Suppose the following Social Security reform became law: -All current Social Sec

Question

Suppose the following Social Security reform became law:

-All current Social Security recipients will continue to receive their benefits, but no increase will be made other than cost-of-living adjustments.

-US citizens, between the age of 40 and retirement, who are not yet on Social Security, can opt to continue with the current system.

*Those who opt out can place what they would have contributed to Socal Security in one or more government-approved mutual funds.

*Those under 40 must place their contributions into one or more government-approved mutual funds.

Now answer the following questions:

1. Who will be in favor of this reform and why?

2. Who will be against this reform and why?

3. What might happen to stock market indexes and why?

4. What additional risk is involved for those who end up in the private system and why?

5. What additional benefits are possible for people in the private system and why?

6. Which firms in the mutual fund industry might not be approved by the federal government and why?

Explanation / Answer

1) US citizens between the age of 40 and retirement will be in favor as they have the option of opting out and thus have the flexibility of investing in govt approved mutual funds if they want.

2)US citizens under the age of 40 will be against as they have to mandatorily place their contributions into one or more government-approved mutual funds.

3)Stock market may take a hit i.e. stock market indexes may go down as the majority investors in the stock market are below the age of 40. They have been mandated toplace their contributions into one or more government-approved mutual funds which would leave less money with them to invest in stock markets.

4)Those in the private system are subject to market risk or systematic risk which isThe possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets.

Investing in government securities is considered safe. Those in the private system will be adversly affected by market movements.

5)Additional benefits for people in private systems would be flexibility to invest. They have the option of investing wherever they want and if they can get returns higher than those given by government, they can do so. They can earn capital gains too.

6) Firms that do not meet the minimum requirements by the federal government would not be approved. Governmnet would have imposed a cap on the maximum amount of risk associated with a MF and those firms who bear higher risk are likely to be rejected. Credibility of the firms would also play a major role in their approval.

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