Social security reform

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In the recent past, various stakeholders in the social security sector like the policy makers as well as politicians and academicians, have made serious concerns on the future of the social security in the modern society. The past mistakes in this social security sector like insolvency crisis, have greatly affected this sector for some given period of time, which has had various negative effects on the growth of the economy. These serious negative effects on the economy have caused major financial institutions like World Bank, to intervene in finding suitable solutions to the social security problems.

As a way of trying to find appropriate solutions, which can best address these problems, conferences have been carried out by the various governments, and other concerned bodies have raised concern on the need to reform the social security system. This is in a bid to improve the welfare of the old people in the society, especially after their retirement from active work service. The various reforms that are taking place in social security systems have been made to replace the government arrangements, with privately managed systems.

The private pension arrangements are considered to be more efficient in the way in which they are managed, as they are founded on individual retirement accounts, which are easier to manage than a large pool of workers with not so much defined information. Most of the reform issues in the social security reforms have been focused on its impact on the government’s fiscal accounts, the effects that the reforms could be imposing on the existing pension scheme arrangements, and the general impact of the reforms on the total national savings.

Considering the various researches that have been carried out in this field of social security, little attention has been focused on the effects that the social reform issues would have on the labor market and the economy. The reason for this is because; less attention has been focused on the major reforms issues in the social security sector, and the likely influence on the labor market performance in the general economy.

In reality the social security reforms have an influence of the level of taxes, which are charged on the individuals and the various contributions, which individuals make towards their future retirement. All these factors among others when analyzed have an influence on the labor market and the economic growth. Thus privatization of the social security sector in one way or another is likely to have an influence on labor market, thus influence the growth of the economy. This research paper will focus on the social security reform issues, and their influence on the labor market and the general economy.

Special focus is made on the creation of jobs through increased investment, which have the ability to influence the growth of the economy. A case study of the United States of America is considered in this research paper, so as to be able to make conclusive findings for the analysis on the effects of social security reforms on the economy. Social security reforms in the United States of America The beginning of the social security systems in the United States of America can be traced way back in the 1930s.

During the 1930s, the United States of America tried to come up with ways, which it could be able to use to deal with the negative effects, which were resulting on the economy as a result of the great depression. During that period of time, most of the industries in the economy experienced failure in their financial activities, which lead to the workers not being provided for their retirement benefits. The government of the United States of America looked for a way in which they could deal with this problem.

The social security system came in hand as one of the effective solutions, which could be used to solve the economic problems that United States of America was facing then, especially in relation to the payment of retirement benefits to the retiring workers (Diamond, p1-50). Under this forms of arrangements, the federal government used to take a given proportion of a worker’s income to a common fund, which was established by the government. Once a worker retires at the age of 65 years, he or she was able to receive on a monthly basis a given sum of money, which could help the person to cover for the expenses that will be incurred.

The funds that an individual could receive under the social security arrangements were as a result of the taxes, that were collected by the federal government at that given time and the system used to work well as the number of individuals, that were retiring was small compared to the number of contributors (Brooks and Razin p206-307). The beginning of social security reforms can be dated back to the period of 1980s, when the United States of America military carried out programs to privatize the social security system that was existed during that time, which was called PAYG (Pay As You Go).

The start of such reforms are said to have began in Chile on of the countries in North America. The initial social security system had been designed around the year 1930s, which was managed as a collective fund that used to serve the welfare of all the old employees after their retirement. These accumulated funds were not managed in an efficient manner, which could ensure that all the old workers who had retired could obtain pension on their retirement. The major issue was that, for the old workers who were considered to be rich their benefits were much high, as compared with that of the rest of the retired workers (Diamond, p1-50).

During the 1970s the social security developed a number of problems in its management system, problems which were characterized by high contribution rates and also insolvency. The high contributions rates were clearly demonstrated where the total contributions, that the employers were making for their employees in addition to the contributions, that the employers could make to the national social security system were more that half the wages of the workers.

Based on this, the social security system could not be able to create any relationship between the retirement contributions, and other benefits that retired workers would be able to derive in the old age, once they are out of the active work service. In that manner the workers used to view the contributions to the social security fund as expenses, and the various benefits that they could receive afterwards could be taken for entitlements (Brooks and Razin p206-307).

