Question

The Social Security system is financed by taxes on the wage and salary incomes and the profit incomes of self-employed persons who are currently working and paying into the system. These individuals pay Social Security tax of 6.2 percent on incomes up to roughly $132,900 with a matching payment by their employers. Income above $132,900 is not subject to tax. Benefits are determined by how much a worker paid into the system over his/her working life. Thus the more one pays into the system the higher are the retirement benefits. The system was devised as a program that would provide a minimum retirement income to working persons. It was to be similar to a pension program.

Economic analysts are anticipating Social Security to run out of funds near the year 2036. There are many proposals for reforming Social Security, but only one fundamentally alters the nature of the current system: privatization.

For Critical Analysis:
Is the Social Security tax progressive, regressive, or proportional? Are Social Security transfer payments designed to redistribute income from upper to lower income retirees? What would happen if Social Security were privatized?

Answer 1

Social security can be considered a regressive tax ,it's also a proportional tax because everyone pays the same rate,at least up to the wage base. Social Security taxes are an example of a regressive tax, which means those who have less income pay a higher tax rate than those who have higher levels of income. In other words, Social security tax is regressive tax, meaning that a large portion of lower-income earners' total income is withheld, compared to that of higher-income earners.

Many people think that Social security is a program which redistributes income from the rich to the poor. But according to new research by Julia Lynn Coronado,Don Fullerton and Thomas Glass, Social security does not redistribute income from people who are rich over their lifetime to those who are poor.In the progressivity of Social security,the authors concentrate on redistribution within, rather than across, generations.This is why it was commonly seen as redistributive and a progressive program.

Privatising Social security can boost workers' rate of return by allowing retirement contributions to be invested in private assets, such as stocks, which yield a better return than the present pay-as-you-go retirement system.

Proponents of privatization see three main arguments, in addition to ideological advantages,for moving towards a private retirement system:

• It can lift the rate of return workers obtain on their retirement contributions;
• It can boost national saving and future economic growth;
• It has practical political advantages in comparison with a Social Security rescue plan based on higher payroll taxes and a bigger accumulation of Social security reserves.