The Future of Social Security and Medicare in the U.S.A.

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The Social Security and Medicare programs that are maintained by the federal government of the United States are facing several problems in the future. These difficulties involve contentious political issues that are problematic for Congress and other formulators of public policy. These programs are clearly in need of certain reforms. However, political pressures from various directions have thus far prevented meaningful Social Security reform from taking place. Social Security and Medicare are also programs that are popular with the public at large, and it is in the interests of the voting public to support policies that will preserve the availability and integrity of these programs over the long run. Thus far, there is a lack of genuine public awareness concerning the problems these programs face, and much of the American public is misinformed concerning the nature of the difficulties, and what potential solutions might be. Policymakers are hampered in their efforts to enact meaningful reforms of these systems out of fear of offending important voting constituencies (Goss, 2010). A better-informed public might well result in a political climate that is more conducive to the carrying out of the needed reforms.

The principal difficulty Social Security and Medicare currently face involves the prospect of unfunded liabilities. Planners associated with these programs normally work to preserve their solvency over a period of seventy five years. However, the United States is presently undergoing a rapid demographic change that is undermining these programs’ long term solvency. The older population is becoming increasingly larger due to the fact that the so-called “Baby Boom” generation of the postwar era is now reaching their senior years in terms of age. Consequently, this growing class of elderly and retired persons is in the process of claiming their benefits under these programs. Yet the population of working-age adults in the United States has not grown to a degree that matches the size of the present generation of benefits claimants (Pecchenino & Utendorf, 1999). The present population differential among generations does not sufficiently balance the ratio between the incoming revenues and outgoing liabilities associated with government-sponsored retirement programs.

Another parallel difficulty that has emerged in recent years in the economic downturn that began during 2007 and 2008. Slow economic growth and high unemployment rates have created a scenario where incoming revenues of the kind that sustain programs such as Social Security and Medicare have fallen off. Higher unemployment rates and lower wages ultimately have the effect of reducing revenues generated by the payroll taxes that are the source of funding for these programs. The end result of this situation is the experiencing of a shortfall by Social Security and Medicare. While these programs may plan to maintain their solvency for a period of seventy five years, at present they are solvent only until the year 2003, a period of a mere nineteen years (Goss, 2010). Once these programs become insolvent, the number of benefits they would be able to payout would only be three-quarters of the amount that has been promised.

An additional problem is the failure of many Americans to accumulate a significant amount of assets to be reserved for their own retirement. Some economists have argued that the Social Security and Medicare systems ironically create disincentives to personal savings. Workers who expect to receive Social Security payments after retirement are less likely to accumulate savings of their own during their working years for the purpose of self-support in their senior years. Other economists and demographers have expressed concerned about declining birth rates within American families. In older societies, it was often the norm that parents would depend on their children for support when they reached old age. Therefore, parents had an incentive to have large families. The availability of Social Security, Medicare, and other social insurance or public assistance programs has resulted in a net reduction of such incentives (Pecchenino & Utendorf, 1999). This failure by workers to accumulate private savings during their careers, along with their increasingly smaller families, results in older people becoming even more dependent on public programs such as Social Security.

Social trends such as these have combined with the effects of the economic downturn to create a national crisis concerning the need to provide for senior citizens when they are no longer of working age. The majority of retirees have no savings at all, and those who do typically have savings of less than $100,000. Such an amount can hardly sustain someone through their sixties, seventies, and eighties, given the present buying power of the dollar. Most retired persons are currently very dependent on Social Security. The average recipient now receives just over $1200 monthly. The majority of Social Security recipients generate at least sixty-five percent of their present income from the program’s payments (Galasso & Profeta, 2004). It is clear that Social Security is an immensely important program and one that more and more Americans will be very dependent on in the future.

