Solvency of social security fund
Solvency of Social Security Fund is the ability of a Trust Fund at any point to pay full benefits as scheduled in law. The solvency of the fund depends on availability of assets that can be drawn on to pay the benefits. Social Security program have always been able to pay scheduled benefits on a timely basis since its inception in 1935. Current Social Security is providing benefits to 50 million people. It obtains its funding from payroll tax, which in the US is known as the Federal Insurance Contributions Act tax. Currently over 10 million workers and employers are supporting the scheme through payroll taxes. All tax deposits are under the Social Security Trust Fund, which comprises of a number of programs such as the Federal Disability Insurance Trust Funds and Federal old age. Moreover, it includes the Survivors Insurance Trust Fund, Trust Fund as well as the Federal Hospital Insurance (Gordon, 2005). All the Social Security taxes are maintained by federal treasury under Social Security Trust Fund.
Expenditure for the current year is paid from current revenues and the excess amount invested in non-marketable Government bonds. The excess Social Security taxes accumulated after payment of benefits and the interest accrued are accumulated and loaned to the government. Social Security Fund’s ability to pay benefits depends on the balance between the current revenues and existing Trust Fund made from redeeming Treasury securities. If the yearly benefits are more than revenues, the capacity of the Social Security to make full payment depends on whether the government will repay bonds on which the funds are tied.
Annual report are presented from the Social Security Board of Trustee showing the program’s financial status, showing previous year financial operations, expected financial operations over next 5 years and actuarial report on the status of the program. The Congress after receiving the long-term actuarial analysis makes legislative changes that modify the laws that are meant to save the program.
A recent report indicated that Trust Fund is expected to pick at over 350 percent before declining and reach exhaustion in 2037 then the program cost exceed tax revenue which may lead to increase amount to be redeemed from the fund. So far the accumulated asset from combined DI Trust Fund and OASI is over 2.5 trillion dollars which is enough to cover net redemption of the assets for many years. An issue may only arise if the Trust Funds reserves are exhausted leading to reduced benefits. But from the records the only time the Fund operated with a negative cash flow was the period between 1973 to 1983 but amendments were made that introduced substantial modification that reversed that situation. The 1977 amendment introduced change in indexation of benefit while that of 1983 altered the normal retirement age from 65 to 67 years and addition of an extra revenue from income tax from Social Security benefits.
Negative cash flow does not necessarily mean Social security fund is headed for exhaustion; this may be brought about by interest rate exceeding the fund’s rate of growth. Negative cash flow causes the Trust fund to decline, which is not a serious situation; but if it persists for a long period, it may become a problem. This is the point when Congress is called to introduce special legislation to arrest the situation and avert any serious problems that may arise when the funds run dry. The legislation brings fundamental changes in the programs’ benefits and scheduled revenue, which bring financial stability to the Trust funds . Legislation introduced generally take effects over a long period of time thus allowing those affected to plan at the same time enabling gradual changes which does not bring sharp break in the tax or benefits. An example is the effects of the 1983 Amendments, which their effects were felt in 2000.
There are two separate trust funds, DI program and OASI program. These two trust funds operate separately and their projections are different although they are grouped under Social Security. OASI program has a very favourable actuarial projection compared to DI program and therefore exhaustion of the two funds cannot occur at the same time.
The solvency of the Social Security will depend on modification of law that will guarantee sustainability of the funds. Analysis point out the specific needs of DI trust that must be addressed; and propose benefits reduction for OASDI program. Politics also will play a major part in deciding the future of Social security because Congress initiate and pass the legislations that sustain the funds (Kohl, 2010).
Benefits
Widowed benefits is received following the death of an employee who is covered by Social Security, the surviving spouse has the right to receives survivor’s benefits. This, in most cases, extends to a divorce spouse. If a couple’s marriage lasts for ten years and above, the current spouse, former spouses and divorced spouses are eligible for spousal benefits. Spouse benefit is limited to only five benefits for an interval of ten years and each should succeed another in a proper divorce proceedings. Since the enactment of the Senior Citizens’ Freedom to Work Act of 2000, the children and the spouse of a worker who has attained the normal age of retiring has the right to claim benefits on the employee’s record (Gordon, 2005).
Children whose parents are disabled, retired or deceased are entitled to receive benefits as a survivor or dependants if they who are under the age of 18 years. This also applies to those children are in their elementary or high schools and are also 19 years and 2 months.
Primary Insurance Amount
The income benefits of an employee must be based on Primary Insurance Amount or PIA. Social Security Wage Base limits the covered earnings in a given year. Workers whose covered earnings are less than 35 years are assigned zero earnings.
The aim of this protocol is to reflect any increment in the national wage through the average wage index. Normal retirement age a pensioner determines when the full benefits are paid. The earliest age reduced benefits is payable is 62 years. If an employee starts getting the benefits prior to reaching the age of retirement, his benefits are reduced depending on the time (in months) in which he starts getting the benefits. At this time, they delay to start getting the retirement benefits past their normal retirement age (Kohl, 2010).
