How has inflation adversely affected social security Term Paper

How has inflation adversely affected social security - Term Paper Example The fund raising mechanism of Social Security makes it a ‘pay-as-you-go’ system and can be termed as advance-funded. In simple words, funds to this program are contributed by the people who are presently working and are utilized for the benefit of the retirees. Ohlemacher (2010) states that Social Security is funded by a 6.2 percent payroll tax, paid by workers as well as employers. The Social Security corpus is being constantly used and is being replenished at the same time. Since inception, the Social Security program has done exceedingly well and has helped the country tide over many difficult situations. Till date, it remains one of the most successful and most popular programs in the United States which has touched the lives of millions of Americans. Vernon (2011) reveals that as of January 1, 2011, the Social Security trust fund stood at $2.6 trillion. At the end of 2010, close to 54 million people were beneficiaries of this program, while another 157 million peopl e had earnings covered by Social Security and paid payroll taxes. The outflow (expenditures) of the scheme stood at $713 billion while the total inflow (income) was $781 billion in 2010. Of this $664 billion was non-interest income while $117 billion was generated by way of interest. Inflation and Cost of Living Allowances There have been annual increases in Social Security benefits which try and counterbalance the adverse effects of inflation on fixed benefits. This indexing of Social Security benefits for inflation is of monumental importance because the absence of such indexing would result in the erosion of the purchasing power of the beneficiaries. Prices tend to rise over time and increase the cost of living. In such a scenario the beneficiaries would be able to purchase fewer goods and services unless the benefits rise in line with inflation. Known as Cost of Living Allowances (COLAs), these increases in Social Security benefits, based on the annual increase in consumer price s, have become an automatic annual feature of the program beginning 1975. Prior to that, such increases were accorded to the beneficiaries only when the Congress enacted a special legislation. The COLA adjustment is based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Work ­ers (CPI-W) over the last year. In periods of deflation where the CPI-W does not increase, no COLAs are announced. Change in Formula Recent reform proposals have called for changes in Social Security’s cost-of-living adjustment (COLA) formula. It has been proposed that a new ‘chained CPI’ be used instead of ‘CPI-W’ that is being used at present. The chained CPI would take into account ‘substitution purchases’ that consumers make to avoid high prices. Estimates reveal that the beneficiaries of Social Security would have to contend with smaller increases under the modified, chained CPI. Estimates reveal that the revised formula would res ult in a retiree receiving $560 less as benefits per year in the first decade. This loss in benefits would reach $984 in two decades from now. There is a section of the society that avers that the government should adopt an elderly-specific