Pay-As-You-Go Social Security System

Question: Discuss about the report of "Pay-As-You-Go Social Security System". Answer: Pay-As-You-Go Social Security System: Economic Growth and Stability The social security system offers present and future employees with returns that are below the market rates since it is a sophisticated pay-as-you-go system of retirement. The workers suffer the burden of the liabilities that are not funded which emerge from windfall benefits to previous retirees (Fanti Gori, 2012). These principles are useful in examining the impacts of three demographic advances including the stumpy birth rate because the conclusion of the baby boom in 1965, the coming retirements of baby boomers as well as the declining trend in mortality of aging. The stumpy rate of birth diminishes the long-run rate of return of Social Security while the unfunded liability is being spread across the small proportion of workforces. The retirements of the baby boomers have no distinct challenge but denote the close of the provisional benefits triggered by the high rates of birth throughout the boom (Teles Mussolini, 2014). The burden of workers will not be necessarily changed since the declining mortality pattern has no effect on the long-term return rate or the number of employees through whom the unfinanced obligation is spreadable. Nevertheless, the policymakers are likely to adopt responses that will shift the burden from earlier to later generations. A pay-as-you-go system results in a lasting below-market rate of the returns equivalent to the rate of growth of the nationwide labour income. The unfunded liability of the system that describes the windfall gains cost given to previous pensioners who donated little system is the entire load levied on both future and current workforce by the returns of below-market (Wickens, 2011). The manner in which the economic effects of demographic development impacts the rate of growth of national labor alongside the unfunded liability allocation dictates such effects. The growth rate of the national income and the workforce is slowed by a lower rate of birth which decreases the long-run rate of return of the Social Security. Such lower rates raise the burden of the system on individual employee since the unfunded liability will only be spreadable across a small number of workers. The high rates of birth of baby boomers raise the Social Security return rate since it boosts the rate of growth of both national labor income and workforce thereby spreading the unfunded liability across a vast number of workforce. The baby boomers retirements are projected to end these temporary gains thus leaving the impacts of the lower post-1965 birth-rate to be faced by the system. The declining trend in the mortality of the aging population has no effect on the national labor income rate of growth (Viard, 2012). The aggregate gains must be decreased with the increasing number of retirees to address the issue of declining trend in ageing mortality while keeping the burden of workers unchanged. The unfunded liability of a mature pay-as-you-go describes the unavoidable start-up bonus cost provided to early workers. A generation will thus suffer below-market returns from one to the next if the system is continued perceived as the liability servicing cost (Viard, 2012). A current generation, on hand, will make a one-time payment of cost of transition of the same PV (present value) if the system is abolished and this cost is perceived as liability retiring cost (Kuhle, 2014). Shrinking the system is preferred to abolition in reducing both costs of transition and gain to future generation as abolition is expensive. Generation 2 can be taxed to pay the full benefit of generation one and informing generation simultaneously that such benefit will get rid of or decreased in the subsequent period thus shrinking or abolishing the cost of transition. The decision to shift from a pay-as-you-go system needs an examination of the rights, obligation as well as needs of various generations (Engelbrecht 2013). It has been argued by economists that gain to the future generations from gradually abolishing or shrinking the pay-as-you-go system validate the cost of transition to the existing generation. In summary, economic examination of pay-as-you-go social security gives intuitions into the differences and similarities of the developments of three demographics which account for aging of America. However, such insights have remained overlooked in big discussions mainly focusing on whether the Congress will have to change the current legislation to deal with these developments compared to how these events eventually affect various well-being after any legal alterations are made (Teles Mussolini, 2014). The current demographic developments are expected to raise the load that pay-as-you-go social security inflict on upcoming generations. Shifting from pay-as-you-go system will eliminate the encumbrances, but foist a significant cost of changeover to the present cohorts. References Engelbrecht, Hans-Jrgen. (2013). "Introduction to Economic Growth, Charles I. Jones New York, WW Norton Company, 1998, xii+ 200 pp., AU $41.95, ISBN 0-393-97174-0." (2013): 97-100. Fanti, L., Gori, L. (2012). Economic growth and stability with public pay-as-you-go pensions and private intra-family old-age insurance. Research in Economics, 66(3), 219-229. Kuhle, W. (2014). The dynamics of utility in the neoclassical OLG model. Journal of Mathematical Economics, 52, 81-86. Teles, V. K., Mussolini, C. C. (2014). Public debt and the limits of fiscal policy to increase economic growth. European Economic Review, 66, 1-15. Viard, A. D. (2012). Pay-as-you-go social security and the aging of America: An economic analysis. Federal Reserve Bank of Dallas Economic and Financial Review. Wickens, M. (2011). Macroeconomic theory: a dynamic general equilibrium approach. Princeton University Press.