Social Security Tax and Benefits

Even though private social security will cost too much to maintain, it should be made private because you control and own the private account resulting in higher returns at retirement. The beginning of Social Security

Social Security was established in 1935; an approved program by the 32^nd President of the United States, Franklin D. Roosevelt. The social security was Roosevelt most important legacy during his presidency. As explained by Bartlett (2005) Social Security was the most successful domestic government program in American history ( ¶1, p1). In 2005 there were over $500 billion dollars collected in form in payroll taxes. The taxes were then turned around in form of benefits to current retirees. Poverty rate among the elderly reduced tremendously over the last 65 years. The burden of caring for a parent or grandparent became obsolete because the elders were able to rely on the social security benefits to enjoy their retirement days. President Roosevelt established the social security program in order to assist the elders in saving for their retirement.

In the past, society established their own system to care for the age relatives. The secret was to have as many children as possible. Roosevelt developed the Social Security program in1935, in spite of the disapproval of many of his peers and elected officials. The program would serve the same purpose it does today. The social security legislature received ideas from business and fraternal societies and business owners. Many company such as Alfred Dolge Company, 1882, created their own pension planning. The plan withheld 1% of the workers pay in promise to pay back 6% interest per year. Roosevelt envisions the social security plan will do the same for the American people. According to Bartlett, the exact form of the social security plan was mainly due to the visions of Franklin D. Roosevelt. Social Security tax rates and benefits returns

In 1935 Social Security legislation imposed a tax rate of 1% for the first $3000.00 wage on both the employer and employee, putting the tax rate at 2%. The first tax was collected in 1937 and the first benefit was paid in 1940. The social security taxes were collected in form of a payroll tax and benefits would be issued at time of retirement. The benefits would assist the retirees with medical expenses and living expenses. At time of retirement the collected taxes would be returned in form of monthly payments. The benefit payment will vary depending on the person's contribution and wages during the working years.

The first person to draw retirement benefits paid a total of $24.75 in social security taxes. Ida May Fuller paid social security taxes from 1937-1940. Fuller retired at the age of 65 and passed away at age 100. During her retirement years her benefits totaled $22,888.92, a very impressive return for only $24.75 contributions. Many workers were not as fortunate as Fuller. By 1980, many workers were able to reclaim the 2% payroll taxes in just 2.8 years of retirement. Many retirees received benefits equal to half of the pre-retirement wage. Over the years social security taxes have increased in order to keep the system afloat and to continue to pay benefits to retirees.

Today the social security tax is 6.2% for the employer and 6.2% for the employee, a total of 12.4 percent. Bartlett reported in 2005 "In 2000 it took a low income workers 11.8 years to get back all of his and his employers social security taxes in the form of benefits, while an average worker needed 17.5 years and a high-income worker 24.9 years". This is a far from matching the percentage Fuller received at the beginning of this program. By 2030, Congressional Research Service estimated that it will take 14.1 year for low income workers to recover his/her contribution. It will take 25.6 years for average income worker to recover his/ her contribution. For high income workers, it will take 55 years. On paper the social security program has sufficient assets to continue to pay full benefits until the year 2018.Social Security financial problems

At present time, Social Security administration collects more in taxes compared to the amount of benefits/ payments issued. For this reason the extra taxes collected are being borrowed by the U.S. Treasury. In turn the U.S. Treasury will issue the Social Security branch a bond. The up to date value of the bonds equal $1.9 trillion in value. (This figure based on 2006 report from social security). According to the Social Security administration, social security receives $94 billion in interest from the bonds in 2005. This may seem like a large figure, however compared to the benefits obligation this is a small percentage. To stay afloat the social security administration must collect more than they issue in payments. According to President Bush as the state of the union on Sept 21, 2005, "Just 13 years from now, in 2017, the government would begin to pay out more in Social Security benefit than it collects in payroll taxes- and shortfalls then will grow larger with each passing year".

The money collected from social security taxes are placed in a trust fund, if the collected funds are not needed to pay for today's retires. The collected and unused portion of the funds will be invested in Treasury bonds. The social security is considered a pay-as-you go account. When retirees claim for benefits, the treasury bonds are cashed out in order to issue monthly benefits to the retirees. Therefore, it is important to collect more taxes than the payout amount to ensure the system stays afloat. Social Security benefits are available to working Americans at the time of retirement age.

