Social Security Is Fundamentally Flawed

___ recent years many analysts have pointed out Social Security's fundamental structural flaws. Social

Security is a pay-as-you-go system. Whereas contributions ___ a private pension plan are invested ___

earning assets, Social Security taxes are not. They are paid ___ immediately ___ benefits. Any surplus is not

saved or invested ___ pensioners. Those funds are borrowed ___ the federal government to pay current

operating expenses and replaced ___ government bonds.

___ common usage a trust fund is an estate ___ money and securities held ___ trust ___ its beneficiaries.

The Social Security Trust Fund is quite different. It is an accounting ___ the difference ___ tax and benefit

flows. When taxes exceed benefits, the federal government lends itself the excess ___ return ___ an

interest-paying bond, an IOU that it issues ___ itself. The government then spends its new funds ___

unrelated projects such as bridge repairs, defense, or food stamps. The funds are not invested ___ the

benefit ___ present or future retirees.

When the time comes ___ Social Security to cash ___ its IOUs to pay benefits, the federal government,

which holds no earmarked assets ___ that contingency, pays the bill ___ issuing additional debt or raising

taxes. The trust fund is not a store of wealth. It is an accounting of how much the government owes itself and

how much it will have to tax the economy in order to pay itself. It is a liability, not an asset.

The Social Security system's own actuaries estimate that Social Security's Old-Age and Survivors Insurance

and Disability Insurance (OASDI) Trust Funds will be bankrupt in 2030. However, that estimate may not

indicate how soon the financial crisis will really occur. The real crisis starts not when the trust fund runs ___,

but when it peaks and starts to decline. At that point the trust fund must start turning in bonds ___ the federal

government to obtain the cash needed to finance benefits. But the federal government has no cash or other

assets ___ which to pay ___ those bonds. It can obtain the cash only ___ borrowing and running a bigger

deficit, increasing taxes, or cutting other government spending. But those problematic responses, even if

implemented, will not appreciably lessen Social Security's financial peril, ___ the system's flaws are more

fundamental.

Exercise 5. Complete the texts with active vocabulary

Text 1

A) taxes they pay

B) retirement system

C) retirement benefits

D) enacted

E) criminal charges

F) employees and employers

G) to finance their retirement

H) a payroll tax

I) half the cost

J) before-tax income

K) to fund their retirement benefits

Social Security is a fundamentally flawed system. If a private firm offered such a 1. ___________ and made

the same claims for it that the federal government makes for Social Security, that firm would quickly become

a poster child for corporate fraud, and its managers would soon be convicted of 2._____________.

Ever since Social Security was 3. __________ in 1935 Americans have been told that their “contributions”

are being deposited into their own account to pay for their 4.______________.

We cannot find any serious study that estimates how many people really believe that the 5. ____________

to Social Security are being saved and invested 6.______________, instead of being spent immediately by

politicians, as is actually the case. But it is clear that many do believe that they have a personal Social

Security account containing the money 7. _________________.

The other fraudulent claim made about Social Security (again, from the very beginning of the program) is

that employees pay only 8.______________, with employers paying the other half. This claim is widely seen

as plausible because the legislation authorizing Social Security clearly stipulates that the required payments

are to be split evenly between 9.______________. If this were true, then employees would now be paying

6.2 percent of their 10._______________ up to $102,000 a year; employers would match that amount.

As any good student in an economic-principles course should learn, however, the amount of 11.

_______________ actually paid by employees and employers has absolutely nothing to do with what

politicians mandate in legislation.

Text 2

A) a transfer of wealth

B) pay-as-you-go system

C) the American Social Security system

D) a payroll tax

E) beneficiaries

F) Benefits

G) a rate of return

H) The amount

I) retirement

J) capital accumulation

To understand the issues surrounding todayʼs Social Security program, one must understand a little history:

First, 1. ___________ itself is a relatively new construct, having emerged from the Industrial Revolution in

the mid-1800s. For the first time in history, workers reached a point at which they were “too weak to work but

not yet weak enough to die.”

In the United States the Great Depression—not the Industrial Revolution—was the primary catalyst for

todayʼs Social Security system. The current 2. _____________ was designed during the Great Depression to

be 3. _____________ from the wealthy (those who had jobs) to the poor (those who did not have jobs).

The worldʼs 135 Social Security systems, whether practiced in Germany, Chile, or the United States, are

financed through 4._____________. 5. ___________ paid to todayʼs retirees are financed by taxes from

todayʼs workers; benefits to be paid to todayʼs workers will be financed by taxes from tomorrowʼs workers. It

is nothing more and nothing less than the intergenerational transfer of wealth, from the younger workers to

older retirees through a payroll tax. Thereʼs no saving, no investing, no 6._____________, just a transfer.

What once made 7. _______________ effective has brought about its potential for downfall. 8. ___________

that can be paid with a payroll tax structure in any year to 9. _______________ is the amount of payroll that

it has, times the tax rate on that payroll. The amount that can be paid the next year, holding a tax rate

constant, can increase by no more than the amount that payroll increases. In the U.S. approximately over

the past 50 years, that increase has been a little less than 1.5% in real terms—roughly equivalent to saving

and investing for oneʼs retirement while getting 10. _____________ of less than 1.5%. This shows the

difference in capital accumulation between a pay-as-you-go system and a market-based system.