The Affect of Social Security in the United States


The social welfare in the United States has been shaped by tradition and by the changes in economic and social development. The United States has transitioned from an agriculture-based economy to fully developed economy characterized by industrialization, urbanization and specialization. The result of these developments had been the surge in the number of employees, who are dependent on a continuous flow of income. The rise of social insurance traces its root from the world war and upon the realization that industrialization in itself presented various risks to the people. The existence of social security has economic and social implications. The welfare is also faced with challenges, demographic and financial (Kotlikoff, 1996). This research paper will discuss the social security system in the United States by describing its history, implication to society and the challenges faced by the welfare.

History of social security

The social security Act was officially passed in 1935 although programs with elements similar to those of the welfare had long been in existence. After the civil war, the state recognized the need to aid the survivors of the war; the widows, orphans and injured soldiers. A pension program was developed to aid these victims. The industrial revolution, which happened between 1890 and 1920, caused a change of the social fabric. It led to the creation of more urban centers that caused the masses to shift from the farm to the towns. Urbanization led to the shift of the family unit from an extended type to a nuclear family. Families in the rural areas had extended families where their old and ill were taken care of in the family setting. Urbanization has created nuclear families where the elderly, disabled and ill had been neglected. Urbanization led to improved health programs and sanitation. This led to improvement of health led to an increase in lifespans. This had led to a surge in the number of elderly citizens who needed a fund that would ensure a steady flow of income. The federal government recognized that the social insurance was necessary to resolve the problems that came with industrialization (Puckett, 2010).

The approach changed from an assistive one to one that appreciated the help as a matter of right. The worker’s compensation law was first enacted in 1911. This law-required employer to be responsible for injuries caused to their employees while performing their duties. Retirement programs had also been established where the employees received financial benefits after retirement. Benefits for medical care were provided for men serving in the armed forces following World War 1. During the great depression of 1930, the federal government realized the need to help the communities because neither they nor the private sectors had sufficient funds to cater for the rising need for help among the Americans. In 1932, loans and grants were given by the federal government to give relief. This followed the establishment of an emergency program that would be used to compensate American in the event of such a depression or similar event (Puckett, 2010).

Franklin Roosevelt appointed an economic committee in 1935, which saw the enactment of the social security Act that was signed into law in the same year, August 14th. Old age and unemployment programs had been developed as a result. These programs had been informed by the consequences of the great depression, which had left the elderly without their pension savings and the large number of people who had lost their jobs. There was need to provide for the elderly and the unemployed. Social security operations were in 1935 defined as able to provide benefits to the elderly, unemployed and for public assistance (Puckett, 2010).

The development of social security was largely a reaction to the problems that hit the country from time to time. Reforms in the welfare are formulated to respond to specific problems as they came up. The development of the welfare is decentralized where the federal government, state and local government are involved in its development in different capacities and not in a synchronized manner. The private sector is largely influential towards the fund. The private sector maintains employment pensions for their employees, illness payments and in providing medical care to its employees.

The effect of the social security

The social security dependence index has been increasing for the periods between 2000 and 2009. This index is calculated by considering the percentage of those making claims in the population, the amount of payments made from the total earnings and average income made in security payments.

Economic impact

The national payment level into the program was in 2009, estimate as $675 billion. When the multiplier of 1.8 is applied to this sum, the country generates a total output of $1.2 trillion in national output. This amount has led to an increase in the country’s development level as well as generating employment opportunities. Approximately 8.4 million jobs were created in 2009 as a direct result of the social security (Gallardo & Myles, 2011). Debates have been focused on the negative impact that social security has on employment. It has been faulted at discouraging people from looking for gainful employment. It has been said that it reduces the propensity to work and to save. The 2009 statistics indicate that this has changed leading to the creation of more job opportunities. This is attributed to the fact that social security has helped to maintain national demand for goods and services, which has the direct effect of causing manufacturers and companies to start new ventures. The productive potential of the people is also increased and creates conditions in which the market can thrive (Gallardo & Myles, 2011).

Social insurance

The welfare has enabled the citizens’ secure better standards of living. Citizens no longer have to depend on their savings and income to cater for life after retirement. The retirees who had been members of the program during the years of employment achieve income security. This program is necessary in planning as it becomes necessary for people to make long-term goal for themselves and for their families. The benefits that are brought about by income security is that demand for products becomes predictable while the labor force becomes increasingly productive and flexible. The program has also been helpful in securing better health care for the old. This has led to the increase in the lifespan age for the elderly. The fund gives assistive services when contributors fall ill, lose their jobs and employ injuries (Puckett, 2010).

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Challenges facing social security in the United States

Following the recent economic crisis, social security in 2009 nearly exhausted its annual surplus for the first time in 25 years. This is attributed to the fact that the recession had led to the retirement of the largest number of employees in any given period. The recession has negatively affected the scheme, which has made massive losses. Changes in demographic patterns have contributed to the budget deficit being experienced by the fund. The average lifespan has increased to 67. The losses are feared to worsen if the economy did not recover from the slump. The chief actuary of the social security, Stephen Goss has predicted that the scheme would be recording losses for the next two years (Wolf, 2010).

