Special Topic 2. The Economics of Social Security.


The social security program is not based on the principles of private insurance. img

The social security system faces a crisis because in order to give people retirement and healthcare benefits the government has to collect huge amount of taxes from the working population of America. The birth rate in America was low and therefore it was a small percent of population who was to be given the social security benefits Since 1990 the tax revenue has been growing steadily and therefore it has been no problem to provide the social security benefits to small percent of retired people. However since 2020 the baby-boom generation is going to retire and also the life expectancy in America is also rising, which will increase the burden os social security benefits to a large percent of senior citizens. In addition to this the number of people above 65 years will increase from 40 million in 2010 to 71 million by 2030. Therefore the numbers of retired people will increase at a more rapid rate as compared to the working persons. The social security expenditure will be far more than the tax revenue of the government. This will create huge deficits in the social security account. The social security trust fund bonds have been used by the Congress, therefore there are no funds for paying the future benefits and there is no source of future income as well. The funding of social security benefits is done through the government treasury and the trust fund bonds are IOU of the treasury to the social security administration. It is a transaction between one government agency to another. The government is therefore the agency generating them and also receiving the interest on them. Therefore the number of trust fund bonds does not matter because their asset value for the American government is equal to zero. Therefore even if the number of these bonds increases it will not give any income to the government for the future income benefits.

As the social security burden is rising it is becoming difficult for the American government to fund them. The government will have to either reduce its expenditure, raise the taxes or borrow. All of the above options are not very attractive. In the U.K. and many South American countries like Chile, Mexico, Columbia the personal retirement account (PRA) have been started. The workers have property rights on these accounts and they can be passed on to their heirs. The workers will be able to earn a higher income on them and they will be able to save and invest them as well. The retirees will become independent. It will also benefit the younger generation as it will reduce their tax liability. Many other European countries have also gone for the PRA system rather than the payroll taxes and pay-as-you-go benefits. The current generation will be otherwise burdened with funding the retirement of the retired people and also the funding of their own retirement. This burden of payroll taxes and pay-as-you-go will go on multiplying.

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