Collapse of social security systems

April 17, 2023, 4:09 p.m.

The financial safety nets hundreds of millions of older people rely on — and hundreds of millions more young people are counting on — will run short of money to pay full benefits within the next decade, the international research.

Repeated financial crises are an inherent feature of the Social Security system. The Social Security trust funds are essentially a sham that cannot assure future financial security. Today’s young workers will never receive the benefits currently promised to them by the program.

The governments-sponsored health insurances that covers older and disabled people, will be unable to pay full benefits for inpatient hospital visits and nursing home stays by 2035, the international research report forecast.

Dismantling of welfare systems leads to abandonment of any full employment policy, accompanied by an erosion of rights to unemployment benefits; reduction in financial resources to alleviate poverty; reduction in the general level of social security; and reallocation of resources for the promotion of equal opportunities.

Demographic changes mean more retirees and fewer workers paying payroll taxes.

Most people seem to imagine that Social Security operates like a traditional fully funded retirement program. In such a system, the tax payments of current workers are saved and invested to finance their own future benefits. As a result, a huge financial reserve is built up sufficient to finance accrued benefits at any point in time. This reserve is used to finance benefits during retirement years, while current workers at that time will be building up their own reserves to finance their own future retirement.

Social Security, by contrast, fundamentally operates on a pay-as-you-go basis. The tax payments of current taxpayers are not saved and invested to finance their own future benefits. Rather, most current tax payments are immediately paid out to finance the benefits for current retirees. Future benefits for present taxpayers are to be paid out of the future tax payments of future workers when today’s taxpayers are in retirement. Consequently, large cash reserves to finance benefits are never developed in such a system.

Such a pay-as-you-go system is quite vulnerable to any adverse development that may upset the delicate balance between expected future taxes and expected benefits. If unemployment rises, revenues from the payroll tax will fall from expected levels. If price inflation accelerates, indexed benefit payments will increase faster than expected. If retirees live longer than expected, benefit expenditures will again grow faster than projected. If the birth rate drops, fewer workers will be available to pay promised benefits in the future that are already paid for and relied on by current workers. These and many other possible developments can quickly tip a pay-as-you-go system into financial crisis, leaving it without sufficient funds to pay promised benefits.

Social Security in most countries around the world is in worse shape with the funds predicted to cover only 57% of benefits starting in 2033. Not enough money is coming in to sustain the funds. Inflation and economic output are driving some of the troubles of funds. And, another problem for the funds has been driven by income inequality: there’s been a faster uptick in incomes for the world’s wealthiest, but slower-than-expected growth for low-income earners, meaning the governments is not collecting as much tax revenue as it expected from much of the population.

The fragile financial state of the social programs, which are only expected to get more expensive in the coming years as more people age into eligibility for them.

The collapse of social security systems means that tens of millions of disabled people around the world who are supported by social security funds will find themselves without financial means of livelihood. It also means that hundreds of millions of people around the world who do not have enough capital or income to pay for their medical expenses will not be able to receive medical care. Hundreds of millions of people around the world will not receive any benefits if they lose their jobs.

Do you think this is a problem, and if so, how do you think it should be solved?