What is the economic rationale for the current Social Security system What is th
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What is the economic rationale for the current Social Security system What is the economic rationale for the abolishing the current system and installing one similar to the one that Butler advocates. Be sure to focus on key issues: e.g. adverse selection, moral hazard, fairness, redistribution. What would you advocate your politician do? Support maintaining the system that is currently in place (and finding a new way to insure solvency) or install a program that acts more like a system for the poor?Explanation / Answer
Social Security program aims at providing monetary and non-monetary benefits to the elderly and to the poor. Under the present system, today’s workers are taxed and the money so obtained is paid to the retirees (elderly). Today’s workers are told how much money is in their personal social security accounts. This is obviously misleading because their so called money has already been paid to the elderly.
Thus government’s predictive promise of paying today’s workers their social security seems only a little bit optimistic.But politicians and policy makers understand one important fact that it is the elderly who are more likely to vote than today’s workers. Hence they plan the policies keeping in mind the welfare aspects of retirees and senior citizens. And because under no condition the government is bound to pay for today’s workers, the terms of Social Security are quite justified.
While federal government through its Social Security programs provides monetary benefits to the elderly, it transfers cash to the poor Americans too through its Earned Income Tax Credit (EITC) program. But since such transfers constitute a small fraction of total federal spending, it can be concluded that most of the government transfer of cash goes to elderly and not to the poor.
A shift from current program of Social Security to personalized fully funded program will be advantageous for today’s workers. Since they are not required to pay Social Security taxes any more, their personal disposable income will rise. They will themselves plan for their retirement and hence might start saving more. This may result in an increase in the current U.S. saving rate.
The government, which was taxing today’s workers in old Social Security program, will now have to think of some other method of providing them Social Security benefits. It cannot transfer wealth to the elderly in the same way as it does for the poor. Ultimately such transition will be a burden on the government and might increase its spending further more.
One difficulty is very clear. Future of those who are retiring now is gloomy. Because they are not working now and thus earning nothing, they are not expected to have a retirement plan. If the government wishes to provide them their respective benefits, it must either borrow or charge tax to finance such spending. If the government borrows, its debt will increase. If it charges tax, it will hamper the growth. Another difficulty is the sharp fall in government tax revenues because taxes on Social Security constitute a major part of U.S. federal tax revenue.
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