Increasing Tax Rates to Sustain Social Security
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Essay Topic
There has been considerable concern that our social security (old age and survivors’ insurance) program is not adequately financed: with expected birth rates, death rates, and increases in payroll tax collections, the current level of benefits can be sustained only with increases in tax rates. Some believe that the appropriate response is to reduce the current level of benefits, others that the appropriate response is to increase taxes in the future. Still others, worried about the effects of even higher tax rates but believing that lowering the benefits of those currently receiving social security would be unfair, argue that benefits should be cut in the future.
You will pick a side, and with economic models, facts, and statistics, you will persuade the Council of Economic Advisors to see why your way is least costly and more efficient than the other presented strategies.
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Economic Model for Social Security
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Economic Model for Social Security
Regardless of political affiliation, Americans continue to love and support Social Security. However, there are financial issues with the scheme. Because it distributes benefits at a higher rate than it collects taxes, its trust fund is being depleted. 81 million Americans are anticipated to see automatic benefit reductions of 20% by 2034 when the fund is expected to run out of money. Fundamentally, social and moral considerations are the primary justifications for improving rather than reducing Social Security. Any policy choice on a crucial social program should consider not just tactical calculations but also the program's overall effects. As alternative retirement supports have become less secure, Social Security payouts have become important to Americans. Therefore, I recommend an increase in tax rates instead of reducing the current benefits level.[“How to Fix Social Security? It’s Political but It Can Be Done,” Princeton University, accessed October 8, 2022, /news/2022/05/02/how-fix-social-security-its-political-it-can-be-done.] [Max J. Skidmore, “Should We Cut Social Security to Reduce the Deficit?” Scholars Strategy Network, accessed October 8, 2022, https://scholars.org/contribution/should-we-cut-social-security-reduce-deficit.]
It is critical to comprehend how Social Security functions to understand why there is a long-term financial problem. First off, payroll tax deductions are used to pay for Social Security. Both workers and employers are responsible for paying these payroll taxes, which are deducted immediately from an employee's paycheck. Payroll taxes will be levied on an individual's yearly salary up to $147,000 in 2022. The Social Security payroll tax rate is 6.2%. Accordingly, 6.2% is split equally between employees and employers. Self-employed workers are subject to the total 12.4% payroll tax rate.[Paul, Trina. “Will Social Security Run out of Money? Here’s What Could Happen to Your Benefits If Congress Doesn’t Act.” CNBC, February 8, 2022. /select/will-social-security-run-out-heres-what-you-need-to-know/.]
A worker's Social Security payroll tax payment does not go into a separate Social Security fund designated exclusively for them. Contributions from current workers fund all existing retirees' benefits. The Social Security Administration estimates that in 2022, 85 cents of every dollar contributed to Social Security payroll taxes will go to the Social Security trust fund, which will pay monthly benefits to active retirees, the surviving relatives of deceased employees and families. The remaining 15 cents are given to a trust fund that helps families of handicapped people.
The Social Security Administration will use up its reserves over the next ten years or more since fewer employees will be supporting more pensioners. The situation is due to the baby boom era, which lasted from 1946 to 1964 and was immediately after World War II, resulting in a fall in the birth rate. People are producing fewer children, and as a result of the dropping birth rate, there are also fewer employees to support beneficiaries. According to Trina, the Social Security Administration will be able to compensate out just a fraction of the full benefits for the retirees, or 78% of them, beginning in 2034 since it will have exhausted its extra reserves. The reduction in benefits might result in retirees receiving lower monthly payments or fewer checks annually, barring a change in U.S. government policy.[Paul, Trina. “Will Social Security Run out of Money? Here’s What Could Happen to Your Benefits If Congress Doesn’t Act.” CNBC, February 8, 2022. /select/will-social-security-run-out-heres-what-you-need-to-know/.]
Long-term financial needs for Social Security are sizable but manageable, and policymakers should prioritize raising tax collections to cover these costs. If decision-makers decrease Social Security benefits, the reductions must be minimized and thoughtfully targeted to avoid posing a severe hardship. Additionally, the changes will almost definitely be implemented gradually, which implies that they could not result in appreciable savings for several years. It will be required to raise Social Security's revenue levels.
The recent erosion of Social Security's tax base because policymakers last discussed solvency in 1983 primarily due to the increase in the cost of non-taxable and rising inequality fringe benefits like health insurance, which justifies increasing payroll tax revenue for Social Security. Additionally, it is widely supported: most Americans favor improving Social Security by increasing tax contributions rather than supporting budget cutbacks to the program.[Kathleen Romig, “Increasing Payroll Taxes Would Strengthen Social Security,” Center on Budget and Policy Priorities, September 27, 2016, /research/social-security/increasing-payroll-taxes-would-strengthen-social-security.]
The solvency impact of a rate increase relies on the timing and magnitude of the change ...