During the period of 1955 and 1979, there was a drastic drop in the number of contributors towards the social security system. This was as a result of the inefficiencies, which were resulting from the management of the social security system. The social security systems therefore faced a threat of collapsing, because it was not receiving enough funds to finance its various activities in the provision of financial security for the retired workers.

The government was charged with the responsibilities of meeting all the expenses, that regarded the administration of the social security system, following this management inefficiencies, the government reduced its contributions to the scheme up to a level of less than 5 %, a value that could not be able to sustain the activities of the social security system (Dixon and Hyde, p206-307). The need for reforms in the social security system in the United States of America has been initiated by the problems, which the old system has been presenting especially in the failure to make investments for the retirement funds.

These problems in most cases lead to lack of funds at some times of emergency to pay the retiring employees, when the number of retirees is high. The reason for this is that, the government that is bestowed with the responsibility of taking care of the retirement funds is likely to use such funds for other government activities, which would make the social security account go bankrupt. As the life expectancy of the individuals after retirement has increased due to improved living standards, there is need to make reforms that will ensure that the old people in the society are able to lead a comfortable life after retirement (Diamond , p1-50).

Privatization of the social security During the early 1980s, the military in Chile made various moves, which could ensure that social security system was made part of the private sector, so as to improve on the delivery of services to the members of the society especially the military. The moves were based on introduction of accounts of retirement, which related to each and every individual in an organization. The individual retirement accounts could be placed under the management and control of private companies, which were referred to as the administrators.

One of the distinguishing features of this system was that, each and every individual in the organization was required to join these arrangements as long as they were working for a formal employer. The individuals had an authority to choose on the kind of administrator that they wanted to manage their contribution funds for retirement, and also they were free to transfer their accumulated funds from one administrator to another (Dixon and Hyde, p206-307).

In the private pension arrangements, when an individual achieves the required retirement age, he or she has an option to withdraw all the funds in a lump sum or invest the accumulated funds in the financial market. Investments in the financial market is made in buying annuities, that could guarantees the retiree a continuous income flows during retirement over a given period of time. In addition to that, the reformed social security provides provisions for life insurance and also a disability program, which is supported by the surplus of the insurance premiums (Yin, Lin and Gates, p135-200).

In this private social security system the government has managed to play a very important role in regulating and monitoring the various activities management functions of the administrators that are providing social security in the old age and also in guaranteeing the retirees a minimum level of pension in their retirement. So as to reduce too much public involvement to the private social security, the contribution rates have been lowered to a level of less than 12%, thus attracting and retaining a high number of employees and employers to the arrangements (Orenstein, p14-166).

In addition to that, institutions were set up to regulate the various investment portfolios and to make sure that the acts of determining the various fee and commissions, that were charged on the contributions that the members were supposed to make was done on a free manner and that entry to the social security industry was free to any of the organizations, that wished to make an entry decisions.

Until recently in the year 2000, most of the administrators were able to carry out management of a single retirement fund and in relation to that, each participant was able to own a single account in the retirement fund (Brooks and Razin p206-307). The individuals that are not employed in the formal system are not allowed to make contributions under this system towards their retirement. The scheme provides such people with an option of establishing an individual retirement schemes account, which are also governed by the same rules and regulations as the private arrangements, which are provided by the employers in the formal sector.

Following the introduction of these scheme arrangements, the number of active contributors to the private retirement schemes increased tremendously to a figure of more than 50% of all the employees that were involved in active employment. The percentage of those who have not been covered by the private pension arrangements, represents the majority of the workers who are involved in self employment activities in the economy, that is described as the informal sector in the economy (Dixon and Hyde, p206-307).

Current researches in social security reforms have established that, because the rates of contributors to the private pension schemes has managed to register positive growth trends since 1986 up to 2002. There are high probabilities that the contributions, that the pension schemes make to the gross domestic product of the United States of America are likely to increase by a figure of more than 40%, from the previous 10% by the year 2010 and the figures are expected to rise to three digits as the level of involvement increases with time by the year 2020.

This is considered to be the case, if the private pension arrangements are embraced fully in the USA. The investment portfolios, in which the funds from the retirement schemes can be invested in, have been expanded to include financial securities for both government institutions and private corporate institutions. There are high regulation measures, that are placed to govern these investments so as ensure that, reasonable returns are able to result form the investments (Yin, Lin and Gates, p135-200).

