PSC 101 Social Security Policy

Summary

This transcript delves into the current challenges facing Social Security in the United States, specifically focusing on the issues of a declining ratio of workers to beneficiaries, and the projected depletion of funds by 2034. It explains the historical context of Social Security's inception during the Great Depression and outlines the potential solutions to the funding shortfall, including raising payroll taxes, eliminating the income cap for taxation, increasing the retirement age, investing in stocks, and leveraging immigration. The piece highlights the necessity of reform to prevent significant cuts to benefits and emphasizes a mix of approaches to ensure the program's sustainability through the 21st century.

Highlights

• The ratio of workers to beneficiaries has nearly halved since 1960. 😲
• Without reforms, beneficiaries may face a 20% cut in benefits by 2034. 🆘
• Raising payroll taxes by just .41% could eliminate most of the deficit. ⚖️
• Eliminating the income cap for taxes could cover 73% of the shortfall. 💡
• Raising the retirement age proposed as a way to cut costs. 📅
• Investing a portion of funds in stocks could increase returns. 📈
• Greater immigration particularly of working age adults suggested as a solution. 🧑‍💼

Key Takeaways

• Social Security faces a looming crisis with funds depleting by 2034 if no action is taken. ⏰
• The decline in workers per beneficiary is creating a financial squeeze on the system. 📉
• Solutions include raising payroll taxes slightly and eliminating the income cap. 🎯
• Raising the retirement age could address 37% of the shortfall, albeit controversially. 🏋️
• Investing in stocks could boost fund returns, though it's considered risky. 📊
• Increasing immigration can help sustain the labor force contributing to Social Security. 🌍
• A mix of incremental reforms is likely the best path forward to sustainability. 🔧

Overview

Social Security is facing a critical juncture as the ratio of workers to beneficiaries has significantly declined. This demographic shift means fewer workers are supporting each retiree, putting immense pressure on the system's financial reserves. The trust funds are expected to be depleted by 2034, leading to potential benefit cuts that could deeply affect millions.

Historically, Social Security was a response to the economic challenges of the Great Depression, designed to provide for the elderly who could no longer rely on familial support. Today, with the population living longer and having fewer children, the system's sustainability is threatened, necessitating urgent reforms.

Potential solutions to this crisis include adjusting payroll tax rates, removing income caps, reconsidering retirement ages, and diversifying investments into stocks. Increasing immigration and targeting younger adults could also bolster the workforce. Each approach has pros and cons, but together they offer a roadmap to preserving Social Security for future generations.

Chapters

• 00:00 - 00:30: Introduction to Social Security Dilemma The chapter introduces the Social Security dilemma in the U.S., highlighting three main issues: increased life expectancy, lower birth rates, and a declining worker-to-beneficiary ratio. It also notes that Social Security consists of two distinct funds.
• 00:30 - 01:30: Historical Context of Social Security Social Security originated during the Great Depression to address poverty among the elderly. Families found it challenging to support the elderly due to smaller family sizes and an increasingly urbanized society. This led to the establishment of trust funds such as the Old-Age and Survivors Insurance (OASI) Trust Fund, and the Disability Insurance (DI) Trust Fund.
• 01:30 - 02:00: Challenges Facing Social Security Today The chapter discusses the economic challenges faced by the Social Security system today. It highlights how having children has become an economic liability for parents, resulting in fewer births and consequently, fewer individuals for the elderly to rely on in their later years. This demographic shift poses a challenge to the sustainability of Social Security. Additionally, the chapter references the impact of the Great Depression, which saw unemployment rates soar to around 25% by 1932, further exacerbating the difficulties faced by the elderly. It was amidst these hardships that Social Security was created in 1935 to provide economic support to the elderly.
• 02:00 - 03:30: Financial Details and Predictions The chapter discusses the challenges facing Social Security in the 21st century, highlighting the decline in the ratio of workers to beneficiaries from 5.1 in 1960 to 2.8 in 2022. This significant decrease suggests a nearly 50% decline in worker-to-beneficiary ratios. The chapter suggests that if current trends continue, the gap between Social Security's outlays and income will continue to widen, emphasizing the financial difficulties the system is likely to face.
• 03:30 - 07:00: Possible Solutions to the Social Security Crisis This chapter discusses the financial dynamics of Social Security, where outlays refer to the payments made to recipients, and income comes from payroll taxes and interest earned on trust fund investments. By 2034, the Social Security trust fund is projected to become depleted, indicating a looming crisis that necessitates finding viable solutions.
• 14:00 - 16:00: Conclusion and Call to Action The chapter discusses the looming financial challenges facing a program where costs are projected to exceed income by 437 billion once the trust funds are depleted. It highlights the potential consequences, including a 20% reduction in benefits by the year 2034 if no legislative changes are made. The chapter emphasizes the necessity for action, warning that inaction would result in substantial cuts to benefits.

