Social security

Social security is a governmental system, providing benefits to elderly or retired people

and other citizens in the case of illness or labor disability. Like every system, it is fundamentally
flawed.
In the past few years, the severe financial problems of social security in USA have received widespread public
attention. The changing demographic structure of US population makes it very expensive to maintain any level of benefits.
Another problem is that nations rate of saving is reduced, and the real root of capital scarcity is social security.
Since social security is financed on a pay-as-you-go basis, the government doesnt accumulate the tax dollars it
receives but pays them out immediately as benefits. The government keeps only a petty cash fund equal to a few months worth
payments. There are no other assets. Therefore, when the social security system induces individuals to reduce their saving, the
program has no stockpile, there can be no investment or capital formation. Benefits paid to today retirees are financed by taxes
from today workers; benefits to be paid to todays workers will be financed by taxes from tomorrow workers. Its nothing more
and nothing less than the intergenerational transfer of wealth, from young workers to older retirees through a payroll tax. There is
no saving, no investing, no capital accumulation, just transfer.
A long-run consequences of a reduced rate of capital formation, stemming from reduced saving, are likely to be very
significant:
1)

Less capital accumulation means a lower rate of growth and a lower level of income. With less capital per
employee, productivity is lower and real wages grow more slowly.

2)

The lack of domestic saving may encourage a growing inflow of foreign investment and ownership in the
United States.

3)

The scarcity of capital and the inflow of foreign funds may encourage an increase in government controls over
the capital markets

A low rate of capital formation and its adverse consequences are avoidable by reducing the growth rate of old age
benefits in order to encourage greater reliance on individual saving and private pensions. One method of doing this would be to
raise the age of eligibility for full pension benefits. By making change effective the government would reduce the growth of
benefits without cutting benefits of the retired or those near retirement.
But anyway the low rate of return for individuals remains hidden by the much more favorable experience of persons
now in retirement. Strong institutional and ideological pressures persist to maintain the status quo by patching over the financial
problems and hiding the lower return through general revenue finance.
Social security is at turning point now. There is a necessity for decisions affecting not only the future of the system
but also the future of capital formation an economic growth in the country.