Essay on Social Security 782 Words | 4 Pages

In their expert history of Social Security, Sylvester Schieber and John Shoven discuss some of the reasons for the rapid expansion of the program. One reason was a good sales job by Social Security advocates: "The use of terminology of insurance and contributions is intended to skirt the perception that people are being ‘taxed' to finance benefits and to mask the huge welfare payments being made to many participants in the program." This was evident in a glowing 1939 article in Life magazine, which called Social Security an "insurance" program that would pay retirees an "annuity." The article included numerous poignant photos of people being helped by the benefits, but little mention of the costs.

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However, while "Social Security is designed to provide low-income individuals with higher returns on their payroll taxes, their shorter expected life spans almost fully offsets the benefit formula's progressivity," notes Cato Institute's Jagadeesh Gokhale. Similarly, Harvard University's Martin Feldstein finds that the progressivity of the benefit formula "is offset by the longer expected life of higher income individuals, their increased use of spouse benefits, and the later age at which they begin to work and pay taxes."

Social Security Essay - 983 Words | Major Tests

Also unlike a private pension plan, Social Security benefits have only a vague relationship to the contributions that workers made. In determining a person's benefits, the Social Security Administration (SSA) calculates the Average Indexed Monthly Earnings (AIME). All earnings upon which a person has paid Social Security taxes until the age of 60 are indexed for wage growth. The indexing formula is based on the ratio of the average national wage in the year the individual turns 60 to the year to be indexed. Wages earned after age 60 are not indexed. The SSA then takes the average of the 35 years in which wages are highest to determine the career average annual earnings; these wages are divided by 12 to arrive at the AIME.

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If policymakers continue "fixing" Social Security in the future with tax increases, it would be very harmful to the economy. As noted, the damage (deadweight losses) caused by tax increases rises more than proportionally as tax rates rise. Since tens of millions of middle- and higher-income workers already face high marginal tax rates on their wages, future increases in payroll taxes would be even more damaging than past increases.

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Such concerns about building a large "reserve" (which was not a real store of wealth) led to Social Security amendments in 1939 that set the program on a pure pay-as-you-go basis. The trust fund became a small contingency fund or bookkeeping entry of no economic importance. The Clinton administration's federal budget in 2000 laid out the reality of the trust fund:

Social security for retirees is paid through payroll taxes on the current workforce

Future Social Security Problems (Essay Sample)

If you started collecting Social Security retirement benefits within the last year and decide it wasn’t the right move, you can repay all the benefits received, including spousal and child benefits, and reapply for potentially higher benefits at a future date.