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Social Security: Is it working?

By Susan Ubogu
web posted November 12, 2018

What is Social Security? It is a federal insurance scheme that is aimed at providing benefits for pensioners – senior citizens – and for those who are unemployed or disabled. For this piece, I am going to focus on the fact that Social Security is meant to provide aid to the elderly, people who can't work for an income.

A pay-as-you-go pension plan is a "retirement scheme where the . . . beneficiaries decide how much they want to contribute either by having the specified amount regularly deducted from their paycheck or by contributing the desired amount in a lump sum." (Investopedia) Many people are advocating for a change in the current setup. The current Social Security system is a pay-as-you-go pension scheme, and I believe this format is able to extract more benefits than the self-funding retirement system would. A self-funding retirement system would require everyone to finds ways to save for their retirement. We should not fall under the assumption that people who benefit from Social Security are completely funded. The Social Security Administration, SSA, estimates that for the average wage earner, benefits received from Social Security will replace only "40 percent of their pre-retirement income [,]" (SSA) the remainder must be self-funded.

I believe that there are clear faults with both the pay-as-you-go system (PAYG) and the self-funded retirement scheme. The biggest problem of the PAYG system is sustainability. The world's elderly population is starting to climb because of increasing life expectancies and falling fertility rates. This is causing the quantity demanded, pensioners who need their retirement to be funded, to rise, while the quantity supplied, the taxes gained from the able-bodied workforce, is falling. When Franklin D. Roosevelt started the program the ratio of workers paying into the system to retirees receiving benefits was 41-1, now, the ratio is 3-1. This is causing an increase in equilibrium price meaning that an able-bodied individual must now pay more taxes to keep the Social Security afloat. (Figure 1)

Figure 1: Supply and Demand Graph of the Pay-As-You-Go System
Figure 1: Supply and Demand Graph of the Pay-As-You-Go System

Despite its obvious shortcomings, I believe that the PAYG system is much more egalitarian than the self-funded system. With the self-funded system, you are expecting people to devote a marginal percent of their weekly, or monthly, salary to fund their retirement. This method puts people already living at, or under, the poverty line at a distinct disadvantage. The World Bank puts the poverty line at $1.90, to put that in perspective a loaf of white bread in Target is $1.29. To tell these people to put 10% – 15% of that into retirement is illogical. If America chooses to adopt a self-funded retirement program it’s telling 53 million people to go and fend for themselves.

I believe that America should stick with the pay-as-you-go welfare system, but they should take notes from other countries to enhance its viability. Another major problem with America's current retirement program is wealthy retirees being able to receive benefits from the Social Security. Iceland solves this problem by having each applicant reviewed, so if you make too much money you are not eligible to receive benefits, they also require employers to contribute to providing pensions. Alongside government pensions, occupational pensions are mandated, a minimum of 12% of earnings per year is contributed to the pensions with 4% coming from the firm and 8% from the individual. In Canada, your benefits are based on your pre-retirement earnings. I think Social Security would be more operable if, rather than moving to a "self-funded retirement system" America altered its current "pay-as-you-go welfare system" to include some of the above-stated ideas because a system in which everyone was required to fund their retirement wouldn't be serviceable to many people. ESR

Susan Ubogu is a high school student studying AP Macroeconomics and this is her first contribution to Enter Stage Right. © 2018 Susan Ubogu.

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