Saturday, June 14, 2008

The Uncertain Future of Entitlement Programs

The uncertain future of the Social Security system provides many young adults with an additional incentive to use personal investments to save for their retirement. Social Security is a government entitlement program that provides financial payments to elderly and disabled Americans. Entitlement programs provide benefits to recipients who by law are entitled to receive benefits if the meet the eligibility requirements. Prior to Social Security, many elderly and disabled Americans lacked enough income to buy the necessities of life. Since the establishment of the Social Security program, however, the poverty rate for elderly Americans has been lower than for the rest of the population.

Many people think Social Security is a federal savings plan that should provide them with a comfortable retirement. This was never its intention, however. Its purpose has always been to help ensure Americans have enough income to buy the necessities of life, even if they are no longer able to earn very much income from jobs. It was designed as a social safety net to keep people out of poverty.

The funds used to provide Social Security benefits are obtained from taxes on workers and employers. Current benefits are funded with taxes on current workers. This structure works well if the number of workers grows at the same rate or faster than the number of beneficiaries. The demographics of the baby boom generation create a problem for the Social Security system, however. The baby boom refers to the increase in the global population from 1946-1964. As baby-boomers retire, the number of beneficiaries increases significantly faster than the number of workers paying into the system.

Proposed reforms of the Social Security system are controversial. Many Americans expect to receive Social Security benefits that are at least as generous as the payments given to previous generations. Americans are reluctant to pay additional taxes, however. In order to maintain the Social Security program in its current structure, however, taxes must be increased or the government must borrow from future generations by increasing the public debt. Another option is to reduce Social Security benefits.

The uncertainty of the future of the Social Security system provides an additional incentive to start saving early for one’s retirement. Social Security benefits, even in today’s modest amounts, may not be available to all Americans in the future.

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