Social Security Never Serves as an Individual Retirement Savings Vault
Social Security, a topic often discussed on social media platforms, has been under fire lately for supposed mismanagement and bankruptcy. However, many people don't understand how the system actually works.
Originating during the Great Depression, Social Security was a much-needed response to the staggering poverty rates among the elderly. In 1935, President Franklin D. Roosevelt signed the Social Security Act, and the program started operating based on a tax system, where employees and employers paid taxes that covered the benefits for those receiving them.
Unlike a savings account, Social Security doesn't function as a collective pot of interest. Instead, it operates like other government services, funded by special or general taxes. At the local level, property taxes fund education, and at the federal level, special payroll taxes finance Social Security. These taxes are then used to establish the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund, which provide benefits to eligible individuals.
These trust funds invest any surplus funds in Federal securities, generating both interest and principal payments to replenish funds over time. This money-in, money-out structure has allowed Social Security to be a critical factor in reducing the poverty rate among the elderly. Today, the poverty rate among individuals aged 65 and older stands at 10.9%, a significant decrease from the past.
Nonetheless, recent discussants raise concerns about the system's financial viability, claiming that benefits have outstripped revenues. According to Social Security Administration's chief actuary Stephen Goss, the issues stem from several factors. Firstly, an aging population because of the baby boomers and a decline in birth rates impacts the number of contributors compared to beneficiaries. Additionally, income inequality has strained the system, with an unsustainable distribution of wealth, which disproportionately hurts Social Security's funding.
During the 1983-2000 period, when income inequality was on the rise, the highest 6% of earners saw a 62% increase in income, while the bottom 94% experienced a 17% growth. This distribution of wealth left the much-needed funding beyond the taxable income limit, worsening Social Security's financial situation. The 2008 Great Recession also took a toll on Social Security, as the yield on government securities dropped, limiting the income generated by the trust funds.
Considering these challenges, the government may need to consider reforms such as increasing the payroll tax cap, adjusting tax rates, or implementing means testing to ensure Social Security's long-term solvency. Improving Social Security may result in empowering future generations of retirees, allowing them to live secure and stable lives.
- Despite misconceptions about its supposed bankruptcy, Social Security's financial viability is under scrutiny due to factors like income inequality and an aging population.
- During periods of increasing income inequality, such as the 1983-2000 period, the wealth distribution becomes unsustainable, straining Social Security's funding and leaving essential funding beyond taxable income limits.
- To address Social Security's long-term solvency, potential reforms could involve increasing the payroll tax cap, adjusting tax rates, or implementing means testing, ensuring that future generations of retirees can rely on its benefits during retirement.
- Social Security's trust funds, which generate interest and principal payments, have played a critical role in reducing poverty among the elderly, as evidenced by the declining poverty rate from the past to 10.9% today.
- The mismanagement claims towards Social Security are often linked to social security misunderstandings, stemming from a lack of understanding on how the system works, including its funding sources, like special taxes, and functions like other government services.
