9. Why does the effect of a pay-as-you-go (PAYGO) public pension system on priva

Question

9. Why does the effect of a pay-as-you-go (PAYGO) public pension system on private saving depend on the reasons people have for saving? b. Summarize the conclusions discussed in class about the likely effect of the U.S. Social Security system on private saving. Why is the effect potentially important for economic growth?

10a. Why is the current structure of benefits and funding for U.S. Social Security expected to be unsustainable without an increase in the payroll tax rate or a decrease in pension benefits? b. If there is no reform in U.S. social security laws the benefit formula will remain the same. How will the future pension benefits be financed after the Trust Fund is entirely depleted? Be as specific as possible, given the information in the course notes and slides.

11. Under one reform proposal for the U.S. Social Security system, part of the Trust Fund would be invested in stocks. The idea is that stocks have paid a higher average rate of return than government bonds in the past. Explain why this policy would probably affect the average rate of return on stocks. What can be said about the likely direction of the effect–up or down?

Explanation / Answer

The PAYGO pension scheme is derived from the strategic non-saving behavior of the young generation. Under this, the plan beneficiaries decide how much they want to contribute either by having the specified amount regularly deducted from their paycheck or by contributing the desired amount in a lump sum.

Thus, it is fully derived from the saving behavior of the people. People are forced to save by either getting the amount deducted from their paychecks or by self-contribution.

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