Economics: The American Government Essay, Research Paper

Economics: The American Government

Most of the problems of the United states are related to the economy. One of the

major issues facing the country today is social security.

The United States was one of the last major industrialized nations to establish

a social security system. In 1911, Wisconsin passed the first state workers

compensation law to be held constitutional. At that time, most Americans

believed the government should not have to care for the aged, disabled or needy.

But such attitudes changed during the Great Depression in the 1930’s.

In 1935, Congress passed the Social Security Act. This law became the basis of

the U.S. social insurance system. It provided cash benefits to only retired

workers in commerce or industry. In 1939, Congress amended the act to benefit

and dependent children of retired workers and widows and children of deceased

workers . In 1950, the act began to cover many farm and domestic workers, non

professional self employed workers, and many state and municipal employees.

Coverage became nearly universal in 1956, when lawyers and other professional

workers came under the system.

Social security is a government program that helps workers and retired workers

and their families achieve a degree of economic security. Social security also

called social insurance (Robertson p. 33), provides cash payments to help

replace income lost as a result of retirement, unemployment, disability, or

death. The program also helps pay the cost of medical care for people age 65 or

older and for some disabled workers. About one-sixth of the people in the United

States receive social security benefits.

People become eligible to receive benefits by working in a certain period in a

job covered by social security. Employers and workers finance the program

through payroll taxes. Participation in the social security system is required

for about 95 percent of all U.S. workers. Social security differs from public

assistance. Social security pays benefits to individuals, and their families,

largely on the basis of work histories. Public assistance, or welfare, aids the

needy, regardless of their work records. All industrialized countries as well as

many developing nations have a social security system. The social security

program in the United states has three main parts. They are (1) old-aged,

survivors, disability, and hospital insurance (OASDHI), (2) unemployment

insurance; and (3) workers’ compensation.

THE SOCIAL SECURITY PAYROLL TAX

This tax was to be taken from the payrolls of the nation’s employers and

employees. The government felt that, like unemployment benefits, the social

security should be financed by those who got the greatest benefit, those who

worked, and were liable to need those benefits in the future.

A plan that would affect those only who had paid such a tax for a number of

years would have done those who were currently suffering under the Depression no

good at all. As a result, the social security plan began paying out benefits

almost immediately to those who had been retired, or elderly and out of work,

and who were unable, primarily because of the depressed economic conditions, to

retire comfortably. In this way, the government was able to accomplish two

objectives: first, it helped the economy pull out of the depression, by

providing a means by which old people could support themselves and, by buying

goods and services, support others in the community ; and second, it showed the

younger workers of that time that they no longer had to fear living out their

retirement years in fear of poverty.

Therefore, the social security payroll tax has been used to provide benefits to

those who otherwise would have little means of support, and as of this writing,

there has never been a year when Social Security benefits were not paid due to

lack of Social Security income. (Boskin p.122) PAYING

OUT BENEFITSSocial

Security benefits increased 142% in the period between 1950-1972. not only the

elderly, but many of the survivers, the widows and children, of those who paid

into the Social Security system, have received social security checks. These

checks have paid for the food shelters, and in many instances the college

education of the recipients.

Unlike private insurance firms, the United States Government does not have to

worry about financial failure. Government bonds are considered the safest

investment money can buy-so safe, they are considered “risk free” by many

financial scholars. (Stein p. 198) The ability of the United States Government

to raise money to meet the requirements of the social security should be no more

in doubt than the governments ability to finance the national defense, the

housing programs, the State Department, or any of the other activities that the

federal government gets involved in.

By paying out benefits equally to all participate in Social Security- that is by

not relying so heavily on total payments in making the decision to pay out

benefits, the system is able to pay benefits to people who otherwise may not be

able to afford an insurance program that would provide them with as much

protection. One of the main reasons for the government’s involvement in this

program, is its ability and its desire to provide insurance benefits for the

poor and widowed, who under the private market, might not be able to acquire the

insurance to continue on a financially steady course.

The government, then, is in a totally unique position to pay out benefits that

would be out of the reach of many American families. Another great advantage of

this system, is the ability of the government to adjust the benefits for the

effects of inflation(Robertson p.134)

INFLATION AND SOCIAL SECURITY

Private insurance plans are totally unable to adjust for the effects of

inflation with complete accuracy. In order for an insurance company to make this

adjustment, they would have to be able to see forty-five years into the future,

with twenty-twenty vision. When a private pension plan currently insures the

twenty-year-old worker, it can only guarantee a fixed income when the worker

reaches sixty-five and a fixed income is a prime victim of inflation (Robertson

p.332) In order to adjust for that inflation, the private insurance firm would

have to be able to predict what the inflation rate will be from the moment the

worker is insured until the day he dies, and then make the complex adjustments

necessary to reflect this in the pension plan. An inflation estimate that is too

small will result in the erosion of the workers retirement benefits.

