The goal of the U.S. social security scheme is to offer financial support to retired persons through the utilisation of social security taxes contributed by the working class. It is quite a successful way to guarantee that retired employers will still find a comfortable existence after retirement. The success of the scheme highly depends on the ratio of the working class to retirees. There is one monumental challenge that the social security scheme faces; it must ensure that the income is always higher than the expenditure to ensure sustainability of the system. Using forecasts that presume a low birth rate, at one point, the spending will have been exceeded by the revenue produced. Consequently, the scheme would collapse in the absence of an acceptable alternate source of revenue (Bergmann 2). It is therefore important to make right and reliable assumptions, particularly those that assume the worst-case scenarios. This trains machine administrators for the worse and makes the required preparations to prevent the scenario. Thinking the worst doesn’t happen will offer the system a spiritual lift, but leave it unprepared for some radical potential adjustments (Boskin 2).
The two most prominent groups of the social security system are those between the ages of 18 and 64, and others aged 65 and up, reflecting the working class and the retired, respectively. In order to provide a straightforward study of the impact of the number of citizens in these two categories, it is important to find the combination of numbers in both groups. One benefit of utilising this metric to compare classes in a community is that it offers a general description of the condition by exclusion process. As a consequence, the next merit of this strategy is one of simplicity. It helps us to examine abstract theories, though with some simplicity. The key drawbacks in this approach come from the predictions it makes. While the official age for beginning employment is 18 years, there are individuals as young as 15 and 16 who work and therefore contribute to social security. Others, on the other side, hit the age of 65 and continue to function and add to the social security scheme. This fact undermines the precision of this form of estimation. It also lacks the contribution rendered by these two classes to the population (U.S. Population Projections 2020-2050 1).
In cases where fertility and immigration stay poor, the dependence ratio of the working class against elderly people is decreased. This implies that the number of elderly persons rises with every working citizen. This situation would mean a catastrophe for the social security system, when less and less individuals would afford it, as the number of dependents would rise dramatically (See table 1). Which is the least desirable solution to the social insurance system; it would mean that fewer funds would be required to cover higher spending (Lee, Anderson and Tuljapurka 4). Present developments are exacerbating the condition as better medical services and higher living conditions have culminated in growing life expectancy. However, this does not imply that the paper supports poor life expectancy.
In the 50-year projection, the population of the workforce shifts to the age ratio, based on the supply of new labour force to offset the retirement age (See figure 1). Based on the indicator that forecasts a rise in the dependence ratio owing to low demographic growth due to low fertility, decreased immigration and improved life expectancy, the job rate does not meet that of retirement. This exerts unnecessary strain on the working community, and the equilibrium must be re-established in some way, either by reducing incentives (expenditure) or by increasing wages.
The most probable outcome is that the population would rise, albeit at a pace that will not keep up with the growing amount of pensioners. The dependence ratio is predicted to shift from 4.88 in 2000 to almost 2.7 by 2050. This assumes that the taxes charged by fewer than three individuals in 2050 would be taken care of by each dependent.This also means that the ratio decreases steadily over the years, the only result being more pressure on a lowly replenished social security system (U.S. Population Projections 2020-2050 1).
Strategies to Save the Social Security System
There are two approaches to prevent an imminent collapse of the social security system; by increasing sources of income for the system, and reducing expenditure. The former involves strategies that increase the income to the system, for example, size of the labor force by adjusting the retirement age and admitting more immigrants into the country. The other option is increasing the amount of social security taxes paid by those in the working class. The latter involves strategies to reduce the spending capacity of the system by reducing benefits paid to retirees.
Adjusting the retirement age. Adjusting the retirement age to 70 instead of 65 would be beneficial as not only increases the source of income for the scheme, but also reduces the load for the working class by shifting from being dependents to tax payers (See table 2). In addition to adjusting the retirement age, senior citizens should be encouraged to join the working class by offering to them incentives including day offs from work and easier access to funding. This strategy would work only in the short run as it is impossible to predict the effect of going back to work for the aged (Diamond and Orszag 2).
Maternal factors. For the nation to have an effective working class in the future maternal care should be enhanced. Incentives should be given to families to increase their birth rate but in a controlled manner. These incentives include free health care and free education to children coupled with increased employment rates. In the long term, this method will ensure that the social security system has adequate income to service all disbursements to retirees. Global economic crisis and increased unemployment aside, the developed world is experiencing a shortage of skilled workforce mainly due to perpetual decrease in birth rates. As a result, the developing countries are bridging the gap through immigration.
