social security
... main problem, according to critics, is the population changes. The population of people aged 65 and older will increase from 37 million in 2005 to 75 million in 2035. Moreover, there are concerns that the population will live longer and this means more payments of Social Security. The problem is exacerbated as, “…the number of younger workers who pay for these retirees will barely rise” (Reynolds 40). Hence, the burdens will become greater on the younger population in the future who will have to work harder to pay more benefits for the elderly. In addition to demographics, the Social Security problem may also be based on economics. There is a wage indexing formula that is used to determine benefit levels. The levels of benefits when people started to collect them in the `1970’s were indexed based on the average growth of real wages as opposed to being adjusted for inflation. “As a result, benefits for new retirees become more generous by about 1 percent each year in real terms, which adds up fast” (Reynolds 40). If Social Security benefits continue to be based on this system, there will be faster wage growth that equals larger Social Security benefits. Taxpayers of the future will be unable to solve this problem as it currently stands. According to Noble laureate Edward Prescott, lower income, payroll, and sales tax explain why Americans work harder and longer than people in Europe. “In economic jargon, lifetime work effort is highly “elastic” (responsive) with respect to tax rates” (Reynolds 40). The labor supply elasticity means that as the population becomes older the promises of payments to the current as well as the future old cannot be financed via an increase in tax rates. However, a reduction in the effective marginal tax rate on labor might help. In short, the problem is that the attempt to provide rising real benefits to more seniors would lead to major taxes on the younger generations. In turn, workers might be discouraged from working, the economy would slow, and this would hurt many. Hence, the problem, many believe cannot simply be fixed via higher taxes Several reforms have been proposed to fix the Social Security system. There are many arguments for and against such reforms. According to Reynolds, those who propose reform without adding the concepts of ownership and change are just trying to push the problem into younger people with not only higher taxes but reduced benefits. Others have proposed reform where there is partial privatization of the system. Yet, critics try to argue that this would be too costly. “Critics of partial privatization claim it would cost a trillion dollars or more to set up such accounts and that diverting taxes to such accounts would make Social Security less solvent” (Reynolds 42). However, such statements are flawed, Reynolds says, as the unfunded debt would not change. Some still have called for higher taxes to solve the Social Security crisis. According to Reynolds, some believe that raising the cap on earnings subject to Social Security taxes can help. However, if a raise is created, the maximum yearly tax would increase and paying larger taxes also comes with larger benefits. This then, would not have a major impact on Social Security in terms of its solvency. Even trying to tax the rich is difficult as a majority of Americans are not wealthy. Perhaps one of the best options to change the system is to offer the American worker choice. Under a choice system, the worker would have the option of depositing their payroll taxes into accounts that are like other retirement accounts such as IRA’s and 401(k) programs. Workers pay a 14.4% Social Security payroll tax, according to the Cato Institute, on wages up to $87,900. With the proposed choice reform, however, the workers would be able to deposit that amount into personally owned accounts. When the employee has built up their nest egg of retirement funds, they can purchase a lifetime retirement annuity to gain a monthly payment. Best Reforms The best reform would be for Americans to partake in the choice program. In having personal retirement accounts, one can benefit from likely higher returns as well as more benefits. With the history of the stock market, it is a clear fact that the stock market performs better than the government in terms of investment. Even conservative investors, according to the Cato Institute, would gain substantial assets through the accounts more than Social Security would pay out. Moreover, because the workers would own their own accounts they can be used at retirement and be easily passed onto family members. In addition to the higher funds gained from personal choice compared to Social Security, benefits of this plan include creation of wealth, individual empowerment, and even an improved economy. The Cato Institute states that lower wage workers would become shareholders in the American economy and via private investment, as well as participation in the market, gain wealth. Moreover, individuals who control their own financial destiny are likely to become empowered. It is held that the entire American economy would benefit from the choice system. For example, this reform would lead to an increase in national spending with hundreds of billions of dollars invested in individual accounts on an annual basis. In turn, these investments would lead to increases in many economic realms, including productivity, jobs, wages, and overall growth. Moreover, with this reform the payroll taxes would be reduced which in turn would lead to higher levels of employment as well as productivity. Further, “Martin Feldstein, of Harvard University, estimates...