Sample Accounting Paper on Social Security Reforms in the United States

Entrepreneur and politician Dudley J. Leblanc had proposed a monthly stipend for the elderly in his 1932 campaign. Despite his failure as governor of Louisiana, Huey Long embraced the trend after noticing the popularity of the idea among Louisiana voters for a long time, and later adopted it on his national platform (Clay, 2010). Then in 1934, “political scientists at the University of Wisconsin-Madison: Edwin Witte, the so-called ‘father of social security’, Arthur J. Altmeyer and Wilbur Cohen developed the proposal for federally funded pension plan. The idea was later popularized by Francis Townsend in 1933, and the influence of the ‘Townsend Plan’ movement on debate over social security continued into the 1950s” (Amenta, 2008).

“The Great Depression caused significant economic disturbances on the American nation. It left millions of people unemployed and struggling to put food on the table. The elderly were the most affected leading to many states passing legislation to protect the elderly. However, most of these elder-assistance programs were underfunded, poorly run and, in some cases, flat out ignored by officials” (Social Security Act, 2018).  This was the gimmick of assistance plans in the country until Roosevelt became president. Generally, during the Great Depression of the thirties when the rate of poverty among older people was over 50 percent, the concept of a social security program was introduced as a measure for introducing ‘social insurance.’

The Social Security Act was passed on 14 August 1935 by Roosevelt’s first Presidential Committee on Economic Security, designed under Francis Perkins, and adopted by Congress as part of the New Deal. The purpose of the act was to regulate the risks of modern American life, including age, poverty, unemployment, and the burden of widows and children without fathers. The bill provides an old age pension scheme, unemployment insurance financed by employers, health insurance for those at financial risk, financial assistance for widows with children and financial assistance for the disabled. “With the signing of this Act on August 14, 1935, President Roosevelt became the first president to support federal assistance to the elderly. The social security act provided benefits to retirees and the unemployed, as well as a lump sum at death. States were also provided with benefits for the elderly, unemployment insurance, assistance to families with dependent children, maternal and child welfare, public health services, and the blind. The law also established the Social Security Board, which later became the Social Security Administration, to structure the Social Security Act and find the logistics to implement it” (History of Social Security in the United States).

The Social Security Act was established with the intent of beginning payroll tax deductions for enrolled persons by 1 January 1937. Although the task was quite tough, registration for the program kicked on by November 1936. At their local post office, the qualifying employees completed an application and obtained a national identity card with a unique, nine-digit identification code (Social Security Act, 2018). The following months saw a surge in the application of the social security card. The Social Security card was—and still is—used to track workers earnings and benefits.

“Early debates on the design of social security focused on how the benefits of the program should be funded. Some believed that the benefits to individuals should be funded by the contributions they made in their careers. Others argued that the implementation of this design project would be detrimental to those who had already started their careers because they would not have enough time to accumulate enough benefits. Social Security was controversial when originally proposed, with one point of opposition being that it would reduce the labor force, but supporters argued instead that retiring older workers would free up employment for young men, which during the Depression was a vital point of concern” (History of Social Security in the United States).

According to Minsk (1996), most women were excluded from the benefits of unemployment insurance and old age pensions. Jobs not covered by the act included agricultural workers, domestic workers, civil servants, and many teachers, nurses, hospital staff, librarians, social workers, and other part-time workers. “This is because most of these jobs were mostly dominated by women and minorities. For example, in 1940 women made up 90 percent of domestic workers and two-thirds of working black women were concentrated in the domestic service. A large population of African Americans-approximately two thirds of those in the labor force, 70 to 80 percent in some areas in the South, and just over half of all women employed were not covered by Social Security. Social Security reinforced traditional notions of family life. Women usually qualified for benefits only through their husbands or children. There is also historical discrimination in this system regarding assistance to pro-children. As the money was allocated to the states for distribution, some areas assessed black families as needing less money than white families” (Minsk, 1996). “These low award levels made it unimaginable for African American moms to not work: one reasons why the program was created” (Quadagno, 1994). A few states likewise prohibited kids conceived with only one parent present, an exclusion which affected African American women more than whites. According to Kelser-Harris (2001), one study determined that 14.4% of eligible white individuals received funding, but only 1.5 percent of eligible black individuals received these benefits.

