Social Security Below-Market Returns
December 17, 2003
In recent years, talk of Social Security restructuring has grown because the system offers many current and future workers below-market returns. This means they will retire with less income than they would have had if Social Security had never been established.
Below-market returns can be attributed to several reasons:
- Social Security is a pay-as-you-go system: Such a system cannot permanently deliver returns higher than the growth rate of total labor income.
- Decreases in the birthrate: Decreases in the number of U.S births slow the growth of the working population and forces U.S labor income to grow at a slower rate.
- Closed-group liability -- because such high returns were delivered when the program was first implemented, the system now lacks resources to deliver similar market returns to later participants.
- The system's closed-group liability would be eliminated and each generation could then invest its own retirement savings in the capital markets.
- Government's current role in transferring money between generations would end, and the new system could operate without any government involvement.
Deciding who should bear the brunt of the transition cost and whether to make this sacrifice is the difficult decision citizens and policymakers must make, say experts.
Source: Jason Saving and Alan Viard, "Social Security Restructuring: Tough Decisions Ahead," Southwest Economy, September/October 2003, Federal Reserve Bank of Dallas.
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