As addressed by President Bush state of the union 2005. In 1950, there were 16 workers supporting every beneficiary. The number of workers have decline over the years. Today there are 3.3 workers supporting each retiree. By the time the young worker of today's work force is ready to retire, there will be only 2 workers supporting each beneficiary. Social Security is facing financial problems today, however these problems will not impact today's retirees or near retirees. The problems will impact the benefits of today's young working Americans in their thirty's. The financial problems are out of proportion and serious. Baby boomers are near retirement age. The baby boomers are expected to live longer because Americans have been promoting healthy eating, exercise and regular doctor visits and preventive medical care were properly supplied. The national census shows low birth rate and longer life expectancy. This is a concern for the social security administration because low birth rates mean less collection of social security taxes. With low birth rates the ratio for benefits versus collection would not be sufficient to keep the social security system afloat.

According to the government, the current social security system will be bankrupt by year 2040. In 1950, there were 16 workers supporting every beneficiary. The number of workers have decline over the years. Today there are 3.3 workers supporting each retiree. By the time the young worker of today's work force is ready to retire, there will be only 2 workers supporting each beneficiary. If no changes are made, payroll taxes would be increased and benefits would be reduce. The reduction of benefits and increase in payroll taxes would not affect baby boomers, near retirees (within 5-10 years) or current retirees; but this will affect the young working Americans age thirty. According to the social security trustee, if no changes are made today, the cost to maintain the social security program would be an expensive one. If the American people waited until year 2040, after all the funds and bonds have been exhausted, the social security administration would need to increase the payroll taxes yearly to finance schedule benefits. The increase in payroll taxes would be estimated to increase from 12.4 percent to 16.65 percent.

The current social security trust funds hold no value. The funds have no ability to accrue any earnings. In fact it is pay-as-you plan. The funds are collected from current workers and immediately issued in form of benefits to current retirees. "Any Social Security surpluses accumulated to date have been spent, leaving a trust fund that consists only of government bonds (IOUS) that will eventually have to be repaid by taxpayers. The current social security systems can stay afloat because they continue to collect more taxes than they pay out. However, this statement will be true only until 2040. According to the White House, baby boomers are expected to retire within 5-10 years. The retirees are expected to live much longer. However due to low birth rates, there will not be enough workers to continue to contribute to the social security taxes. By the year 2017, there will be more benefit payments issued than there is tax collected. This would cause a deficit and the social security will be bankrupt by 2040. Consequently the new young American retiring in 40 years would receive 27% less benefits while paying more social security taxes. According to the U.S. Department of Labor, Social security pays the average retiree about 40 percent of their preretirement earnings (2007, ¶2).

The estimates may prove to be correct. In 1960, a sixty five year old male may expect to live another 13.2 year and a female 17.4 years. By 2003, the sixty five year old man has 16.7 years to enjoy during his retirement age. While the female can enjoy 19.5 years, this is 2.1 years more than in 1960. Improved in medical technology, self awareness and healthy eating habits are projected into the estimated years.

The increase in payroll taxes would continue to increase to 17.78 percent in 2080. Simultaneously the benefits would also be reduced 26 percent, and continue to be reduced to 30 percent by year 2080. As addressed by the Comptroller General of the U.S. and Chairman of the Federal Reserve Board, the sooner the problem is addressed the simpler and inexpensive it would cost to fix the financial problems. The independent, bipartisan Social Security advisory Board has said: "As time goes by, the size of the Social Security problems and the choices available to fix it become more limited." To ensure that younger workers will have a better planning for their retirement as well as assurance for the future of social security, it is necessary to address the problem now instead of waiting for the system to completely exhaust itself by 2040.

As a senior at the National Center for Policy Analysis and a columnist for Creators Syndicate, Bartlett addressed a very good question. "The real questions, therefore, is whether we can afford benefits that have been promised". Ideally and very unfortunate for many Americans, the government suggests that a 2-percent tax increase is all that is necessary to fix the Social security financial deficit. However, Bartlett suggests that increasing the tax is not the answer. The ratio between the worker paying taxes and the beneficiary as increased from 30 percent today to 54 percent by 2080.

Another rising concerns of the government, many workers are drawing benefits as early as age 62. In 2002, 56.1 percent began withdrawing benefits at age 62, and 22.7 percent started before age 65. When workers starting withdrawing benefits earlier than expected, this impacts the economy. Bartlett explains that when workers retire before their normal retirement age, they will stand to lose $1.00 of benefits for every $2 earned. This is equivalent of 50-percent margin tax rate. Many workers interprets the current social security as "use-it-or-lose it" program so the workers would retire sooner in fear of losing their benefits later to the government. However, the private social security offers workers an incentive for staying in the labor force longer. The new social security will give each worker the unlimited freedom to control their own assets with government intervention.

