Question

everal solutions to the looming bankruptcy of the Social Security trust fund have been proposed. Critically discuss each the following proposed reforms of the U. S. social security system in terms of long-term program viability, and in terms of who gains and who loses.

a. Eliminate the maximum payroll tax cutoff (currently at $128,400) and extend this tax to all earnings from work.

b. Raise the minimum retirement age from 62 to 64 while keeping the benefits from early and full retirement ages actuarially neutral.

c. Phase out social security benefits to those earning more than $80,000 a year from other    sources.

d. Replace Social Security with mandated private savings accounts.

Answer 1

Solution

Under the US Social security program,an payroll tax equivalent to 12.40% of the earnings of the employee is deducted every month,which aims to support them after their retirement.It has been introduced after the Great Depression.There are some fears that the scheme might become un-viable in the future because of reasons like rising life span due to healthcare improvement,the population growth has been decreasing rapidly,inefficient management of the funds collected,undocumented immigrants taking benefits.

Impact of the following reforms of the US Social security system :

a. This reform will increase the amount of money inflow into the social security account.Yes,this will help the long-term viability of the scheme.The persons whose income is above $128400 are loosing whereas the social security scheme is the winner.

b.Raising the minimum retirement age from 62 to 64 - This will reduce the outflow of funds to the present generation retirees.Gain to the social security fund. Loss to the presently approaching retirees and future retirees.

c.This will improve the long-term viability of the socaial security as it will reduce the outflow to people earning more than $80,000 from other sources.The losers are the ones who are earning more than $80,000 from other sources because they have contributing to payroll tax hoing to benefit from the social security schme in the future but they might not get benefits in their future as they approach their retirement.The Gain is to the people who are earning less $80,000 from other sources and are presently contributing to the scheme.Since the phasing out decision is improving the long-term viability of the scheme,it is aplus for them.

d.This is better (Gain) for the present generation individuals.But the present generation retirees cannot be supported on the present funds in the scheme as the existing amount in the scheme is sufficient for the same and also since the scheme is replaced with mandated private saving account,the inflow to the funds drops.The loosers are the ones who have already contributed significant amount towards the scheme and now transitioning to private savings account.These people may feel cheated as they fear they might not get the retirement benefits in relation to the funds that they have contributed till now.

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