The Social Security System

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The Social Security System is an American social insurance and pension scheme that was established in 1935. It's a pay-as-you-go arrangement. Any analysts have referred to the scheme as an intergenerational capital transfer. According to Vickers and Yarrow (2010), the program's viability is determined by demographic considerations such as birth rates. When the Social Security System was established, the American birth rate was 2.3 percent. However, the actual birth rate in the United States is reported to be 2.1 percent. Nonetheless, today's America is more developed, with lower unemployment rates and lower mortality rates. Oliveira 2014 provides that the payroll tax rate in America has increased from2% in 1950 up to 12.4% presently.

Research hypothesis

The study begins with a hypothesis that the Social Security of America has worked in improving the economic condition. Since the beginning of the Social Security System in 1935, the higher levels of poverty have reduced. The level of dependence ratio has highly reduced and people have participated more in savings and investments (Mitchell, 2011). The study hypothesis is, therefore, Social Security System of America is taking the nation to a higher level of growth and hence, among the best strategies for growth.

Literature review

This section contains a review of various literatures in relation to the research problem. Mitchell 2011 conducted a study in determining how the American’s Social Security System works. The study findings revealed that American’s birth rates have reduced while death rates have reduced. Further investigations revealed that the trends have contributed to development of the Social Security System in the nation. The study also revealed that as people become aware of the program, great changes in the political dynamics have been happening. Still in the same study, the Social Security is said to have been an overwhelming program which was considered as the third rail of American politics (Mitchell, 2011). It is revealed that about 69% of Americans proposed to switch from the social security program to a individually funded system. These people argued that their retirement income cannot be controlled by the government and they wanted to control it by themselves.

In a study performed by Kansas 2015, about 82% of American adults provided that they would wish to have a portion of their payroll taxes to be invested in bonds and stocks instead of taking the whole of t to the social security program. According to the study, 73% of Americans wish to invest their payroll taxes in private accounts. According to these findings, America seems to be changing their political dynamics in a fundamental sense. If people start to invest in the bonds and stocks rather than on the government in form of the social security program, their attitude towards corporate profits and the free enterprise program will change. As a result, this will alter or interfere with the America’s agenda.

Forman 2006 points out that Americans have tried to explore the various political possibilities of the social security privatization. The author provides that there is a bipartisan of 80 members in the American’s House of Representatives who are pursuing the privatization system idea. The study also revealed that Bill Clinton is aware of the Social Security crisis and he is in process of making him mark for another thing apart from the Paula Jones episode. Forman argues that the returns from the returns from private invested retirement systems will be higher those received from the Social Security System.

During the study, some of the participants argued that, in the Social Security System, their income is not put under investment as compared to what they would do by having their payroll taxes in their private accounts. Other respondents claimed that the collected payroll taxes will sooner be insufficient to pay all the retirees given that most of Americans are currently going for retire earlier than they were expected. As a result, the system is most likely to run negative which may cause the administration to turn to the government for some help (Forman, 2006). This is when the government can up with policies such as increasing taxes, reducing benefits, increasing borrowing and reducing government expenditure.

According to a study conducted by Hardy 2013, the present value of investing the US payroll taxes future cash flows in real assets would be about $20 trillion, a value that shows a great boost to the economic growth. The author provided that nations that adopt a fully funded individual retirement scheme are more likely to be highly competitive as compared to those that stick to the social security system. The study provides that workers should be given the option to chose whether to retain their payroll tax incomes to the Social Security System or to in private investment schemes.

The author also argues that people should be allowed to withdraw their benefits at any age provided that assets will have grown to the level in which a minimum standard annuity can be purchased. In this way, the individuals who chose to take the private option, they can be issued with zero coupon to reflect their payroll taxes paid. According to the study findings, almost 100% of the workers would chose the private option especially for the young employees (Hardy, 2013). 

Oliveira 2014 seeks to determine the need for the Social Security Program in the United States. From the study, Oliveira found that the program mainly focuses on the old age as they retire from a long life of labor. Before 1935, retirement was not readily available people would struggle to come up with adequate systems of retirement. As a result, the local elders had to make a decision on who is worthy of support and how they would offer support from the colonist. According to the study, during the 18th and 19th centuries, a poverty relief was issued to the poor (Oliveira, 2014). However, the relief was made unpleasant so as to discourage dependency. At the same time, the people who received relief were entitled to lose things like personal property, voting rights, and freedom of movement. According to the study findings, this technique was useful in reducing the rates of poverty as no one would want to experience the shame that comes from getting provided with the relief.

A summation of what other authors have researched regarding the topic

DeWitt, L., Béland, D., & Berkowitz, E. D. (2008). Social security: A documentary history. Washington, D.C: CQPress.

The authors wrote that an important precursor existed in America before the 1935 which provided a social security program to the poor segment. It was provided that the civil war resulted to a hundreds of people left as widows, orphans and disabled. As a result, there came up a generous pension program to enhance developments in social security. The author explains that the program of civil war pension started after the beginning of the war which provided some help to the disabled, widows and orphans. At the beginning of 1906, old aged people were qualified to receive pension benefits and included in the social security program. The study findings reveal that more than 90 percent of the remaining civil war veterans were in the Social Security Program (DeWitt, Béland & Berkowitz, 2008). It is also found that young women got attracted to old men due to the pension program. One would opt to get married to an old man because of the assurance of the income received from the pension program that would cater for their needs.

Livingston, S. G. (2008). U.S. social security: A reference handbook. Santa Barbara, Calif: ABC-CLIO.

