Pointed Summary

• COVID-19 Pandemic unemployment surges.
• “Baby boomer beneficiary” issue.
  

Relevance

The COVID-19 pandemic hit the United States in 2020 and led to a large surge in unemployment. This increase is not necessarily news, however, it becomes increasingly relevant in the discussion at hand. As touched on earlier, Social Security is funded mostly by payroll taxes. As such, with less people in the workforce, there is less tax revenue funneling into the Social Security Pension Fund. Assuming that the economy will recover in a fair amount of time, current social security beneficiaries were still adversely affected even prior to the pandemic.

History

President Franklin D. Roosevelt signed into law the Social Security Act on August 14, 1935 in order to “provide unemployment insurance, old-age assistance, aid to dependent children, and grants to the states to provide various forms of medical care” in the midst of the Great Depression. The system has long engrained itself in American life and political culture so much so that $8.7 trillion and $7.4 trillion have been paid out into the Trust Funds and in benefits respectively since its inception.

Recent Developments

On top of the issue, the ratio between social security beneficiaries has been rising disproportionately to the amount of workers. This is mostly attributed to the fact that the U.S. is at point in time in which a large amount of the past generation is exiting the workforce and aging into Social Security. There has been a drop of 2.8 workers per beneficiary to 2.1 in the previous few years. If it were to remain as is, not only are beneficiaries already being affected, but it will likely continue to deplete leaving the trust  underfunded. In fact, “Social Security trustees project that the OASI trust fund will become depleted in 2033 and the DI trust fund will become depleted in 2057.” The fact that the Social Security fund is expected to move towards insolvency in the near future illustrates the need to address the problem now before any future ones arise.

Policy Problem

Stakeholders

The Social Security issue is a critical policy to evaluate due to its magnitude. Specifically, the wide range of U.S. constituents that it impacts. Namely, taxpayers and beneficiaries. Legal entitlements require the government to obligate their benefit promises. If the SSA were to become insolvent and delinquent in payment, it “would not relieve the government of its obligation to provide benefits,” calling in the possibility of fiscal and/or credit expansion by the Treasury and Federal Reserve.

Risks of Indifference

If Social Security were not to be addressed and reformed, strain would continue to be placed on the system as the worker-to-beneficiary ratio and the purchasing power of the dollar continue to decline. The Congressional Research Service (CRS) estimates that the OASI fund will be depleted by 2033, the Disability Insurance (DI) fund by 2057, and the OASDI fund by 2034. If left alone, the result is insolvency, benefits will have to be cut of 22% by 2034 and 26% by 2095.

Policy Options

Raising taxes and generating more government revenue is a logical solution to bolster Social Security. On the surface, as the government generates more capital, presumably by pursuing more progressive taxation, it follows logically that it will have more money to dispose and allocate to the retired. As a result, traditional macroeconomic theory suggests that more capital for consumers would flow back into the economy, thereby increasing the national GDP. 

However, while this logic does have some merit in theory, this policy option needs to be reevaluated for a few key reasons. First, during extreme economic situations where the Fed and Congress have to prescribe certain policies, including changing tax rates, increasing taxes related to Social Security may be difficult. This is because by altering those rates, the same change will be reflected on checks distributed to beneficiaries—whether that be lowering (less liquid funding) or raising to a point higher than optimal taxation (inefficient and less real funding than estimated). Since beneficiaries live off of the fixed checks, manipulating their main source of income may be devastating to retired constituents.

Additionally, another problem to analyze is the inherent dangers of an extreme progressive taxation system, which is the most likely policy option. Specifically, economists claim that certain aspects of supply-side economics are critical in a nation’s economy. Thereby, by taxing the rich at an increasingly high level, certain amount of investments in stocks, bonds, or startups may decrease and capital will flow out of the country, harming domestic goods and consumers.

As noted earlier, the current retirement age is 65 years old with the qualifier that the given person has had at least 10 years in the workforce. If the government were to raise the retirement age, it would mean there would be less beneficiaries all together thus re-balancing the worker to beneficiary ratio. This would allow the trust to be much more sustainable in relation to transitioning demographics, especially through times of higher unemployment. It also means each individual beneficiary would likely receive more money.

However, the age is already at 65 and in order to make a significant change, the government would probably have to increase it by at least 5 years. Forcing people to work until they’re at least 70 before they can retire and collect social security is unfavorable and would likely be rejected by the older population. 

The government spends money on a wide variety of different programs. A more judicious option is to cut spending in all areas—i.e., military, Medicare/Medicaid, etc.—and reallocate to Social Security for a stable funding source that would not only be beneficial down the road but would serve immediate benefits. 

Today, there already exist many private retirement plans—such as a Roth IRA—which people typically sign with their company to get retirement benefits on top of Social Security. However, it could begin to be used as an alternative to Social Security. If private companies and individuals were given the option to create private retirement plans instead of defaulting to Social Security, then these individuals would maintain greater control of their retirement. This is due to the fact that they would not be jeopardized by national employment rates or rely on younger taxpayers.

At the same time, there would be less of a burden on the Social Security system from those who chose to remain on the system because there would be less beneficiaries, thereby extending the longevity of the Trust. Companies would also be able to use their retirement plans as a more vital tool when competing with other firms for certain workers and skills. However,this would only be possible by deregulating private retirement plans which would mean eliminating powers of the Employee Benefits Security Administration of the Department of Labor.

Given its social and political implications, politicians will most likely address old-age pension insurance by increasing its spending—along with other social welfare as well as military programs. To finance it, the government would either have to borrow money or raise taxes. As supply-chain issues, inflation, and interest rate hikes bring the future of U.S. economic prosperity into question, the easiest and the government’s preferred method would be central bank credit expansion by the Federal Reserve.

However, an expansion of the money supply in order to finance ballooning federal expenditure would continue the inflation and wage stagnation that has already been seen at the beginning of 2022. Without a balanced budget, however, socio-economic issues will continue to arise until there is a change in government spending and economic policy.