PSC 101 Social Security Policy Transcription

• 00:00 - 00:30 hello it's the Social Security dilemma so what troubles Social Security in the United States today first people live longer second people have fewer children and third the result of all this is that the ratio of workers to beneficiaries is declining first we have to understand what Social Security really is social security consists of two distinct funds
• 00:30 - 01:00 the old age and survivors Insurance trust fund abbreviated as oasi and the disability insurance trust fund di Social Security was created during the Great Depression because of poverty among the elderly as their immediate families found it harder or impossible to provide for them partly because people started having fewer children and partly because the social setting became more urbanized so in an urban setting
• 01:00 - 01:30 children are an economic liability so parents are having fewer children and in their old age they have fewer people to rely on to provide for them and also with the onset of the Great Depression the unemployment rate skyrocketed by 1932 it reached approximately 25% so the elderly really fell on Hard Times which is why Social Security was created in 1935
• 01:30 - 02:00 now on to the actual Troubles of Social Security in the 21st century way back in 1960 there were 5.1 workers per beneficiary but by 2022 there were only 2.8 workers per beneficiary so nearly a 50% decline in the ratio of workers per beneficiaries as it stands now the gap between outlays and income will continue continue to grow that is to say the
• 02:00 - 02:30 outlays are the payments to Social Security recipients and the income is what comes into the trust fund from two sources one Social Security taxes the payroll tax and two uh the interest that Social Security trust fund is earning on its Investments so by 2034 the last year before funds are expected to become depleted the Social Security Tres expect
• 02:30 - 03:00 that the costs will exceed income by 437 billion when the trust funds are depleted benefits will be limited by the income assigned to the program and absent changes to law benefits would be reduced by 20% so if nothing is done around year 2034 benefits would be reduced by 20% so we see that inaction is not an option because this this would be a huge cut to
• 03:00 - 03:30 benefits and may plunge millions of seniors into poverty so something needs to be done what is going on here in addition to a low ratio of workers per beneficiaries the other thing that's that is going on here is that old people live longer in 1960 an individual who reached age 65 was expected to live to 80 on average today that person is
• 03:30 - 04:00 expected to live to 85 Social Security old agent survivors Insurance trust fund began running cash deficits in 2010 the combined trust fund has been running deficits since then excluding interest social secuity cost has exceeded its non-interest income since like I said 2010 in 201 21 Social Security's total
• 04:00 - 04:30 cost exceeded its total income that is to say the payroll tax plus the interest that the trust fund has been earning on its Investments so for the past past couple of years we see that Social Security uh old agent survivors Insurance trust fund has been running a deficit even if even after you consider the interest that
• 04:30 - 05:00 it's making on its Investments social secuity actually projected uh that the fund will be exhausted around 2034 35 so bottom line is without making any changes the current level of benefits cannot be maintained past the mid 2030s Investopedia has a very good summary of of what can be done to fix
• 05:00 - 05:30 Social Security and so what I present here is essentially information from Investopedia except for the last point which it does not include and we'll get to it in a few moments so I thought why reinvent the wheel if someone has already collected a bunch of important information that goes right to the heart of this matter so first we can raise the payroll tax rates payroll taxes would have to rise by .41 percentage points to
• 05:30 - 06:00 15.81% so by just raising the payroll tax by Less Than 3 and a half% we can basically eliminate the projected deficit uh to the end of the 21st century so this would ensure that the program has the funding to pay scheduled benefits in full over that time frame the payroll tax rate is
• 06:00 - 06:30 12.4% as of 2023 with workers contributing 6.2% and employers matching that contribution second we can uh eliminate the cap on taxable income even though this cap has been there for the longest time since basically since the funding of the program uh we can remove it so the cap
• 06:30 - 07:00 in 2024 is $168,600 so imagine a person who earns $168,600 in 2024 pays exactly the same in Social Security taxes as a person who earns 10 times more let's say $1.6 million according to a December 2021 Congressional research service report eliminating the payroll tax while leaving in place the rules that c High earners benefits would address 73% of
• 07:00 - 07:30 the projected shortfall payroll tax rates could then be raised from 12.4% to about 13.3% to eliminate the shortfall in its entirety so what Investopedia is driving at here is that a combined approach of some kind is probably going to be effective where you raise taxes on Social Security only slightly like by one percentage point
