirement accounts, which will augment the social security safety net. For example everybody should have the ability to invest some amount of money each year in 401k type plans, even those who employers do not sponsor such plans. There were three reform proposals total. Reform 1 establishes a voluntary personal account option but does not specify other changes in social securitys benefit and revenue structure to achieve full long-term fiscal sustainability. Some of the highlights of this reform are; workers can invest 2% of taxable wages in a personal account,

expected benefits to retirees rise while the annual cash deficit of the system falls by 2020. Reform 2 enables future retirees to receive social security benefits that are at least as great as todays retirees, even after adjusting for inflation, and increases benefits to low-income workers. It establishes a voluntary personal account with raising taxes or requiring additional worker contributions. However, Reform 3 establishes a voluntary personal account option the generally enables workers to reach or exceed current-law scheduled benefits and wage replacement ratios. It achieves social security system solvency by adding revenues and by slowing benefit growth less than price indexing. I would argue that reform 3 is the best solution to this problem. With this reform personal accounts are created by a match of part of the payroll tax from 2.5% up to $1000 annually for any worker who contributes an additional 1% of wages. This reform also states that in exchange, traditional social security benefits are offset by the workers personal account contributions compounded at an interest rate of 2.5% above inflation. It establishes a minimum benefit payable to a 30-year minimum wage worker to keep retirees above the poverty line. This reform has a lot of quality solutions to the current social security problem and thats why it is the best solution.

Resources: http://krugman.blogs.nytimes.com/2008/08/30/how-important-is-social-security/ http://www.ssa.gov/oact/solvency/index.html http://www.nytimes.com/2010/03/2 http://www.socialsecurityreform.org/solutions/index.cfm5/business/economy/25social.html http://www.cfr.org/economics/social-security-reform-problem-proposed-solutions/p7579 http://www.ssa.gov/pressoffice/pr/trustee11-pr.htm