A public controversy also exists concerning the relationship between Social Security, Medicare and the budget deficits of the United States’ federal government. It has been argued by some policymakers that policy related to Social Security should be used for the purpose of education resources and deficit reduction. Under such a scenario, monies from the Social Security trust fund would be used in part for the purpose of controlling budget deficits. Some economists have criticized such proposals, and argued that it would be a mistake to either tamper with the Social Security trust fund, or focus on deficit reductions during a time of high unemployment rates and slow economic growth. Further, it is argued that revenues generated thus far by payroll taxes have been adequate to fund Social Security at present. The Social Security trust fund is also legally prohibited from providing more in benefits than what it generates in revenues. The budget deficits of the United States are caused not by Social Security but by other factors (Pecchenino & Utendorf, 1999). These include the nation’s military budget which is much larger than that of other nations, interest payments on past debts, and the high costs of healthcare which escalate the costs of public healthcare programs such as Medicare and Medicaid.

The primary difficulty the Social Security program faces is its projected inability to cover the costs of the benefits that have been promised to future generations of retirees, i.e. those who are expected to retire after the year 2033 (Goss, 2010). One proposal for reforming the program in order to enhance its solvency that has been suggested is to reduce the regular Cost of Living Adjustment (COLA) that Social Security beneficiaries receive. The purpose of this adjustment is to ensure that Social Security payments continue to match living costs after these after been adjusted for inflation. However, critics of these adjustments have argued that overall rates of inflation are frequently miscalculated or overestimated. The proposal to reduce the cost of living adjustments has itself been criticized on the grounds that inflation estimates by themselves do not fully reflect the costs of living faced by older people. For example, senior citizens tend to be heavy consumers of healthcare services.

Such services are frequently provided not in the context of competitive markets, but within institutional settings where the cost of healthcare is somewhat fixed, and certainly very high. Other economists have argued that adjustments to payments with the intention of matching increases in the cost of living might be feasible if the practice of gathering statistical data concerning inflation rates faced by senior citizens was more thorough going and determinant (Goss, 2010). The federal Bureau of Labor Statistics could certainly compile such data, though it does not presently do so. However, the collection of such information by the bureau could begin if it were required by Congressional legislation.

Ultimately, the day will come when the Social Security program is not able to meet its liabilities for benefits that it has promised to subsequent retirees, as these liabilities will be unfunded due to the program’s increased inability to generated revenue from payroll taxes that match promised benefits (Galasso, 1999). The hard decision will have to be made by legislators and policymakers whether to reduce the benefits that are being provided to recipients or to raise taxes in order to cover the unfunded liabilities. Decisions of these kinds will be unpopular among substantial sectors of the American public and carry significant political liabilities of their own. Obviously, no recipient wants to see their benefits cut, particularly after they have paid into the program throughout their working lives and have been promised a sustained level of benefits. Likewise, no working person wishes to see their payroll taxes or federal income taxes increased.

It is widely recognized by economists that benefits provided to older persons with relatively high incomes will have to be reduced. It has been estimated that such a reform might reduce the cost of Social Security by as much as ten percent. Also, the overall volume of personal income that is subject to payroll taxes might be substantially increased. If the volume were doubled, it has been suggested that another thirty percent of the unfunded liability could be closed. Also, increases in general payroll taxes need not be draconian. A mere one to two percent rate of increase in such taxes could be phased in over a period of ten to twenty years. This increase might be able to account for another fifty percent of the liability (Galasso & Profeta, 2004). Lastly, the retirement age could be raised as Americans live longer and enjoy better health.

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References

Galasso, V. (1999). The U.S. Social Security system: What does sustainability imply? Review of Economic Dynamics, 2, 3, 698-730.

Galasso, V. & Profeta, P. (2004). Lessons for an aging society: The political sustainability of social security systems. Economic Policy, 19, 38, 63–115.

Goss, S. C. (2010). The future financial status of the Social Security program. Social Security Bulletin, 70, 3, 111-125.

Pecchenino, R. A. & Utendorf, K. R. (1999). Social Security, social welfare and the aging population. Journal of Population Economics, 12, 4, 607-623.