The current regulations on the social security systems have put limits for the various administrators of the private pension schemes, on the minimum amount of funds that they are supposed to give their members once they have attained the retirement age. In that respect the scheme administrators are required to maintain reserve funds, that will ensure that the scheme’s financial stability is maintained all the year round, so as to guarantee the members access to their retirement benefits as the reserve fund caters for the uncertainties in the market operations of the scheme administrator.

This measure besides the requirement that a scheme maintain only one fund at any given point in time, have contributed to the reduction of competition at the marketplace up to the year 2000 (Orenstein, p14-166). The reforms in the social security sector, which followed afterwards as from the year 2000 onwards, were focused on how the scheme administrators could be enabled to have more than one fund.

The scheme administrators have now been allowed to have more than one fund, an act that has enabled the schemes to make early retirement payments to men on attaining the age of 65 and for women at the age of 60 provided that they have managed to accumulate funds, that can enable them to finance more than 69% of their pensionable salary. Once an individual retires he or she has two options to make on his or her retirement benefits under the current schemes, either the person invests the funds by purchasing an annuity from the financial institutions or withdrawing the entire accumulated amount based ion the given schedule.

In addition to that, the government provides for a minimum pension for all the individuals who qualify to join the private pension arrangements (Diamond, p1-50). Weaknesses of new system Given that most of the privatization moves have focused on the issues that relate to the policy reforms and changes, the costs of carrying out these reforms are met by the government, which is forced to incorporate the various costs in its budget allocations.

In the process of adopting the new private social security arrangements, the various individuals who had been making their contributions to the old scheme, that was being financed by the government when they shifted their contributions to the new system, they were compensated by use of government bonds which were made to each person’s retirement account. In having to make this compensation plans as the reforms were being carried out, the government incurred a lot of expenses the costs will are considered to be minimized by the year 2015 (Brooks and Razin p206-307).

The major weaknesses of this private social security system as described in (Feldstein, p215-403) include the coverage of the individuals, who are involved in this system. Given that scheme covers individuals who are employed in formal work sections, and excludes those ones who are self employed, this has posed as a hindrance to the various individuals in making voluntary contributions towards the scheme. This act leads to the reduction on the coverage ratio of the private social security system in the United States of America.

On the other hand, the act of the government being able to provide individuals in the private pension scheme arrangements, some given minimum amount of money has been able to raise a moral concern all over the world among the self employed people. This issue has been raised bearing in mind that most of these individuals earn low income. These persons can only be able to benefit from the contributions, when they can make contributions to the scheme depending on the amount of income, which they have managed to earn so as to guarantee them a pension on their retirement.

It has been also established that, it is expensive to manage the private pension arrangements considering the high costs, which are involved in the administration fees and commissions besides the marketing costs. These high costs involved in running and managing the private pension arrangements have led to the reduction on the levels of returns, that result from various investments which reduces the amount of returns, that the members receive on retirement (Orenstein, p14-166). Social security reforms and economic growth

The various reforms in the social security sector in the United States of America especially in Chile has been part of the whole range of efforts, which are focused at making the United States of America economy stabilize in the international world market economy. In the 1970s the military personnel had made a wide range of reforms in the social security system, which included the tax system and establishing links to the international market, which sought to widen the operations of the scheme in the international market.

The military also carried out reform actions, which led to privatization of most of the organizations, which were owned by the federal government and in that way contributed to the establishment of a dynamic financial market. Later on, the various reform issues encompassed the labor markets as well as social security of the different societies, all over the world (Shaviro, p126-156). During the 1970s, the reform issues were initiated to address the various labor issues, which were emerging in the labor market in the United States of America.

The main points of interest since that period in a number of reforms, that have been carried out in the social security have been on job security and payroll taxes issues, as well as the worker unions involvement in collective bargaining (Shaviro, p126-156). Since the inception of the social security reforms in most of the countries, the labor markets began registering positive performance levels. One of the effects that resulted in the labor markets include reduction of unemployment levels as the real wages, that workers were entitled to receive rose.