Social security had never had to pay as many benefits as it paid in 2009. This is because the scheme had been used to collecting payment from citizens since 1984. The government to pay for other programs uses the $2.5 trillion accumulated by the scheme. This has forced the scheme to borrow funds, increase taxes and spend less to make the benefit payments being claimed from its beneficiaries. The scheme is expected to experience the same kind of problem long after the recession has ended. This is because the labor force has evolved to more baby boomers that leave work at will, within the next ten years. The increase in the number of retirement by the baby boomers puts a strain on the system. To curb the losses and to make up for the difference between benefits owed and tax collection, the social security has to borrow funds from other programs (Wolf, 2010).

The US government has remained quite on its plan to resolve the system’s long-term deficit. The future of the systems in the hands of the government remains uncertain. Workers remain uncertain about the possibility of a benefit cut if they retired. Privatization as will be discussed later in the paper informs the workers of their contributions in later dates that would help resolve the system’s fiscal challenges (Kotlikoff, 1996).

There is lack of information on the benefits that workers would receive after retirement. Despite the fact that the social security has promised to issue the US workforce with account statements with calculations of their benefits, this would mean that the systems accepted its liability to pay the retirees. The systems cannot afford to make such a commitment owing to the fact that it has a deficit of funds to pay for benefits (Kotlikoff, 1996).

Adjustments for social security

Permanent adjustments, according to Alan Greenspan, ought to be made to ensure that there were a sufficient number of employees who would be paying into the scheme even with the rapid retirement of the baby boomers. The scheme faces a couple of options to deal with the effect of baby boomers. First, the retirement age could be raised to give the scheme time to adjust to the rush for retirement. Secondly, the system could also explore the option of cutting the benefits payable so that it can first rectify the problems currently being faced by the fund. Thirdly, the system could look into the possibility of increasing taxes. An early adjustment of the system would help prepare the beneficiaries for the changes. It would also ensure that the fund would recover to a surplus as opposed to the current deficit (Bosworth and Burtless, 2000).

Proposed solutions to the problems facing social security

  1. Privatization of the system could lead to an increase in the money stock available in the economy. This would be after a part of the system’s fund is invested. An increase in money stock has the effect of reducing interest rates. Low interest rates encourage capital spending, which in turn increases production and lowers the unit cost of goods. This chain process indicates economic growth that is stimulated by investment in the event privatization. (Gallardo and Myles 2011)
  2. Stock market investment using the system’s fund. The volatility of the stock market would result to negative returns for ignorant retirees. This results in the reduced consumer spending due to reduction of the real gross domestic product.
  3. Tax and payment reforms. The proposal is that the retirees get taxed for payment exceeding their contribution in the same way income is taxed. Currently retirees pay tax for amounts that exceed a predetermined limit. The new system would also increase the tax rate by two percent. Tax increases reduce the amount available for spending due to a reduction in the disposable income. This proposal might affect the economy negatively as reduced spending worsens the employment situation; more people are laid off due to reduced demand and consequently production.
  4. Increase in the retirement age from sixty two to sixty seven. This proposal is informed by the fact that Americans are living longer and are still able to work. Increasing the working duration expands the employee’s real gross domestic product.
  5. Extension of social security to include those who are currently excluded such as government and state employees. This move would increase the system’s revenue by an estimate ten percent. The economic effect of such a move would be reduced spending due to the reduction in the gross domestic product. Reduced spending has negative effects to the economy as the end result is increased unemployment. The reduction in disposable income per household results from the continued payment into the fund by these employees, state and government employee, who continue to work even after retiring from their state and government jobs. This would be a case of double contribution. This option just like the tax increases may increase the system’s revenue, but in the long run, it impacts the economy negatively (Kotikoff, 1996).

Privatization is thus, the best option for the system. Privatization would transform the system into a private mandatory savings plan. The immediate result of such action, as illustrated by chile, is the reduction of distortions in the labor force. Secondly, it alters resource distribution, risk sharing and spending by the retirees. Currently, the system does not give its employees information relating to the benefits that they are likely to receive. A privatized system would ensure that the workers would receive account statements routinely (Bosworth & Burtless, 2000).


Catalyzed by the great depression of the 1930, the social security agency was enacted into law in 1935. The agency was established to respond to the changes in economic and social status of the citizens of the United States. Today, the agency has provided assistive benefits to the elderly, sick, unemployed and even children who lack parental provision. The agency has had major changes over the years. Again, administrative challenges and demographic changes has caused the agency to have a deficit fund base that is insufficient to pay benefits for the increasing numbers of retirees. Privatization has been stated by various scholars as one of the solutions to the system’s problems. With privatization of the system, the deficit would be resolved by having the amount collected into the fund invested into other programs. Reforms for social security are being pushed to encourage a saving culture. These savings are then used to finance investments in the private and public sectors. These investments are useful ingredients to stimulate economic growth (Engen & Gale, 2007).

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