Due to apparent reasons about the financial problem of social security, the government has worked together and proposed the social security reform. President Bush proposed a new social security reform in 2005. The new program will turn social security taxes into private accounts. This new program will establish voluntarily personal accounts for workers. The private accounts will consist of 40% bond and 60% investment. At retirement, workers will have the opportunity to choose a withdrawal options. According to Tanner, this proposal will restore Social Security. It is expected to do better than the old system (2004, p2, ¶5). Workers who choose the individual account will accumulate larger amount of savings compared to the traditional Social Security plan. The individual plan will create larger returns and wealth for the low-income family. The Social security reform commission concluded "a real (inflation-adjusted) return of 2% per year would be sufficient to break even." The new social security reform will not affect anyone retiring in the next 5-10 year or anyone born before 1950. Current retirees would continue to receive their full benefits along with inflation adjustment.

Rauch suggests private account could also increase national savings (2005, ¶15). Tanner writes, "People who own assets behave differently and see their place in society in a different light" (2005). As stated by Tanner, "private accounts will give workers ownership of and control over their retirement funds, allowing them to accumulate wealth and pass that wealth on to their heirs; it would also give them a stake in the American economic system. Thus reducing the workers dependency on the government to fund their retirement.

A bulletin written by Basler, 2005 shows a poll conducted by Pew Research Center in Washington shows fifty-four percent of Americans supported the idea of private accounts. According to Basler (2005, ¶1) the social security reform gives each working adults the flexibility of decision to allocate a portion of their social security payroll taxes into a private investments accounts. Bartlett claims that increasing taxes instead of establishing private social security accounts will limit the personal savings and reduce and affect the economic growth.

Many suggestions have been made about how to fix the social security financial problem. Democratic congress suggested increase the retirement age from sixty five to sixty seven. This suggestion was not recommend by the Green span commission or Reagan Administration. Another proposal, change the social security payment formula. The proposal would cease the accumulation and increase of real benefits annually. Currently the benefits are indexed to wages which rises faster than inflation. AARP group has opposed the idea of changing any part of social security. Many democrats and liberals have never really expressed a definite position to oppose privatizing social security.

Conclusion

American people will not need to depend on the government to supply them with monthly paychecks to cover cost of living. The true ownership of a retirement accounts encourages savings and personal responsibility. (Rauch, 2005), "Private accounts will make millions of low income Americans stockholders and bondholders". According to Bartlett, "Republicans want to wean people away from the state; turning workers into investors, to the greatest extent possible". Democrats have a different philosophy and views. In the history of America only one president was able to claim social security has their presidency legacy. That was former president Franklin D. Roosevelt. Former President Clinton also tried to end his presidency with this legacy, Monica Lewinsky scandal interfered with Clinton's Plan. Today President Bush wants to give it a shot at claiming his greatest legacy, social security reform.

If no changes are made to social security, the American people can see an increase of taxes. The increase in payroll taxes would be estimated to increase from 12.4 percent to 16.65 percent. While taxes are increase benefits would continue to decrease. The increase in payroll taxes would continue to increase to 17.78 percent in 2080. Simultaneously the benefits would also be reduced 26 percent and continue to be reduced to 30 percent by year 2080. The young Americans retiring in 40 years would receive 27% less benefits. As addressed by the Comptroller General of the U.S. and Chairman of the Federal Reserve Board, the less it will cost if the problem is fixed sooner than later. The independent, bipartisan Social Security advisory Board has said: "As time goes by, the size of the Social Security problems and the choices available it fix it become more limited."

References

Bartlett, Bruce (2005, March). Social security then and now. Opposing viewpoint resource center. Retrieved June 25, 2007, from the Thomson Gale database.

Basler, Barbara. (2005, February). Changing social security is risky business. Money and work. Retrieved Sunday, May 27, 2007, from http://www.aarp.org/bulletin/socialsec/changing_ss.html

Marmor, T. & Mashaw, J. (2006). Understanding social insurance: Fairness, affordability, and the 'Modernization' of social security and medicare. Health Affairs, 25, W114-W134. Retrieved Sunday, May 27, 2007, from the EBSCOhost database.

Rauch, Jonathan (2005). Social security as social engineering: Why private accounts are all about values. Retrieved June 15, 2007, from http://www.reasons.com/news/printer/34687.html

Social Security Administration. (2007, January 12). Learn about social security programs. Retrieved May 17, 2007, from http://www.ssa.gov

Strengthening Social Security for Future Generations. (2005). Presidential actions. Washington, DC: U.S. The White House. Retrieved May 17, 2007, from http://whitehouse.gov/infocus/social-security

Tanner, Michael (2004, February). The 6.2 percent solution: A plan for reforming social security. Retrieved Sunday, May 27, 2007, from EBSCOhost database.

U.S. Department of Labor. (2007). Top 10 ways to prepare for retirement. Retrieved Sunday, May 27, 2007, from http://www.dol.gov