Since the 1930s, according to Kalznelson (2005), the provisions of Social Security have shifted, evolving in reaction to economic issues as well as concerns regarding changing gender roles and minority positions. Officials responded more to women’s issues than to those of minority groups. Gradually, Social Security shifted towards universal coverage. In 1950, conversations turned away from the inclusion of occupational classes to how to provide more appropriate coverage. “Changes in Social Security have reflected a balance between promoting equality and efforts to provide adequate protection,” he added.

Initially, monthly payouts of old-age benefits were set to begin on January 1 , 1942, where a lump sum payment was earned by qualifying persons who turned 65 before that date. On August 10, 1939, an amendment was passed to shift the start date to January 1, 1940, to obtain monthly benefits. An increasing concern about the effect that the reserves produced by the 1935 Act had on the economy was one explanation for the proposed changes in 1939. “The government was blamed for the 1937 Recession, tied to the abrupt decrease in government spending and the $2 billion that had been collected in Social Security taxes. In 1940 instead of 1942, benefits became available and improvements to the compensation formula expanded the amount of benefits available to all recipients in the early years of Social Security. The scheme had been conceived by the original Act as paying benefits out of a broad reserve. The Social Security paradigm was changed into more of a hybrid system by this Act; while reserves would still accumulate, the pay-as-you-go system would help most early beneficiaries. Just as importantly, the changes also delayed planned rises in contribution rates” (Social Security Act, 2018).

Within a few years of the 1935 Act, demands for Social Security reform arose. Some claimed, even as early as 1936, that women were not getting enough support. Therefore, in an attempt to protect the family, some called for reform that more concretely tied women ‘s assistance to their reliance on their husbands. “In 1950, after years of debates on the inclusion of domestic labor, household employees working for the same person at least two days a week were included, along with non-profit workers and the self-employed. In 1954, hotel workers, laundry workers, all farm workers, and employees of state and local governments were added. The tax rate was increased to 4.0% in 1956 (2.0% for the employer, 2.0% for the employee) and disability benefits were added. Women were also eligible to retire at 62 in 1956, with benefits reduced by 25 percent. Without the reduction in benefits, widows of covered employees were allowed to retire at 62.  In 1961, retirement was extended to male retirees at age 62, and the tax rate was adjusted to 6.0 percent” (Morton & Liou, 2017). Furthermore, incentives for millions of beneficiaries have been expanded and a new contribution schedule has been set up. The Social Security Act of 1965, part of President Lyndon B. Johnson’s “Great Society” policy, added Medicare and Medicaid in 1965. The 1965 Social Security Reforms provided Social Security beneficiaries aged 65 and over with medical care. This new “Medicare” program also offered people 65 and older the chance to purchase supplemental medical insurance.

By the late 1900s, there was a financial danger to social security. Several reforms to try to save the service were passed. They attempted to adjust the formula of benefit qualification for people born after 1917, raise payroll tax and marginally decrease benefits to help reduce costs, leaving some beneficiaries in tough economic times with less income. The efforts, however, yielded no fruit. Under the raid, President Ronald Reagan signed legislation that gradually increased the retirement age to 67, taxed Social Security benefits and provided Social Security benefits to federal workers (Social security Act, 2018).

President George W. Bush made efforts and his administration extended disability insurance and food stamps to eligible immigrants and their children, eliminated military pay credits and increased coverage of Medicare prescription drugs. Later, in 2011 and 2012, the administration of President Obama briefly lowered the Social Security tax rate from 6.2 percent to 4.2 percent. The step helped to ease the financial pressure on American employees, but did nothing to avoid the risk going into future debt.

Several social care and social insurance services are included in the new version of the social security act. While better known for retirement benefits, survivor benefits and disability income are also offered and are independent of the lumpsum pension. It may also help, in the event of your death, your legal dependents (spouse, children, or parents) with benefits. I A clear set of requirements provided by the Social Security Administration (SSA) determines the benefits criteria. In order to qualify for compensation, a person must pay into the Social Security program during their working years and accrue 40 credits. The amount of benefit someone earns is dependent on their history of earnings, the year they were born, and the age that they began claiming Social Security. Depending on one’s salary and tax filing status, the benefits can be taxed.