Because the government, unlike the private insurance firm, can guarantee that it

will exist well into the future, and will have the continued income of the

Social Security tax to draw upon, it can make on-the-spot adjustments for

changes in the inflation rate. Some adjustments, in fact, have been automatic in

the recent years, therefore relieving the pensioners of the periodic worry of

whether this years benefits would be adjusted, or whether the level of payments

would remain stable, thereby, relative to the cost of living, making them poorer

that ever before(Stein p.28).

In the face of the government’s ability to make those necessary adjustments and

to continually finance the Social Security program, many opponents of the system

argue that the government programs are driving out the private insurance

industry. The statistics remain otherwise.

SOCIAL SECURITY FINANCING

The social security tax is one of the fewest taxes in the United States, and the

only federal tax in the country, that is given for a specific purpose. All other

taxes are put into another fund, so that welfare programs, defense, space

projects, and the other categories of government spending are all financed from

one giant, uncategorized bowl of tax revenues(boskin p.62).

When the Social Security system was first established, it was felt that a direct

payroll tax, based on the pay of the worker and paid both by employer and

employee, would be the fairest way for the people that were currently working to

pay benefits to those who weren’t working, as well as to provide for some future

requirements and disabilities. Therefore, a specially constructed payroll tax

was used to fund the program.

By measuring the amount taken in by the tax to the amount, not only that is

taken out, but to the amount that will be taken out in future years, opponents

of the Social Security system make the case that the system will be unable to

keep itself in such a manner indefinitely. And, if Social Security were a

private insurance program, it wouldn’t. But the fact is that Social Security is

not a private program. it is funded by the government.

Further, the government is in a unique position to change the laws of commerce

and contract to adjust the system, making it more responsive to the needs of the

retired, which, in turn, would reduce their need for the Social Security

benefits. For example, the United states Government should raise the mandatory

retirement age. By raising the age to sixty-eight, the Social Security System

could delay paying out benefits for several years to thousands of people, saving

the system a significant amount of money in benefits.

For these reasons, the government is in a position which cannot be compared to

private industry. In this sense, looking at social security as an insurance

program and comparing it to other insurance programs in the private system could

easily give the impression that the system is gong bankrupt, when in the reality

it isn’t.

THE FUTURE OF SOCIAL SECURITY

The thing to keep in mind about the Social Security system, then, is this: the

system itself is in no fundamental danger of collapse. There is only temporary,

cash flow situation that must be carefully looked at. The federal government

pays out 4.5 billion more in Social Security benefits as it collects in taxes

every year. In fact, $4.5 billion is a small price, compared to the other

programs the federal government now finances from general revenue. Besides

tapping the general revenue fund and raising the retirement limit to 68 or even

70,the government has the option of raising the Social Security tax or even

reducing the benefits slightly. The government has so many options with regard

to financing the benefits that the question becomes of the cash management, not

quite as significant as the huge deficits that the Social Security has been

accused of having.

The government is already under way to help alleviate this cash flow problem.

Public officials have debated which of the various ways would help best serve

the public interest, and legislative action has been taken that would ultimately

result of the Social Security system to a positive cash base. This shift would

provide the workers of America with the same benefits they have been guaranteed

since 1935- and have been paid, and expanded ever since. The social security

system has withstood forty years of changing economic conditions and greater

concern of public welfare. What would replace the system, if the critics had

their way?

SOCIAL SECURITY PERSPECTIVES

The social security system has saved an untold number of people from disaster

throughout many years. Many of the nations old people- some as young as sixty-

two, a few over a hundred, live from Social Security paycheck to Social

security paycheck, with this government program as their livelihood. There can

be no doubt that social security has made a tremendous effort to alleviate a lot

of suffering that has occurred, even in recent times.

The Social Security act was one of the cornerstones of Roosevelt’s new deal

program, and it is one of who’s necessity has been proven, and whose usefulness

has allowed it to live. Like all the other new deal projects, Social Security

was never meant to show a financial profit, It was meant to show a profit only

in the amount of human suffering, It was able to lift. The social security

program cannot be measured in the same manner that a private program can be

evaluated in, because it is a governmental welfare program. which doesn’t mean

that it acts in competition with private programs, that was never its intent.

The social security administration has written:

“Today the American economic system has produced relatively full employment,

widespread ownership property, and a rapidly increasing standard of living for

the majority of Americans. It has developed a threefold structure to prevent

economic insecurity: a public social objectives, mutual protection through

private employee-benefit plans to bring the added strength of voluntary of group

action: and private savings and other individual action to achieve the greatest

range of choice”.

One only has to look at the number of people, and the amount of money, that

those who are recipients of Social security effect, and the advantages of Social

Security become obvious: it has taken a group of people who have traditionally

been a financial burden on society, and provided a program that they have

contributed a little to their own financial well being. the amount of dignity

and self respect these people have gained cannot be measured in dollars.