One adverse effect of the pay-as-you-go system of funding Social Security is that:
A)it builds up a surplus of savings,which increases interest rates.
B)it reduces private capital formation,thus reducing future incomes.
C)it reduces the wealth of the elderly who spend most of their income on consumption rather than on investment goods.
D)it creates an income disparity between the working age population and the elderly.

Question

Quizplus · Accepted Answer

The pay-as-you-go system of funding Social Security reduces private capital formation because it requires current workers to pay for the benefits of current retirees rather than investing in their own future. This can lead to a decrease in future incomes as there is less investment in businesses and other economic opportunities. A surplus of savings could actually lead to lower interest rates, and while there may be some income disparity between working age and elderly populations, this is not a direct result of the pay-as-you-go system. The system also does not necessarily reduce the wealth of the elderly who may still have other sources of income besides Social Security.

One Adverse Effect of the Pay-As-You-Go System of Funding Social