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Reviving a Social Security solution

By Savannah Rigby
web posted November 17, 2014

If I find a one-hundred dollar bill on the ground by some miraculous form of luck, I have two simple options. I can spend that money, or I can save it. I am more of a financially cautious person myself, so I would most likely put it into savings. I am a junior, and college is expensive after all. However, if I knew that I had enough money stored away in savings for my college tuition, I would be more likely to spend that money instead of adding it to my existing savings and creating a surplus. Why is that? It is because, at that point, spending the money is more rational of a decision than saving it because I already have money stored away for future use. This is the mindset accompanying Social Security.

Social security, at its beginning, was an expansionary policy of the New Deal aimed at keeping senior citizens out of poverty. The system worked because current workers would pay into it, knowing they could reap the benefits when they retired. However, as anyone familiar with Social Security knows, the problem with the system is that senior adults who had not yet paid into it were able to receive their pensions. Because of this, it is practically impossible (without government shoveling more money into the system) for current workers who retire to receive their pensions equivalent to the same amount they paid into the system. For this reason, the amount of money that is in Social Security savings per retiree is decreasing. Of course, this is a negative thing for workers who have been putting in money into Social Security for the span of their careers.

Many people have considered alternatives to Social Security or ways to fix the system. 2004 Nobel Prize in Economic Sciences Winner Edward Prescott suggests a seemingly simple solution: mandatory investment accounts for retirement. Although Prescott does not delve deep into the details of this plan, we can still examine the proposal.

The main advantage of mandatory investment accounts would be that the government could retire the Social Security system. Mandatory investment accounts would work better than Social Security because they are individualized. Rather than money going into one big pot to be divvied out among participants later, money goes into an account for the individual storing it away. This is important because the individual is then ensured that he will get out the money he put into it, without worrying about it lessening over time.

One aversion some might have to this proposal is that it is mandatory by government, just like Social Security. An alternative some have suggested is that Social Security should be optional and that people could have their own personal savings account for retirement if they choose. Others have said that people should just have their own personal accounts along with Social Security; after all, saving for yourself would be rational, right? Prescott disagrees. He says that when you are faced with the option of saving or spending a certain amount, it is rational to spend it because you know that there is money already saved for you. Just like in the earlier example of the hundred dollar bill and my hypothetical decision to not put it into college savings. This is why Prescott advocates for a total replacement of the system with mandatory investment accounts.

Even though I believe that getting rid of Social Security is a good thing, I have always thought leaving it up to the individual on whether to save for retirement or not was the way to go. By getting rid of Social Security, saving would become rational once again. However, instead of simply viewing it ideologically, Prescott instead looks at the situation pragmatically. While using government to force people to save may not be the most appealing idea, people who do not save for retirement will have to supported by some entity later. That entity would most likely be the government via welfare. Therefore, to prevent government having to spend money on those people later on, he offers the solution of making saving mandatory. Because even if saving for retirement became rational, there would still be those few irrationals who would later be in the care of government. For these reasons, I believe that Prescott suggests a compelling alternative to a very much broken system. ESR

Savannah Rigby is a high school junior currently taking an AP Macroeconomics course. Her interest in politics has fueled her desire to learn about economics. 

 

 

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