Question
The long-term solvency of Social Security is widely believed to be in danger. Play the American Academy of Actuaries Social Security GameLinks to an external site.. Once you have “solved” the game. Share your select results with your classmates by discussing the following questions:
- What options you found to be off limits, and why?
- What options did you select to solve the social security problem? Explain your choices.
- Note: When replying to your peers on their post for the “Social Security” activity – comment and ask questions about their choiceshttps://socialsecurity.actuary.org/
Answer
- Introduction
The long-range outlook for the Social Security system is one of the major economic policy issues facing the nation. The 1979 Advisory Council report noted that “Economic uncertainty surrounding the current situation and prospects for the future of Social Security has gradually increased…”. In the mid-1970s, concern about the short-run financing problems led to legislation in 1977 and the 1979 Advisory Council report. More recently, increased uncertainty about the future of the system has led to a number of proposals to examine Social Security in the context of comprehensive tax and transfer system and even proposals to alter the system because of its perceived adverse impacts on private saving and rate of return to workers. These concerns about the future viability of the system and how changes in the system on the elderly and on the economy as a whole are warranted in light of the changing age distribution of the population are all concerns that would be addressed in an evaluation of the long-term solvency of Social Security. This analysis is concerned with the adequacy of future financing for the existing benefit package. Thus, the issue of what the Social Security system should be trying to accomplish in the future is a complex issue that is intimately tied to overall national priorities and needs to be examined separately. This analysis would focus on the implications of continued aging of the population and the changing relative earnings of the population that will occur as the system attempts to provide a benefit package that is tied to past earnings and more importantly with changing economic conditions at the time in terms of the impact of future financing on the overall economy and the welfare of the elderly.
Social Security is a largely unfunded system. Benefits are paid by today’s workers and their employers to today’s retirees and other beneficiaries. Thus, the system has an important internal link because the level of benefits is directly tied to the amount of revenue collected. There is also an important external linkage. Trust Fund operations – accumulation of reserves when the system runs a surplus and spending those reserves in the event of a deficit – are linked to the economy and federal budget. Social Security must be examined as a unified system and in the context of the overall federal budget.
1.1 Background
The U.S. Social Security system is the largest government savings program in the United States. To be precise, the system is made up of more than 100 separate trust funds that feed into the ultimate federal OASDI trust. The two major funds that we usually think of as comprising Social Security are the Old-Age and Survivor’s Insurance (OASI) fund and the Disability Insurance (DI) fund. These programs are far and away the largest government savings in the nation. The Social Security system was established in 1935 as a method of providing economic security for U.S. workers. The system’s initial design was based on a social insurance ideal that would provide financial aid in the form of pensions to retired workers aged 65 or older. The designers of the Social Security system believed that the primary cause of long-term damage to income was retirement, disability, or death of the head of household. Mistimed, incomplete or nonexistent private insurance or annuity arrangements in anticipation of these life-cycle contingencies caused a need for social insurance that would replace lost income for families. High unemployment during the depression era and a proliferation of old-aged individuals with few or no savings caused a substantial amount of debt-ridden or poverty-stricken families. This drove the necessity for social security to provide aid to dependents and the survivors of deceased workers. The ultimate goal was to provide a unique and universal national plan aimed to prevent old-aged destitution by assuring a minimum standard of living. The system has changed and expanded many times, now covering workers of all ages and their families. In 2003, 158 million people were paying into the system with 46 million receiving benefits. Now more than ever, the primary goal of Social Security is to replace a higher percentage of pre-retirement earnings for lower-income workers than for higher-income workers.
1.2 Purpose
This report examines the prospects for the long-term solvency of Social Security. This is not a new topic, nor is it one that will soon go away. The current problems of Social Security are a product of bad design, and they have been with us a long time. Social Security has always been a pay-as-you-go system, with current revenues from payroll taxes and taxes on benefits always used to pay current benefits. As a result, no trust fund has been built, nor have there been any real assets accumulated. In fact, the trust fund is an accounting device that has no economic significance. When the system began to get into trouble in the late 1970s (apart from the change in the way the consumer price index is calculated, these problems are still with us), there was an attempt to create a reserve that would carry the system into the 21st century. But it is clear in retrospect that this effort was too little and too late. With the large prospective deficits of the system, it is not possible to close the gap solely with changes in the financing. Measures to change benefits or to employ general tax revenues would affect the system’s finances, but they would not affect the system taken as a whole. All of this has shown to be relevant since Social Security is currently facing a growing deficit and drastic measures need to be taken to allow for solvency. The best way to view the long-term prospects of the Social Security system is to look at the present value of the difference between the income and expenditures of the system for the infinite future. This calculation takes into account the future change in the burden of the system with time, namely the initial favorable years where the ratio of benefits to taxes will be low and the future years where this ratio will be high. Thus, we define the infinite future as the time where the system has achieved a new steady state where the time in the system is the only determinant of the benefits. Viewing the prospects of Social Security in this way can give us a clear answer on what changes need to occur for solvency, and what the impact of those changes will be.
- The Social Security Game
2.1 Overview
2.2 Options and Limitations
- Discussion Questions
3.1 Off-Limits Options
3.1.1 Explanation
3.2 Selected Options for Solving the Social Security Problem
3.2.1 Rationale for Choices
- Peer Interactions
4.1 Commenting on Peers’ Posts
4.1.1 Asking Questions about Choices
- Conclusion