Question

In: Economics

What changes do you feel are likely to be made to Social Security in the next...

What changes do you feel are likely to be made to Social Security in the next 5 to 20 years? Why? Think of the people/organizations affected by the change, and who would support the change and who would fight it.

Solutions

Expert Solution

Due to change in demographics, the U.S. entitlements like Social Security and Medicare system will face financial challenges in the near future. The increasing life expectancies and declining fertility rates are causing the U.S. population to age. Today nearly 12 percent of the total population of U.S. is aged 65 or older, and by the year 2080, it is expected to be 23 percent. Moreover by that time the working-age population is shrinking from 60 percent today to a projected 54 percent. As a result, the Social Security system is experiencing a declining worker-to-beneficiary ratio, which will further decline to nearly 2.1 in 2040 (the year when the Social Security trust fund is projected to be exhausted). This shows a significant challenge to policymakers; and if the programs are not altered, by the year 2030 they could consume two-thirds of the federal budget; and consequently would hinder the growth of US economy.

A commonly proposed solution to the growing spending challenges faced by Social Security is to increase payroll taxes for increasing the funds. However the policy will discourage the firms for new employment as they firms would prefer to avoid increasing employer costs, consequently it will raise the unemployment rate. It will to help cover the shortfalls in social security that nation might face soon, however it would result in one of the largest tax increases of all time which can be burden for those who earns higher than the wage base limit. Moreover it will not address the underlying problem of rising number of retirees and a reducing number of workers, thus a temporary solution and not the permanent one. Furthermore imposing an increase in payroll tax increase on low-income earners will be very difficult.


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