Livingston 2008 explains that the United States’ Social Security System is in trouble. It is found that payroll taxes have highly increased in the past 40 years. The social security has become a burden to American workers who dedicate all their payroll taxes to the system and yet receive stipends as their retirement benefits. According to the study, privatization is the only answer to the experienced problem and most of American workers are for it. The privatization system has been found successful in some countries like Australia, Chile, Mexico, the great Britain and in Singapore. Such countries have reported high levels of retirement income together with more security for the old citizens.

The study findings revealed that more than a million employees in America who have been exempted from the social security system and are enjoying higher levels of retirement benefits through their private pension plans. The author argues that privatization would enable Americans to retire with dignity. As they use their payroll tax income to invest in private projects, it would earn them higher incomes than in the social security system where such incomes are subjected to deductions. Therefore, privatization would boost the levels of savings and investment in America and hence, creating more job opportunities (Livingston, 2008). As a result, economic growth and development would improve leading to a better nation.

Mitchell, O. S. (2011). Prospects for social security reform. Philadelphia: Univ. of Pennsylvania Press

Mitchell 2011 argues against the need for social security in America. The study explains several drawbacks associated with the system which draws the nation’s growth and development. First, the author states that the program is going broke. Each social security recipient was supported by 16 workers in 1950 but currently, only 3 workers support one recipient. This is an indication that the burden associated with the Social Security Program has highly increased and that workers no longer benefit from it. Secondly social security taxes are too high. According to the study, the average payroll taxes have increased by 17 times, a change from 2% to 12.4%.

This burden is too high and hence reducing the people’s disposable income. With these higher taxes, the income left for personal use is too little to cater for all the needs (Mitchell, 2011) Another posed argument is that the program has become bad deal for the workers. Most of the workers claim that there are better opportunities for investment that exceed the benefits offered through the system. From the study findings, privatization is among the best ways for safe and secure retirement.

Upon further research, it was found that thousands of Americans have already switched to other retirement systems. The amount paid by these individuals to the private retirement systems is equal to that charged by the social security system. However, in the private systems, these people were reported to enjoy much higher benefits than they used to in the social security system. According to the study findings, workers in the private retirement systems receive three times more benefits than those in the Social Security Program (Mitchell, 2011). At the same time, life insurance and disability benefits under the private plans are more generous as compared to what is provided though the social security program.

Hardy, D. R. (2013). Social insecurity: The crisis in America's social security system and how to plan now for your own financial survival. New York: Villard Books.

Hardy 2013 explains that the Social Security System of America is in trouble. According to the study, the program has caused a huge liability which is a problem to the tax payers. The program is said to have pushed the national budget deficit to higher record levels. The study findings reveal that federal borrowing is likely to grow for at least six folds which will consume about 15% of the economic output. This is an indication that the government will at sometimes have to borrow to finance the program. America has been struggling on how to deal with the increasing national debt. As provided by the social security trust fund’s board of trustees, the long range balance has reduced since 1983.

Lessons learnt

As stated in the research hypothesis, I expected that the Social Security System of America has contributed to their higher level of economic growth and development. However, according to the obtained findings, it is not true to say that the program is contributing towards the nation’s economic growth and development. Irrespective of the fact that the program has managed to offer support to the poor, most of the citizens are negatively affected. One of the major issues realized is that most of Americas have opted to allocate their payroll taxes to private retirement systems other than the Social Security System. It is discovered that the program is more of a burden than of benefit to the workers. The findings reveal that privatization is more beneficial than the social security system. The system is associated with several challenges that hinder the nation from pursuing growth and development. For instance, payroll tax rates have increased by 17 times, from 2% to 12.4%.

Another lesson learnt is that the current generation is much wise than the older generations. Previously, workers used to allocate their funds in the Social Security System believing that it will be helpful to them during old age. In this way, people used to work for all their lifetimes. During their period of work, very few of them would allocate some funds for private investment. Instead, they purely depended on the Social Security System program. However, in the current generation, individuals go for retirement when they feel good to go irrespective of the age. The young American has focused more on investment. That is why most of them are seeing no need for the retirement plan. Most often young people prefer having their funds investment in private programs than can earn them higher benefits as they grow. As a result, the levels of savings and investments have increased. Most of the upcoming companies are owned by the young people, creating more employment opportunities and hence, reducing poverty in the nation. References


DeWitt, L., Béland, D., & Berkowitz, E. D. (2008). Social security: A documentary history. Washington, D.C: CQPress.

Forman, J. B. (2006). Making America work. Washington, DC: Urban Inst. Press.

Hardy, D. R. (2013). Social insecurity: The crisis in America's social security system and how to plan now for your own financial survival. New York: Villard Books.

Kansas. (2015). The Social Security Program: An analysis of the Federal Social Security Act and the testimony preceding its passage with special application to Kansas. Topeka: Printed by Kansas State Printing Plant, W.C. Austin, State printer.

Livingston, S. G. (2008). U.S. social security: A reference handbook. Santa Barbara, Calif: ABC-CLIO.

Mitchell, O. S. (2011). Prospects for social security reform. Philadelphia: Univ. of Pennsylvania Press.

Oliveira, F. E. B. (2014). Social security systems in Latin America. Washington: Inter-American Development Bank.

Vickers, J., & Yarrow, G. K. (2010). Privatization: An economic analysis. MIT Press series on the regulation of economic activity, 18. Cambridge, Mass: MIT Press.

November 23, 2022

Government Business

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Social Security Insurance Tax

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