The adoption of Social Security in the United States, SSN , which is issued under Section 205 (c) (2) of the Social Security Act (now coded as 42 U.S.C$ 405(c) (2)) has increased tremendously thus increase the number of contributors. Most of the U.S entities such the military, the Internal Revenue Service as well as a number of private agencies such as health insurance companies, colleges and universities, banks and employers now use SSN as a personal identifier. For the tax purposes, most parents seek to get Social Security numbers for children who are dependent to allow them get included in their tax returns.
All people filling tax returns, including spouses, are required to have Social Security Number. The adoption of the Social Security number is important because the administrator is able to project future obligation based on the information given by the applicants. Social security is obtained from taxes imposed on wages of self-employed persons and employees.
For the employed persons, an employer and an employee are responsible for half of the Social Security tax. However, the employee’s half is withheld from his/her pay check while the self-employed are supposed to meet their Social Security tax. As a matter of priority, the employer is mandated to remit this tax to the government.
The Federal Insurance Contribution Act also imposes a withholding tax on wage amounting up to Social Security Wage Base, which varies with the inflation. Demographic and revenue projections Social Security Administrator projects a stable demographic situation, but as life expectancy improves above the projected, it may lead to insolvency of the funds. Data from National Centre for Health indicate that the expectancy rate stood at 47 years in 1900, then rose to 68 in 1950 and reached over 77 years in 2002. Social Security Trustee’s recent report predicts an increase in life expectancy within the next seven decades by 6 digits to reach about 83 years by 2075. However, an estimate by the Census Bureau shows a more rapid growth and the longer life spans indicated by Social Security will be reached in 2050, as compared to 2075 as earlier indicated.
Since 1982, all revenues from interest payment, OASDI tax receipts and other income have been exceeding the benefit payments. In fact, it has been shown that the surplus has surpassed US$ 150 billion mark in 2004 (Gordon, 2005). Nevertheless, there is an inherent problem because as the population born 1950s attain the age of retirement, expenses may tax receipts. In addition, it may exceed all system income plus interest within the next few years.
At that point, the beneficiaries’ payments will rely on Treasury Notes redemption and will continue drawing on Trust Fund until depletion, leading to benefits reduction by three-fourths of the current levels. According to data provided by Social Security Administration data in 2005, the Trust Fund exhaustion was projected to get exhausted in 2041, while data by the Congressional Budget Office put it at 2052. In 2011, OASDI Trustees reported that the annual cost surpassed non-interest income in the year 2010. It is projected to maintain this particular trend throughout the next 75-years valuation period. However, total trust fund income and interest is able to cover costs enabling continued growth of the trust fund.
It is predicted that starting 2023, it will reach its peak, but will reach depletion point by 2036. Non-interest income is expected to be sufficient to meet expenditure at about 77 percent of benefits schedule after the trust fund exhausts around 2036 and will decline further to 74 percent by 2085.
Problems facing Social Security
Low rate of return Social Security is accused of paying very low returns compared to private retirement accounts. This claim is supported by the comparison that was made between Social Security earnings and those of Galveston County pension plan.
The data presented showed that employees earning $ 50,000 yearly would have obtained some $6,843 per month under private plan while those under the Social Security would collect $ 1,302 based on interest rate since 1996 (Gordon, 2005).
Taxation
Workers feel burdened by the taxes imposed by the federal government. In fact, a large number of workers are concerned with the failure by the government to keep its own promise. The social Security Trustees in 2007 suggested that the payroll tax be increased progressively to reach 16.41% by the year 2041 and eventually reach 17.60% before the year 2081 (Gordon, 2005).
A section of the Social Security benefits is subject to taxation, thereby adding more tax burden to the pensioners. Fraud and Abuse Fraudsters are stealing Social Security numbers and using them to commit different crimes. Criminals use email and internet to obtain victims Social Security numbers and sometimes credit card number and bank details, which they later use to obtain illegal funds. Social Security scheme is a huge program and in such circumstance sometimes, fraud is likely to occur. However, the Social Security Administration has an investigatory group to check on this vice.
Conclusion
Social Security is an important scheme that has lifted generations of elderly people from poverty. This scheme should be saved at all cost. However, tough choices must be made. One option is to increase the retiring age to 70 years. The second option is to limit the annual cost-of- living adjustment and vary its calculation formulae. The third option is to increase payroll taxes and tax wages above $ 113, 700 (Kohl, 2010). The fourth option is to reduce benefits, especially for those workers earning above national average.
Reference
Gordon, C. (2005). Bringing Solvency To Social Security: A Solution For The Future Generation. Lincoln, NE: iUniverse.
Kohl, H. (2010). Social Security Modernization: Options to Address Solvency and Benefit Adequacy. New York, NY: DIANE.
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