Economics Study Set 18

Business

Quiz 31 :
the Stock Market

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Quiz 31 :
the Stock Market

The social security program of US is called the Old Age and Survivors Insurance (OASI). The program provides benefit to the old age retirees. The program is primarily financed through the payroll taxes collected from current employees. The government in return provides the assurance of giving the social security benefit to the current employees at the time of their retirement. The social security program of US is thus an intergenerational transfer of funds. The social security program does not work as private insurance. It is not based on the same principle as the private insurance. The private insurance companies raises funds from their customers and invest them in the market assets. After a given period these assets generates stream of income which provides the insurance company the necessary funds require to fulfill its obligation towards its customers.

The social security program of US is called the Old Age and Survivors Insurance (OASI). The program provides benefit to the old age retirees. The program is primarily financed through the payroll taxes collected from current employees. The government in return provides the assurance of giving the social security benefit to the current employees at the time of their retirement. The social security program of US is thus an intergenerational transfer of funds. The social security program was initiated in 1935. At that time the number of retirees was low and average life expectancy was 65. There were 16.5 workers per retiree. The payroll taxes were enough to cover the current obligation of government and the government even built a trust fund from the surplus revenue. With time the average life expectancy and the number of retirees both increases. There are current 3.2 workers per retiree and this causes the payroll taxes to rise sharply. The ratio of worker per retiree will decline further and by 2030 it will reach 2.2 workers per retiree. When the number of retirees was low the government could provide generous benefits with lower payroll taxes. As the ratio declined it is very difficult for the government to maintain the same. To give the same amount of benefit the government either has to increase the taxes, or borrow from the public, or cut the other expenses. The real problem with the fund will rise when revenue from taxes will fall short of the benefit the government liable to pay. The social security trust fund is built with the surplus payroll tax revenue above the benefit in the social security tax system. The fund uses the surplus revenue to buy special non-marketable bonds from US treasury. Treasury uses this fund to finance current government spending. During last few decades the treasury has spent the entire fund even over it. Hence, if the government encases the bonds, the treasury has to borrow it from other sources. Therefore, the monetary value of the fund to the government is zero and has no use. For these reasons, after 2018 the trust fund will be of no help at the time when government liability of benefit will exceed the revenue from payroll taxes.

The social security program of US is called the Old Age and Survivors Insurance (OASI). The program provides benefit to the old age retirees. The program is primarily financed through the payroll taxes collected from current employees. The government in return provides the assurance of giving the social security benefit to the current employees at the time of their retirement. The social security program of US is thus an intergenerational transfer of funds. With the current structure of social security benefit the government is likely to face unfunded liabilities because of changing demographics. The social security benefit now pays return of 2% from the tax paid whereas the regular investment pays 7%. The unfunded liabilities of social security can be reducing only through revising the structure of social security. The government should think about allowing the workers to investing the taxes into a personal retirement account. This will enable the property right to the funds contributed into their account and also can be passed into heirs. It will enable the person to have personal investment account with no harmful effect on incentive to work. It will encourage savings and investment in the economy and will promote growth. Thus the government should think about allowing the workers to investing the taxes into a personal retirement account.

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