Launched in 1935 as part of Franklin Roosevelt’s New Deal, the term
social security refers to a federal social insurance program that
seeks to keep retired people and the elderly out of poverty. All employers and
workers are automatically taxed a certain portion of their wages—7.5 percent for
workers as of 2007. This money is then paid out to people who have retired from the
work force or who are unable to work.
Many people erroneously believe that social security functions as a pension
system and that retired people withdraw money from an account filled with funds
saved from a lifetime of working. In reality, social security money exists in one
enormous account, funded by today’s working people. Workers’ taxes pay to support
today’s retirees. As a result, the money a person gets from social security is not
always the same as the amount he or she has put in: Some people will receive more,
and some people will receive less. Social security is an entitlement program,
which means that certain people are entitled to benefits from the federal
government.
The Worker-to-Retiree Ratio
Because social security relies on current workers to pay for benefits to
current retirees, the ratio between workers and retirees is important. Ideally,
each retiree is supported by a large number of workers so that each worker only
has to pay a small part of the retiree’s benefits. As baby boomers grow older,
however, more retirees will be eligible for benefits, which reduces the ratio
and increases the amount each worker must contribute to social security. In
1946, the ratio was roughly forty workers per one retiree. Researchers project
that by the time the baby boomers have all retired in 2030, the ratio will have
shrunk to two workers per one retiree.
The Social Security Crisis
Many people worry about an impending social security crisis of having to
fund too many retirees from the salaries of too few workers. Although the
program has been running a surplus for many years, eventually people will be
drawing social security benefits at a rate faster than workers can contribute.
This deficit will force the government to either find money elsewhere to
maintain benefits or drastically cut those benefits. Analysts also worry that a
social security deficit will hurt the federal budget because many agencies have
been borrowing from the current social security surplus. These agencies will
eventually have to repay their debts to the social security program, causing
massive upheaval in federal finances.
Solutions
Politicians and political scientists have proposed a number of ways
to save social security before the crisis hits:
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Raising taxes: Raising payroll taxes—either by
increasing the payroll tax rate or by raising or eliminating the ceiling
on income subject to the social security tax—would generate more social
security funds.
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Reducing benefits: Cutting benefits would save money.
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Means-testing: Reducing benefits given to the rich
would increase the amount of social security money available to the
poor.
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Privatizing: Allowing workers to decide how much to
invest in Social Security is an extremely controversial program because
it forces workers to take responsibility for their contributions.