Privatization will enable individuals to establish their personal retirement accounts, which are considered to be sound investment practices as the individuals can be able to derive positive benefits from their retirement funds (Shaviro, p126-156). The benefits which could result in an economy, once the privatization of the social security policies are carried out, covers a wide range of interests of the various parties that are likely to be affected by the funds that come out of the social security system.

For example, privatization of the social security systems ensures that, workers in the economy are able to get full compensation in their various work activities. Since in most cases the government sponsored social security systems are subjected to a variety of political decisions in the federal government. Therefore the worker does not have any legal rights to the benefits, which result from the scheme though it is a must that they make contributions to the scheme.

In the private pension arrangements, a worker is free to depend on the security of ownership in the scheme, whereby a person is able to decide on the various investment decisions, which he or she will take once the retirement age has been attained. On the other hand, an individual can leave the benefits from the scheme to accrue to any other person he or she will decide on (Altman and Shactman, p169-330).

Concerning the effects of private pension arrangements in relation to economic growth, a private pension system has the potential of initiating growth of the economy as there are likely to be lead to increased levels of investment in the economy and also high levels of savings. As discussed in (Koitz, p1-67) most Americans are not able to save their incomes as they in most cases they rely on the funds, that they will derive from the social security during their retirement.

If the private pension arrangements are fully embraced in the United States of America economy, the dependence ratio of the workers towards the government sponsored scheme will reduce, thus making most of the workers to focus on making personal savings towards their retirement funds. These actions will encourage the workers to save their extra income especially the individuals that are married. When the rate of savings is increased, the economic activities in the economy will be initiated to move towards a direction, which will ensure growth is achieved.

The cost of capital will then go down leading to increased level of investments by the investors in various sectors of the economy(Gramlich, p1-70). When the economy is able to expand its economic activities, more employment activities will be created. A good example of one of the economies, which has managed to achieve positive growth in its economy as a result of the reforms of the social security system, is Chile. This is one of the countries in North America, which has managed to achieve a growth of more than 5%, since it implemented the private pension arrangements.

In addition to that, a private pension will enable the various individuals who benefit from the social security funds to invest their retirement benefits in the financial market. the investments could be made in financial assets like in the annuities and other financial assets like bonds, which will initiate the growth of the economy thus lead to the reduction on the taxes that workers are being charged (Shaviro, p126-156). Recommendations So as to ensure that the social security reform programs, that are carried out by the government and various private organizations address the issue of equal distribution of income within an economy.

Equal distribution of income will in turn influence the growth of the economy. Efficient management of the resource base for the social security funds, is what is able to guarantee success in the operations of a given pension scheme arrangement. The following recommendations needs to be taken into consideration so as to achieve success in the reform programs (Gramlich, p1-70). First of all, the pension programs need to be restructured in such a way that the payroll taxes, which are charged to the members’ accounts are, reduced this is to enable the members to be able to make contributions, that they are able to benefit from.

The programs should also be able to provide an allowance for the restructuring various legislations, that relate to job security. In addressing this issue, the members involvement to the schemes will improve leading to improved living standards of the workers after their retirement (Altman and Shactman, p169-330). Effective communication systems should be established between the scheme administrators, and the contributors so as to enable them gather information on the various issues, that can be improved on the administration of the schemes in order to create benefits for the scheme administrators and the workers (Gramlich, p1-70).

It is through effective communication links that the management of the pension schemes can be improved. Conclusion As discussed in the research paper, the various changes in the social security sector of an economy influence the growth of an economy. The changes that have taken place in the social security from a government sponsored program to the privately sponsored pension arrangements, have had an effect on the various factors in the labor market like the minimum wage rate and the unemployment rates amongst other labor market outcomes.

Based on the analysis, it is established that both the informal and the formal sectors of an economy are interrelated in their influence on the growth of the economy. The reforms that are set to reduce the tax levels on the labor market, are likely to result in the increase of the wages that workers will receive in their employment which will influence the organizations to invest as they are able to attract and retain high performing employees who are motivated to work, thus reducing the levels on unemployment t in the economy.

The overall effect of these changes will then be transformed on the general economy, which will be able to achieve growth in its production activities. The reason being investors and workers will be motivated to carry out various activities in the business environment, where they feel that their welfare is taken into consideration.

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