You must receive ample “credits” during your working years to be eligible for Social Security benefits. For every $1,300 in earnings, you will receive one credit in 2017, up to a maximum of four credits every year. And when you move jobs or take a break from the workforce, these credits will count towards your potential eligibility. Usually, the dollar amount required to earn one credit is increased annually. An individual must be “fully insured” to obtain most Social Security retirement payments, which essentially means that he or she has worked long enough and has invested enough money into the system. This is tracked using credits: For each quarter of the year you work, you earn one credit. So, if you work for a whole year, you earn four credits in total. You need 40 credits to be eligible for retirement benefits. Since you can’t earn more than four credits per year, to ensure full eligibility, you have to work for at least 10 years. Each quarter, you have to get a certain amount of cash to, which fluctuates annually to receive that quarter.

Workers may start receiving retirement Social Security funds when they turn 62. However, this is the early retirement age — the full retirement age depends on when you were born. Retirement benefits are not just for retired workers.  “Several other members of the family besides the retiree may receive the benefits including: a spouse over the age of 62, a spouse of any age caring for a child under the age of 16, a spouse of any age caring for a child disabled before the age of 22, a divorced spouse over the age of 62 if the marriage lasted 10 years or more, unmarried children under the age of 22, a divorced spouse over the age of 62, 62 if the marriage lasted 10 years or more, unmarried children under age 18 or still in high school or children who were disabled before age 22” (Hardy & Quadagno, 1995).

Social security also offers coverage to individuals who become disabled in a way that eliminates or inhibits their capacity to perform duties. “Like retirement benefits, these payments depend on the amount of credits you have entered into the scheme. However, there is no need for a full 40 credits. The exact sum depends on your age. Disability insurance covers all personal health conditions, both physical and mental problems, that last for at least 12 months continuously and prohibit productive engagement” (Amenta, 2008). The constraints on the taxation of Title VIII were removed from the Social Security Act as part of the amendments of 1939 and included in the Internal Revenue Code and dubbed the Federal Insurance Contributions Act (FICA). Payroll taxes for social security are often referred to as ‘FICA taxes.’ Social security is primarily funded by payroll taxes called the Federal Insurance Contributions Act Tax (FICA) or the Self-Employed Contributions Act Tax (SECA), as mentioned above. The Internal Revenue Service (IRS) collects tax payments which are then entrusted to the Federal Old Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund, the two Social Security Trust Funds (Burtless &Bosworth, 1999). Social security taxes are paid to the Social Security Trust Fund controlled by the U.S. Treasury. Costs for the current year are compensated by tax receipts for Social Security. When revenues surpass expenditure, as they did between 1983 and 2009, the surplus is invested in special sequence, non-marketable U.S. government bonds. As a result, the Social Security Trust Fund implicitly funds the general deficit spending of the federal government. In 2007, there was a net surplus of $2.2 trillion in Social Security taxes and interest on payments paid out (Morton & Liou, 2017).

“The Social Security Administration (SSA) levies 6.2% less Medicare taxes on an employee and another 6.2% less Medicare taxes on the employer. Both the employer’s and the employee’s tax add up to 12.4%, which is equivalent to the social security of the self-employed. That is how social security benefits are financed. The system works by pooling the workers’ compulsory contributions into a large pot yet only paying the benefits to those qualified for them You pay into the program when you work by getting a percentage of your wages taxed and earmarked for Social Security. The maximum taxable earnings cap for 2020 is $137,700-the sum adjusted annually for inflation in incomes across the economy. A separate payroll tax of 1.45% of an employee’s income is paid directly by the employer, and an additional 1.45% deducted from the employee’s paycheck, yielding a total tax rate of 2.90%. For this portion of the levy, there is no limit restriction. This portion of the tax is used to finance the budget for Medicare, which is largely responsible for providing retirees with health insurance. In June, 2005, the gimmick was introduced by the government. The gimmick was adopted by the government in June, 2005” (Burtless & Bosworth, 1999).

