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BC Professor Examines United States Social Security Problems

Most college students don’t think about retirement, let alone the structure of the United States’ Social Security system. Yet, with Election Day upon us, America’s dwindling Social Security Trust Fund should be a real concern for many, if not all Americans. Experts predict that the Social Security Trust Fund will run out by the mid 2030’s, requiring at least a 25% cut in benefits. And considering that middle class wages are stagnating, the average US citizen is living longer than ever before, and healthcare costs are growing exponentially, more and more US citizens, now and in the future, are relying on welfare benefits after retirement.

With existing funds running out and the working class supporting a large generation of retirees, what possible options does the United States face in regards to fixing its welfare problem?

Alicia Munnell, the director of the Center for Retirement Research at BC as well as a former assistant to the Secretary of the Treasury of United States, has done extensive research on the increasingly clear problems with social security.

Professor Munnell contends that the discourse around Social Security has changed from “the traditional discussion focused on the rising cost of the program and the need to reduce spending” to a recognition of the benefits of social security by both party’s candidates, although she maintains that, “expansion (of social security benefits) is unlikely to take the form of an across-the-board raise for all participants.”

Rather, Prof. Munnell argues, “Targeted changes are more likely, such as increased benefits for widows, for those who take time out of the labor force to care for children, and for those with a history of very low wages.”

In an article she wrote for the Washington Post in early October, Munnell outlines two potential solutions to the 75-year old deficit faced by America’s social security system. The first is a raise in the payroll tax, which addresses the deficit directly.

Prof. Munnell asserts, “if the payroll tax rate were raised immediately by roughly 2.66 percentage points—1.33 percentage points each for the employee and the employer—the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2090.”

Munnell’s argument here is less of a permanent solution, but an increase in the payroll tax would buy time for the government to redesign the welfare system.

In the same article Munnell also establishes a second solution: an increase in the payroll base. In her words, “other options exist for increasing revenue to eliminate the deficit, such as broadening the payroll tax base by including the value of employer-paid health insurance premiums or increasing the cap on taxable earnings — currently $118,500 — to cover, say, 90 percent of earnings”.

Both options that Professor Munnell proposes attempt to solve a problem that she refers to as the "legacy burden."

Prof. Munnell explains the current state of affairs, “We have ended up with a mostly pay-as-you-go system, because we gave away to early cohorts the trust fund that otherwise would have accumulated.”

Commenting further, Professor Munnell said, “Many of the early beneficiaries had fought in World War I and had suffered losses in the Great Depression, so the decision to pay benefits far in excess of contributions to those early retirees may have been justified on public policy grounds. But the cost of that decision was to forego the buildup of a trust fund whose accumulated interest could have covered a substantial part of today’s benefits.”

In short, Professor Munnell sees the demand for benefits in social security and recognizes that in order to increase or even maintain those benefits the US must first tackle the legacy debt, which manifests itself as a 75 year long deficit.

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