Issues and Global Trends in Social Security
In this section we elaborate on the following:
Reasons for funding gaps in Social Security and Medicare
Current actuarial projections
International views on social insurance
The trend toward privatization
Issues in Social Security
During the 2000 presidential election campaign, Social Security financing was the most heated issue, with the debate focusing on privatization and moving away from the pay-as-you-go system.
When the stock market was booming and everyone believed they could do better by investing their own funds, the idea of moving away from the current system became very appealing; however, their tune changed after the large decline in the stock market. The immediate big issue in early 2006 was how to help those who could not pay the deductibles and coinsurance for the new drug program. The major funding problems are still at issue.
Social Security was originally designed to operate with advance funding, but for many years they have operated on an unfunded, pay-as-you-go basis. As a result, this generation of workers is paying for the benefits of current beneficiaries. Social Security taxes have increased much faster than the general level of prices and even faster than the cost of health care during the past two decades.
Issues in Social Security (Continued)
As depicted in Figure 18.2 "Number of Workers per OASDI Beneficiary", the number of retired workers has increased faster than the number of those working.
Retired workers are concerned about the certainty of their benefits and future required tax rates. The current generation of taxpayers has serious doubts about the ability of the Social Security system to deliver benefits at current inflation-adjusted levels.
Figure 18.2 Number of Workers per OASDI Beneficiary
In 1945, there were forty-two workers per retiree. Currently, this has decreased to approximately three workers per retiree and is expected to decline to two by 2020.
The Social Security funding burden is being borne by a shrinking sector of society because birth rates have declined and longevity has increased. This trend will continue as the baby boomers move out of the work force and into retirement.
Issues in Social Security (Continued)
Such doubts are understandable, considering recent problems of the OASI program, which is by far the largest part of the system. Each year, the trustees of the Social Security and Medicare trust funds report on the funds’ status and their projected condition over the next seventy-five years.
The 2008 Annual Reports continue to show that both Social Security needs serious reform.  Both programs face a long-term financing gap. Closing the gap between monies going into the Social Security funds and monies coming out of the funds will be a challenge. It will force the government to come up with innovative solutions to fixing the long-term deficits.
Whether the objective of the Social Security program should be to provide a “floor of protection” or a “reasonable level of living” remains debatable. Reform will require agreement, however, by politicians and the public on not only what benefits citizens are entitled to, but what benefits taxpayers are willing to fund.
Global Trends in Social Security Systems
In many countries, financing the government social security system has become increasingly difficult for several reasons.
Benefit levels have increased in many nations, to the point where the tax rates necessary to support benefits are at an all-time high.
For example, free or very-low-cost medical care may be available to everyone, disability benefits may require little proof of inability to work, and generous disability payments may result in the moral hazard of malingering.
Global Trends in Social Security Systems (Continued)
Experts anticipate a shift from public sector social insurance plans to private sector plans, especially for retirement benefits.
Private sector organizations, particularly insurance companies, have successfully managed retirement savings and income for decades and are in a position to improve management and funding practices.
The trend toward privatization is worldwide, including both industrialized and developing countries. The potential for market expansion for insurers and other financial institutions is tremendous.
Several countries have already begun to privatize the social security system, namely, Chile, Peru, Mexico, Italy, and Japan. In Chile (beginning in 1981) and Peru (in 1993), for example, workers are required to contribute to their own retirement fund, and contributions are invested by a private pension fund manager selected by the worker. In both these countries, the prefunded privatized system appears to be working well.
Some countries also are moving toward privatized medical care systems.
Case Study 05- Does Privatization Provide a More Equitable Solution
Please download and study the case study entitled “Does Privatization Provide a More Equitable Solution” from the module resources section for this module.
The case study discusses the cases for against the privatization of the Social Security system in the United States.
Case Study 06 - The Future of Social Security
Please download and study the case study entitled “The Future of Social Security” from the module resources section for this module.
The case study discusses where experts believe the Social Security system is going in the United States.
In this section you studied problems with the Social Security program in the United States and examples of global trends in administering social insurance:
During the past two decades, Social Security taxes have increased faster than the general level of prices and the cost of health care.
Extended life expectancies and lower birth rates have resulted in the funding burden being borne by a shrinking sector of society (three workers per retiree).
Seventy-five-year actuarial projections issued annually by the Social Security and Medicare trustees show long-term funding deficits, with the program running out of money in the next thirty-two years.
Global problems with social insurance institutions mirror those of the United States.
Privatization of social security has worked well in Chile and Peru.
The trend toward at least partial privatization and prefunding is worldwide.
1. Do you think Social Security coverage should be voluntary? Explain.
2. Would you favor privatization of the Social Security retirement program, as other countries have done? Explain.
3. What solutions, other than privatization, would alleviate some of the funding problems of Social Security in the United States?
4. Should health insurance be expanded to cover everyone for a broad array of medical services, without regard to age or work history? Do you favor expanding health insurance into a national health insurance plan?
 Social Security and Medicare Board of Trustees’ Summary of the 2008 Annual Reports on the status of the Social Security and Medicare Programs. The goal of the public trustees is to
approach the current state of Social Security and Medicare in a nonpartisan way. They aim to ensure the integrity of the reports, both in methods of preparation and in the credibility of the information they contain. Realizing that numerous assumptions must be made to predict the future condition of the funds, the trustees prepare these reports because they believe the reports paint the most reliable picture available today. This summary is available online at.
 2005 OASDI Trustees Report, Section II: Overview,http://www.ssa.gov/OACT/TR/TR02/II_highlights.html#76460.
END of UNIT
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