The mutual obligations of American family members are substituted by State assurances in social security schemes.
That is, instead of ‘family’ acting as an institution to nurture the young ones and the latter taking care of their parents in their old age, the State undertakes to provide social security. Individualism is the social philosophy; no family member needs to take care of others. Individuals are protected by the state. The state provides for social security in return for a 16 per cent deduction from their salaries.
A direct consequence of such individualism is the growing burden of unsustainable debt. The family need not make provisions for itself, as it owes no responsibility to its members.
The Federal Government has taken upon itself onerous obligations of making future social security payments for all its citizens. This is in addition to social welfare measures that are not funded.
Super spenders
How sustainable are the finances of an American family and more importantly, the social security investments of the State?
A financial position of average American family seems pretty grim, with only $3,800 as bank balance. Half the Americans in the family have a retirement account.
The remaining households have saved $35,000 only for their retirement. Their house is worth $160,000, of which they owe their bank $95,000. Their average annual income is $ 43,000, but they struggle to pay their credit card dues.
Forty six per cent of American credit card holders carry forward their balance from month to month. Aggregate credit card debt is a staggering $ 798 billion. One in seven Americans owns as many as 10 credit cards.
Forty per cent of working Americans are not saving for retirement. About 8 per cent of Americans do not even have a bank account!
But, spending has not reduced for these households. The average household has a debt of $117,951 and the combined debt held by them is around $2 trillion, which is the GDP of the UK! As much as 24 per cent of Americans have postponed their retirement age.
Living beyond their means for these households has become a habit that is very difficult to reverse. Consumerism has been very active in the past three decades, and consumer debt in the US has witnessed an increase of 1700 per cent since 1971.
Medical debt is a growing problem for the Americans, and a study has revealed that 60 per cent of all personal bankruptcies in the US are due to medical bills. The surprising fact is that out of this, three fourths of the bankruptcies are those who have health insurance policies.
When the family’s financial health is in a shambles, how does social security work?
Declining trust
The deduction from the pay check towards social security collected in the past three decades amounts to a $2.5 trillion surplus held by the social security trust fund.
The US has estimated 78 million in the retirement queue, waiting to collect $ 40,000 per person per annum social security, which works out to more than $3 trillion.
The trust has invested its money primarily in Treasury bonds. Thus, the US Federal Government has taken away the social security contribution from the trust to itself as borrowings in return for IOUs.
This may not in itself be a serious problem till the trust is in surplus. However, by the middle of the next decade, the social security surplus will turn into deficit, when those who have contributing in the past decades retire.
The Government will have to come up with hundreds of billions of dollars a year to cover its obligations to the trust fund. At this point, the key question that may come up is whether the trust fund actually exists. One view is that the social security surplus actually consists of paper certificates (bonds) which are non-negotiable, and cannot be sold in Wall Street or to foreign investors. But these have to be returned to the Treasury for money – hoping that the Federal Government will return the promised money.
Added to these are other forms of security assured by the Government, such as Medicare and Medicaid benefits, which jack up the claims on the US Government substantially, creating enormous stress on the already debt-ridden Federal Government.
Two obvious solutions, of substantially raising taxes or cutting spending, can prove to be painful. It would cut down drastically the disposable income in the hands of people, or dramatically reduce economic growth.
Providing the promised social security has become a humungous burden for the State.
Human beings at some stage beyond the age of 60 would have to depend on someone when their earning potential is greatly reduced. The question is whether such dependence should be to an impersonal system, or to human beings in close touch with the elderly.
Both systems have their challenges. Clearly, in the US, the state will be increasingly demonstrated as a poor substitute.
(The author is a corporate lawyer and fellow of ICAI.)