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Tuesday, May 01, 2012

Social Security


This article discusses reasons for why Social Security is on unsustainable path. The article first presents the SS as a retirement program. Later it acknowledged the problem of annual deficit in Social Security Trust Fund, which basically means that SS is not a retirement program, but rather a redistribution program. This means that those who work, pay into SS, and then SS pays to those who are retired.  In case of growing trend of current

employees vs. retirees, this system will work, but as soon as the contribution into SS will be less than
payments to retirees, this scheme will not work, SS will run out of money. Is it possible? Yes it is. That's exactly what article is talking about. In recent years, payments from SS exceeded contributions to SS. The SS fund will not run out of
money immediately because it enjoyed surplus of funds for many decades. The only problem is that
those surplus funds were spent on other government programs. So, now other agencies have to repay
those “loans” to SS fund.

The author suggested that in order to solve the problem, the retirement age will have to be raised and SS tax will have to be increased as well in order to sustain SS.

The question is: why is it  the government got involved in this financing/retirement business? Is there a market failure that government has decided to provide Old Age insurance?

First of all, getting to an old age is not an insurable event.

So, is there a market failure?
1. Is it a public good? No. it’s easily excludable.
2. Is there a monopoly power involved in providing these services? No.
3. Are there externalities? Not that I know of.

4. Asymmetric information? I know that everyone will get old one day Also, there is something
that no one knows – the future. So I do not see any asymmetric information problems associated
with retirement.
5. Adverse selection. Will only neediest people invest into the future? Unlike health care,
everyone needs money to live. So, adverse selection is not a source of market failure.
6. Moral Hazard. Riskier behavior? I do not see a source for moral hazard as well.

Obviously, there is no market failure in retirement, which means that the government should not be
involved in this business. There are private companies that would do the same job better.

However, there still might be a role for the government to play in the retirement planning. If I invest
my savings into private companies, there is a chance that these companies might go bankrupt, which
will leave me with no savings. This is when, the government could provide me with a TRUE reliable
insurance policy (if I voluntarily want it), protecting me from the event, which I hope never happens
- private companies going bankrupt. In this case, the government will insure a small final portion of
the risk that the savings the person had accumulated will not disappear. If the person has never saved
anything, unfortunately that would be his or her own problem.

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