Question

In: Economics

Not counting Social Security, should the government force people to save money in personal accounts for...

Not counting Social Security, should the government force people to save money in personal accounts for their eventual retirement?

Solutions

Expert Solution

Retirement in U.S. is supposed to be financed by three sources: Social Security, employer pensions, and additional saving. Social Security in U.S. makes up the foundation and serves two roles: it’s a forced saving plan by making everyone contribute 12.4 percent (the employer and employee contribution) of their income (up to the first $113,700 they earn) in exchange for the promise of income in retirement. It’s also social insurance because the lower your income, the larger your benefit will be relative to what you paid in. But for most people, it is not intended to finance all of retirement.

The problem is the other two sources are falling short. Employer pensions, for those who had them in the private sector, have been replaced by private accounts like a 401(k) plan. With these accounts, the individual is left to save enough and bear investment risk. Thus, most people don’t contribute enough.

A big drop in consumption is not only a problem for the individual. Collectively it creates a drop in demand, which can devastate economic growth. Plus without any wealth, more retirees will qualify for Medicaid, in addition to Medicare, to finance end-of-life care. Projections of elder healthcare costs assume seniors will for pay the expenses Medicare doesn’t cover, especially long-term care. But if people run out of money, the burden falls on the state.

Some, like economist Teresa Ghilarducci and Senator Elizabeth Warren reckon so. It is not a new idea. Countries like Australia and Chile already force their citizens to contribute to retirement accounts. We know from their experience that forced saving changes the government’s role in our lives and, potentially, its relationship with financial markets.

Possible Solution:

  • Instead the government could lean on the private sector to avoid these conflicts. In both Australia and Chile private managers administer the forced saving accounts. People can pick their manager, who also presents them with a menu of investment options. The government may regulate characteristics of the investment options, in terms of fees or risk, but the manager selects the actual investment choices. Their experience suggests America could mandate saving within the employer-based pension account structure it already has.
  • Another, potentially more palatable, alternative to forced saving is nudging. That is what Britain has adopted. The British government requires firms to automatically enroll their employees in a pension account and put 8 percent of their salary into it. But people can opt out of the account if they wish. Nudging — defaulting people into a saving plan — has been proven extremely effective at increasing participation in pension accounts. Depending on where you set the default saving rate, it can increase the amount people save, too. More nudging increases saving, but still retains an element of personal freedom. Leaving some discretion to the individual is important because everyone has different saving needs at various points in their lives.

Related Solutions

Should the Federal Government make a CHOICE to try to influence the Social Security cost-of –living...
Should the Federal Government make a CHOICE to try to influence the Social Security cost-of –living adjustments?   Should the goal be: a) an exactly equal change each year, b) a somewhat more (or less) equal change each year, c) a slightly more (or less) equal change ... or d) the government should not try to influence the Social Security cost-of –living adjustments at all ? (300-500 words)
There is a suggestion that businesses/government workers should move to a 401(k) to replace Social Security....
There is a suggestion that businesses/government workers should move to a 401(k) to replace Social Security. What is a 401(k) and why is this a good or negative idea?
Government: What is the current politics around the Social Security Fund? Is Social Security in crisis?...
Government: What is the current politics around the Social Security Fund? Is Social Security in crisis? What are some suggestions from both sides of the political aisle to strengthen Social Security?
A government study concluded that 45% of people receiving Social Security payments also receive retirement income...
A government study concluded that 45% of people receiving Social Security payments also receive retirement income from a private IRA. We decided to take a sample of 200 people receiving Social Security payments and asked them if they also receive retirement income from a private IRA. Define the random variable x to be the number of people who also receive retirement income from a private IRA. Showing your work in Excel as demonstrated in class, what is the probability that...
how do we treat retirement and social security problem? A government report concluded that Social Security...
how do we treat retirement and social security problem? A government report concluded that Social Security will be insolvent in 2035 and Medicare will be depleted by 2026. What do you think of the social security and retirement problem in the upcoming 20 years? What policy needs to be made? Should we take any actions or we should just wait?
Beyond Social Security Disability Insurance, should the government mandate disability coverage by employers or provide disability...
Beyond Social Security Disability Insurance, should the government mandate disability coverage by employers or provide disability coverage to all citizens? Why or why not? What about Long-Term Care Insurance? How should employers look at offering LTC Insurance among a comprehensive benefits package?
The personal income tax, corporate income tax, and contributions to social insurance (Medicare and Social Security)...
The personal income tax, corporate income tax, and contributions to social insurance (Medicare and Social Security) together makes up approximately ______ of all federal government tax revenues annually (based on annual data from the period 2010-2015.) A. 95% B. 65% C. 45% D. 15% E. 4.5%
Disposable income equals personal income plus transfer payments. personal income minus personal income taxes. Social Security...
Disposable income equals personal income plus transfer payments. personal income minus personal income taxes. Social Security contributions minus personal income taxes. Social Security contributions plus transfer payments minus personal income taxes.
Toward the end of the twentieth century, the U.S. government wanted to save money by closing...
Toward the end of the twentieth century, the U.S. government wanted to save money by closing a small portion of its domestic military installations. While many people agreed that saving money was a desir- able goal, people in areas potentially affected by a closing soon reacted negatively. Congress finally selected a panel whose task was to develop a list of installations to close, with the legislation specifying that Congress could not alter the list. Since the goal was to save...
Should the government focus on increasing the happiness of its people?.
Should the government focus on increasing the happiness of its people?.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT