Question

Public Economics How does Social Security promote consumption smoothing? (Is it all paternalism?)

Answer 1

Does Social Security Smooth Consumption?

Regardless of the reason, market failure in the annuities market or paternalism, Social Security’s existence is motivated by the notion that individuals are not appropriately protected for their retirement consumption.Whether this leads to a failure of consumption smoothing, and thus a need for government intervention, is an open question. On the one hand, once workers retire they have many years of consumption to finance. On the other hand, retirement is generally a very predictable event for which most workers can readily prepare. So it is not clear how important Social Security is for smoothing consumption across the working life and retirement years. In particular, all that Social Security may be doing is crowding out the savings that individuals would otherwise set aside for their retirement The important question of the extent to which Social Security provides real insurance, as opposed to just crowding out savings, has been the subject of many studies, in three different areas.