Tax increase. Another way to increase the supply of funds for the social security is by increasing taxes levied on the working class. Increasing taxes is beneficial to the economy in the short term but harmful in the long term as it reduces the purchasing power of the working class who in turn spend hugely. Lowered spending limits the amount of money in the circulation, which does not sound right especially now when most economies are struggling including here in the United States (Diamond and Orszag 2).
Immigrants. Programs that allow import of labor into the country should be encouraged. Incentives like decent job opportunities offered to citizens of less financially able countries would encourage them to move to this country, especially through expansion of the American Green Card program. Immigrants who come to the country for a period of less than two years benefit the social security system for a short time before going back to their countries. The government should abolish restrictions to qualifying candidates. For instance, granting young professionals citizenship without much delay and bureaucracy, and requiring higher qualifications from the older immigrants will ensure a bigger pool of legitimate and valuable contributors to the system. In addition, the government can promote and support the progress of immigrant workers’ studies. Firms and businesses that employ them should reciprocate by increasing their wages, which will increase their tax contributions. Though they should be encouraged to learn, offering immigrants citizenship is the best option since few will have the desire to go back to their countries thereby ensuring long term contribution to the social security system.
External borrowing. Borrowing money from international foundations like the IMF, the World Bank forms the other option. This is even more encouraging as it is easy to secure credit for the country considering its strong credit history. However, since it is impossible to predict accurately other factors that affect the economy, there should be caution in considering this option. Even if there were to be positive changes in the economy and demography of the country, future generations would have to deal with the heavy burden of paying off debts whose interests keep rising (Diamond and Orszag 3).
Domestic borrowing. The government can seek for funds domestically by offering government bonds at attractive rates. This way the government is able to seal its budget deficits while citizens will have the opportunity to invest. Domestic borrowing is, however, tricky especially where the government has a large budget deficit and when economy is not likely to improve drastically in the short term (Myers 3). The reason for this is that interest on bonds has to be paid irrespective of economic conditions.
Government projects. The government would start income generating projects, which also create jobs and whose proceeds would be used to take care of the aging population. This is the most viable of all strategies if diligently executed. Vigilance should be observed to ensure funds are not appropriately allocated to ensure maximum benefit.
Demographic patterns are bound to change, and the US may soon start importing labor in larger proportions than expected. It is, therefore, quite essential that stakeholders formulate strategies to reduce or alleviate dependence on the working class to take care of retirees. While the economy is not in the finest condition, and it is expected to be like this for some time, sound options still exist. Some of them include adjustment of retirement age, adjustments in the taxation policies and government investment in income generating projects that also create jobs. The various benefits and misgivings of these changes should be analyzed keenly for their long term effects before implementation,.
- Bergmann, Barbara R. The Economists’ Voice: Could Social Security Go Broke?. Berkeley: The Berkeley Electronic Press, 2005. Print.
- Boskin, Michael J. The Economists’ Voice: Straight Talk on Social Security Reform. Berkeley: The Berkeley Electronic Press, 2005. Print.
- Diamond, Peter A., and Orszag, Peter R. Saving Social Security: The Diamond-Orszag Plan. Berkeley: The Berkeley Electronic Press, 2005. Print
- Lee, Ronald, Anderson, Michael and Tuljapurka, Shripad. Stochastic Forecasts of the Social Security Trust Fund. UC Berkeley :Institute of Business and Economic Research, 2003. Print.
- Myers, Dowell. Written Testimony. 2007. Print.
- U.S. Population Projections 2020-2050. Print.
- Figure Reference
- Figure 1: Graph showing old age dependency ratio (65+/20 – 64 populations)
- Source: Ronald Lee, Michael Anderson, and Shripad Tuljapurka (2003). Stochastic Forecasts of the Social Security Trust Fund. Institute of Business and Economic Research, UC Berkeley. This graph shows a clear visual representation of the gradual increase in dependency ratio. It shows that 2050 will just be the start of imbalance between the social security income and expenditure.
- Table Reference
- Table 1: Table showing the exponential increase in the number of dependents versus the working class
- Table 2: Table showing dependence ratios if retirement age is adjusted to 70
- Source: Internet release date January 13, 2000, U.S. Census Bureau
- These tables (tables 1 & 2) show demographic changes are bound to happen. However, the changes will happen much later if retirement age is adjusted to 70. This shows that though change in retirement age is an option, other options must be pursued, as this one does not show reliability in the long term.