Both workers who pay FICA (Federal Insurance Contributions Act) and SECA (Self Employed Contributions Act) taxes for 40 quarters of coverage (QC) or more on a fixed minimum wage or more are “full insured” and eligible to retire at 62 years of age with reduced benefits and higher benefits at full retirement age, FRA, 65, 66 or 67 depending on the date of birth. Retirement benefits depend on the “adjusted” average salary earned in the last 35 years. Earlier-year salaries are “balanced” before averaging by multiplying the portion of the annual adjusted wage index, AWI, for earlier salaries, for each annual salary index. (History of Social Security in the United States).  To determine the 35 year “average” indexed monthly wage, adjusted salaries for 35 years are often used. In determining the adjusted average wage, only wages lower than the “ceiling” income are considered. When the worker has fewer than 35 years of covered wages, the non-contributory years are allocated zero earnings. If the earnings covered are more than 35 years, so the top 35 are taken into account. The average indexed monthly salary covered for 35 years, AIME, is the sum of 35 adjusted salaries (or less if the worker has less than 35 years of covered income) divided by 420 (35 years x 12 months per year) times his inflation index, AWI (Burtless & Bosworth, 1999).

“The average indexed monthly salary (AIME) is then split into three separate salary brackets, each multiplied by a different benefit percentage, to determine the cumulative benefits a retiree is eligible for. The receivable benefits (the so-called primary insurance amount, PIA) are the total of each bracket ‘s salary times the benefit percentages that are added to each bracket. Congress determines the gain percentages and can therefore adjust easily in the future. The bend points, where the brackets change, are adjusted for inflation each year by Social Security” (History of Social Security in the United States).

“The Social Security Trust Fund is an account operated by the United States Treasury that collects payroll taxes from employees and their employers on Social Security and pays payments to beneficiaries of Social Security. Currently, the Social Security Trust Fund consists of two different funds: the trust fund for Old-Age and Survivors Insurance (OASI) and the trust fund for Disability Insurance (DI). The OASI Trust Fund is used to pay pensions to retired employees and their families, as well as to the families of deceased workers. The DI trust fund covers compensation for employees with disabilities and their families. When employees and employers contribute more money than they need to pay taxes through the Social Security system, such “excess” payments are invested in special U.S. government securities. This was the case between 1984 and 2009, when substantial cash surpluses were reported by Social Security. This helps the federal government to borrow money from the trust fund for non-social security purposes. These interest-bearing bonds are a type of IOU payable from future receipts of FICA taxes. There are two types of special government securities: short-term debt certificates which mature on the following June 30 and bonds that normally mature in one to 15 years. None of these securities is exchanged or publicly traded on the bond market” (Kalznelson, 2005).

There have been proposals to change the Social Security system in the United States. A roots of partial reform attempts or proposal of social security may be able to go trace back the 1930s when institutions are established. In the late 1990s, privatization saw proponents arguing that the high rates of return of the U.S. stock market were losing out on U.S. employees paying compulsory payroll taxes for Social Security. They compared proposed” Private Retirement Accounts “(PRAs) with the common savings plans for Individual Retirement Accounts (IRAs) and 401(k). There are countries other than the United States that have set up individual accounts for individual employees, giving employees leeway in choices over the assets in which their accounts are invested, paying employees after retirement by annuities covered by the individual accounts, and allowing the heirs of the employees to inherit the funds. In October 1997, a secret agreement was reached between the Democratic president, Bill Clinton, and the Republican Speaker of the House, Newt Gingrich.to reform Social Security. By urging the neutral members of Congress from their parties to work together, the agreement required both the President and the Speaker to form a coalition of the century. About a week before Clinton presented the proposal in his State of the Union address, the progress of the amended agreement reached on 28 October 1997 between Bill Clinton and Newt Gingrich was interrupted by Lewinsky’s case. Republican Senators Spencer Abraham and Pete Domenici broadcasted for the first time a series of “lock box” proposals. These proposals would amend each house’s rules, declaring it out of order to consider any bill that would contribute to a Social Security deficit unless a majority or supermajority votes to suspend the rules but all of these proposals failed (History of Social Security in the United States).

As early as 1978, President George W. Bush suggested that the Social Security System could not be sustained unless individuals were allowed to invest the payroll tax themselves. He suggested that social security could only be fixed through voluntary personal retirement accounts. He argued that this approach would offer a better deal to the youths because the rate of return would be higher than in the traditional system; the accumulation could be passed on to children and grandchildren; and “best of all, the money in this account is yours, and the government can never take it away”.  However, the initiative didn’t make it through obstructed by congressional Democrats uniformly opposed and Republicans in disarray. Still, the Bush administration extended disability benefits and food stamps to qualified immigrants and their children, eliminated wage credits for the military and expanded Medicare prescription drug coverage.

