Question

The Social Security System in the US has been successful so far in terms of reducing poverty among the retirees. However, there is concern that the system may become unsustainable in future. There is a proposal to change the system from its current setup of ‘pay-as-you-go’ to a ‘fully-funded system’, wherein the latter case workers contributions will be invested in financial assets (aka in stocks, bonds etc., managed by private fund managers) and workers will be repaid back with the principal and interest when they retire.

Discuss the potential benefits and costs of the proposed solution relative to the existing system.

Answer 1

Solution

A fully funded arrangement would be advantageous for many reasons. Firstly, when full funds are gained, the mechanism will have lesser anxieties over forthcoming near-term anticipated deficits. The government would thus be able to focus on more demanding concerns. Another benefit of a fully funded mechanism is that it retains most of the structure of the prevailing arrangement. A fully funded mechanism provides the government greater opportunities to invest a part of the monies in equities. The main economic benefit of upholding Social Security with a fully funded mechanism is that national savings rise, hence stimulating growth in the economy in the future. As Social Security was developed as a transfer drive to aid the destitute elderly, a fully funded arrangement doesn’t alter the redistributive nature of the prevailing mechanism.

Although a fully funded system has several benefits, few demerits are present. For instance, raising savings to build up the higher trust for greater consumption in the future outcomes in lesser consumption presently. Another drawback is that one generation has to pay for itself & for the present cluster of retirees