Question

To what extent could the purposes of the social security program be served by a law requiring individuals to purchase retirement insurance from a private firm? Discuss difficulties with such a proposal, and what kinds of regulations might be required to avoid these difficulties.

Answer 1

It is a known fact, that private enterprises exist to make profits whereas the government can fund its requirements through other means also.

Across the United States and many other countries like the United States, the Social Security Scheme provides unemployment support to people and helps those that do not earn money for themselves or have lost their jobs. It also provides pension to those who retire from their work place. The payments are made from regular deductions in salaries that people earn.

If a private firm were to cover this, it would require significant number of people enrolling to the service. Social Security Earnings are like any other insurance scheme for private firms. These earn profits on risks. So, if a firm has significant number of buyers, some of which demand money for unemployment it would make a profit from those who are currently employed or are not retiring any time soon.

The difficulty in implementation of this proposal is the fact that private players would price the social security higher than its current price and if monopoly is allowed in this market, it would lead to big problems of pricing, availability and service as they would make maximum profits at higher price points.

If the government is to allow for this, then they must keep a max capping on the pricing of social security and promote mandatory deductions at the same time so that balance is maintained between profits of the firm as well as consumer welfare from the point of view of those that seek these benefits is also taken into consideration.

Also, over a period of time, multiple companies should be allowed to trade in this market to disallow the creation of a monopoly which may harm the market as described above. Multiple companies dealing in this market type would allow for competition to exist and prices would not go beyond a certain limit.

Please feel free to ask your doubts in the comments section.