• 07:30 - 08:00 and you also eliminate the the cap and that that alone basically solves the issue uh to the end of the century solution number three raise the retirement age people born in 1955 and 1956 will qualify for full benefits at age 67 no later than 2023 some have suggested raising the full retirement age to 69 or 70
• 08:00 - 08:30 effectively creating and across the board benefit benefits cut so it's considered a benefits cut because over your lifetime you will get less and Social Security uh money if you start collecting it later in life the Social Security Administration estimates based on the assumptions in the report that gradually raising the full retirement age to 69 for those born in 1972 or later and increasing it by 1 month every 2 years thereafter would eliminate 30 7% of the system's long-term funding
• 08:30 - 09:00 shortfall the Social Security administration's office of the chief actuary regularly posts estimates of the financial effect on a variety of Social Security reform proposals and Provisions okay so raising retirement age um or specifically age of full Social Security eligibility I think is something that will be seriously considered and most likely implemented some some variation of increasing the retirement ages is probably inevitable given that older
• 09:00 - 09:30 people live longer than ever before invest a portion of trust funds reserves in stocks so Social Security trust funds invest rece receipts that aren't immediately needed to pay benefits in special uh issue US debt obligations so by law they may also Hold marketable Us debt Securities and they've done so in the past special issue debt sold to the Social Security
• 09:30 - 10:00 trust funds may be redeemed at face value at any time in contrast to the treasury's marketable Securities which are only guaranteed to return face value upon Redemption stock market returns have historically outpa those from fixed income Investments on average so some have suggested that the social security trust funds invest a portion of their reserves in stocks most likely through broad Market funds uh exchange traded funds to increase
• 10:00 - 10:30 their investment income So currently by law uh what this means in plain English Social Security trust funds must invest in US Government debt but this law should probably be amended to allow at least a portion of the trust fund money be invested in somewhat higher risk but also higher return uh Securities like the companies that are traded on the stock market I know there's a lot of opposition to it
• 10:30 - 11:00 but I think this would be effective for example people who do not participate in Social Security who have an employer uh 401K matching plan and who do not pay social security taxes they have the freedom to allocate their retirement investments in any which way they wish but when it comes to Social Security recipients the Mantra is that you you should not allow allow Social Security
• 11:00 - 11:30 funds to be invested in greater risk greater return instruments because I mean it's just too risky well again the very fact that people who do not have social security and who have 401ks instead can choose their own uh investment instrument belies the idea that you simply cannot allow seniors or people who are not yet seniors but are who who are still collecting who are
• 11:30 - 12:00 paying Social Security taxes um to invest for themselves to decide how their social security uh taxes should be invested now this Fifth and last point is something that Investopedia does not mention and currently it's politically controversial so if you're listening to this in the mid 2020s obviously you know that the issue of immigration is an important divisive
• 12:00 - 12:30 issue in the United States that in recent years immigration has been increasing and today approximately 14% of the US population are first generation immigrants well one way to keep the labor force growing and to keep Social Security taxes coming is to increase immigration specifically focusing on adults who are young enough to work who do not require the public to pay their education say people between
• 12:30 - 13:00 ages 18 and 40 to increase immigration in that age group particularly people who have a profession who have skills that are needed uh to fill uh gaps in the labor market and that would replenish the Social Security oasi trust fund so we know that the United States in this regard has already done better as a country of immigrants than some other similarly economically developed
• 13:00 - 13:30 countries like Japan which has resisted allowing Mass immigration and we see that the Japanese population has already declined precipitously since 2010 and U it continues to decline and uh the Japanese public debt is even greater than the United States public debt and even countries like Germany which until recently did not have have uh Mass immigration so German
• 13:30 - 14:00 population today is about 85 million which it PS reduced benefits could still be paid from ongoing payroll tax revenue without meaningful Social Security funding changes but the sooner Congress fixes the systems deficits to avert that possibility the better of the system and its recipients will be and