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Sunday, October 31, 2010

The Pay As You Go System (Paying for Pops)

The Pay As You Go System (Paying for Pops)

Depending on one’s vantage point, Social Security is either a pro and/or con. I believe the social Security program to be the latter. Social Security is defined as government provided pensions, disability payments, unemployment compensation and health benefits ( or simply, the income redistribution from the young to the old and from the worker to the non worker). From the definition alone one can (who doesn’t receive S.S.) recognize the gaps of this program. Many Americans leave the work force somewhat relying their livelihood on this awful program most of them having been born during the baby boom generation in which the program was set up (1935) to fix the Market failure of the Great Depression. This is an important factor now as the current generation is being trumped (in terms of population) by the baby boom generation who in turn is expecting to get Social Security benefits in which they once put in for. The issue of using Social Security as a crutch is that it may not be enough to adequately live off of but enough to exist off of with stipends between 1000-1100 a month.
According to Mary W. Walsh in the New York Times article entitled, Social Security to See Payout Exceed Pay-In This Year, the 2008 recession has depleted Social Security funds more quickly than expected therefore depleting the funds before 2037. This means by the time I’m ready to retire the funds and benefits of Social Security (in which I contributed to while participating in the workforce) would have been long gone. Stephan C. Gross. Chief actuary of the Social Security Administration stated, “ the problem… have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.” This implies that because certain citizens were laid off (as a result of the recession) had to take an early retirement in which they had not properly planned nor saved for, forcing an even greater number of employed workers remaining to pick up the check of both the already retired and the newly retired.
Where is the Market Failure? There isn’t a foreseeable market failure in my eyes because Social Security itself cannot be defined as a market because it is entirely financed by the government. However Social Security is highly inefficient in terms of a “Pureto Optimal Allocation of Resources.” It forces generations unborn to a contract that may not have any application to them directly. It affects the size of the workforce by giving some older workers the incentive not to work because of a set age of retirement (65) hence allowing for S.S. benefits. It opens the door for Moral Hazard (because of insurance I can have risky behavior) to creep through, in turn significantly reducing the incentive to save and allowing S.S. to not only be a crutch for some but a wheel chair for others. As Mary Walsh put it, S.S. will outlay and exceed revenue every year, regardless of how well the economy is operating. Something must be done, government can’t just cut off Social Security entirely however it can’t continue on the path its going without my generation (me in particular) becoming vehemently outraged especially after we have paid our dues.
Cites, David N. Hyman, Public Finance.
http://www.nytimes.com/2010/03/25/business/economy/25social.html?_r=1

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