“In December 2011, Democratic President Obama’s National Commission on Fiscal Responsibility and Reform proposed the ‘Bowles-Simpson’ plan for making the system solvent. It combined increases in the Social Security payroll tax and reductions in benefits, starting several years in the future. It would have reduced benefits for upper-income workers while raising them for those with lifetime earnings averaging less than $11,000 a year. Republicans rejected the tax increases and Democrats rejected benefit cuts. President Barack Obama opposed privatization (i.e., diverting payroll taxes or equivalent savings to private accounts) or raising the retirement age, but supported raising the annual maximum amount of compensation that is subject to the Social Security payroll tax ($137,700 in 20) to help fund the program” (Kessler-Harris, 2003).

Basically, the idea of social security is good as it provides a country’s citizens with a bunch of benefits thus ensuring a good economic status for them. However, the social security program bears the nation a heavy financial burden. it is extremely inefficient and costs every citizen hundreds of thousands of dollars over the course of their lifetime, that everyone would benefit from dismantling the core of the system. Privatizing social security would raise the rate of return of employees by allowing retirement savings to be invested in private assets, such as stocks that yield better returns than the existing pay-as-you-go retirement plan. Returns will be further improved if the government borrows on a vast scale to pay past social security expenses, enabling workers to invest a greater portion of their pay in high-yield investments. Exactly the same rate of return can be obtained, however, if the current public system is changed to allow Social Security reserves to be invested in private assets.

By moving the retirement system away from pay-as-you-go funding and towards advance financing, privatization will raise national savings. Such a move would entail a compromise on consumption, either by cutting benefits or by increasing the combined social security payments and the new retirement package. Privatization policies that do not place a sacrifice on consumption will not reach a higher saving rate. Higher national savings can also be reached by reforming the existing public retirement program. The crucial change in policy is the move to advance funding, not the move to a private system (Burtless & Bosworth, 1999).

People should be allowed to invest the money on their own, and then retain the current social security program by just taxing the income as regular income and providing that portion to the poor, disabled and others who prove needy. Instead of taxing everyone at 6% and paying benefits to everyone, the system can be used to help only a part of the population. This can lift the rate of return workers obtain on their retirement contributions, boost national saving and future economic growth. The model also as practical political advantages in comparison with a Social Security rescue plan based on higher payroll taxes and a bigger accumulation of Social Security reserves. People would be better off paying income tax, approximately 1-1.5%. the amount could be pulled to the welfare programs and help other citizens and maybe the government when in short of funds. The rest of the 4-4.5%, citizens should be allowed to invest in their own retirement accounts which overtime would significantly outproduce what they would possibly be able to withdraw from social security.

According to Burtless and Bosworth, (1999) , any change must navigate a big financial barrier. This is because Social Security has accrued trillions of dollars in liabilities to employees who are either retiring or who are about to retire. In order to make room for a new private plan, legislators must find funds to pay for these expenses while still giving young workers enough money to deposit into new private accounts. This means scaling back past liabilities – cutting benefits – or growing contributions from current workers. Many major privatization proposals also include major new federal borrowing. As a result, if a balanced budget amendment were to become part of the constitution, it would torpedo any effort to substitute most of Social Security with a private retirement system.

 

References

Amenta, E. (2008). When movements matter: The Townsend plan and the rise of social security (Vol. 99). Princeton University Press.

Burtless, G., & Bosworth, B. (1999). Privatizing social security: The troubling trade‐offs. The Washington Quarterly, 22(1), 205-215.

Clay, F. (2010). Coozan Dudley LeBlanc: From Huey Long to Hadacol. Pelican Publishing.

Hardy, M. A., & Quadagno, J. (1995). Satisfaction with early retirement: Making choices in the auto industry. The Journals of Gerontology Series B: Psychological Sciences and Social Sciences, 50(4), S217-S228.

History of Social Security in the United States. (2020, November 9). In Wikipedia. https://en.wikipedia.org/wiki/History_of_Social_Security_in_the_United_States#cite_note-When-5

History.com Editors (2018). Social Security Act. HISTORY. https://www.history.com/topics/great-depression/social-security-act. Retrieved on November 9, 2020

Katznelson, I. (2005). When affirmative action was white: An untold history of racial inequality in twentieth-century America. WW Norton & Company.

Kessler-Harris, A. (2001). Voluntary Work and Labour History: A Postscript. Labour History, 129-133.