Public Economics and Privatization of Social Security - Research Paper Example

Public Economics Paper I (a) Privatization of social security is increasing throughout the world Chile, Sweden, Australiaand Argentina have already privatized. One of the greatest proposals along the lines of privatizing social security and its argument came in 2005 President George W. Bush purported a plan to permit all workers under 55 to invest a percentage Social Security taxes into "personal retirement accounts. The US Social Security system is envisioned to give a shield protecting American workers and their relations in case of disability, retirement, and early mortality. Shifting Social Security aids to private accounts is a way of preventing Social Securitys anticipated forthcoming financial shortfall (Myles, 54). Privatization of Social Security would permit workers to control personal retirement money through personal investment accounts. Backers of private accounts argue that retirees would have the freedom to invest their retirement funds in the stock market as they aspire, theoretically gains huge returns than with government-invested money. Privatization programs are based on a modest idea. Instead of contributing to a collective or group, pay-as-you-go retirement plan, employees would be obligatory to build up retirement savings in directed private and individually owned accounts (Matthews and Dorothy 23). Workers can withdraw these funds from the accounts when they reached the retirement age or became disabled, and their beneficiaries could inherit any funds accumulated in the account if the employees died before reaching the retirement age or becoming disabled. At the time a worker chose to begin receiving a pension, all or some of the funds in the workers account would be changed into an annuity that would exist until the worker died. If the worker marries, both spouse, and worker might be needed to allow a joint survivors annuity, this is to say, an annuity that would extant until both the spouse and worker have died. Under some suggestion, workers could choose to draw some of the finances as a massive distribution when they retire or disabled. Employees would be allowed to choose how their contributions were invested, within broad limits (Matthews and Dorothy 23). In few privatization programs, contributions would be collected by a semi-public or single public agency or group and then invested in one or more of a given number of investment funds. A worker might be provided with the choice of investing in, say, five various funds - a stock market index fund, a corporate bond fund, a money market fund, a real estate investment trust and a U.S. Treasury bond fund. By pooling the investments of all protected workers in a limited number of funds and unifying the collection of contributions and finance management, this method would minimize administrative expenses, but it would limit workers investment options Wf W W’ w1 L’ Q labor By implementing private system, the government would be shifting away from the traditional social security as shown above where the distribution of the burden of social security varies with the slopes of the demand and supply. In this system of private socials security, the all of the burden is never shifted to workers or tax absorbed by firms. A social security system that United States workers are a "pay as you go" program with gains paid from a flat tax on labor, "half" by employers and "half" paid by labor. Below is a table highlighting key points that differentiate the two systems of contribution Current social security Typical private pension PAYGO Funding Full Funding Mandatory Contributions Voluntary contributions Defined Benefit Personal Defined contribution Accounts No Investment Choice Investment Choice Government Management Private-sector Management Redistribution Actuarial Fairness Annuity Only Lump-sum Payout Option 1. b) The plan will be financed with taxes on labor with. Obtaining a privatization system initiated is too costly. The transition expense of setting up new personal accounts while continuing to give benefits to Social Securitys current beneficiaries would need an extra $1 trillion to $2 trillion. Privatizing Social Security, which essentially is putting individual’s retirement funds at the urge of the stock market, will subside the federal retirement system through potentially risky investments. Under one plan, workers would be needed to give 1.6 % of their covered wages to manage publicly but individually selected retirement accounts. The 1.6 % contribution would be on top of the 12.4 % combined tax that employees and employers already pay into Social Security. Under the more impressive privatization system, the overall contribution would increase by 1.5 percent of covered wages, but 5 % points of the higher tax would be redirected into own selected and privately managed personal security accounts (Myles,84). c) One of the long-run economic effects of privatizing social securities is the possibility of economic growth like it happened in Chile. This is a fact since the present value to the America economy of investing the potential cash flow of payroll taxes in real assets could be on the order of about $10 to $20 trillion. That would mean a permanent, important boost to economic growth (Myles, 25). Privatizing Social Security can boost employees rate of return by permitting retirement contributions and pooled funds to be invested in private assets, for instance as stocks, which give a better return than the current pay-as-you-go retirement mechanism. Returns on short run can be boosted still further if the government borrows on a large scale to pay for previous Social Security liabilities, permitting workers to invest a larger percentage of their pay in high-yielding resources or assets. In the long run, privatization channels funds out of Social Security into personal accounts leaving an even larger solvency problem. Privatizers fill this funding gap by soon cutting Social Security benefits (Myles, 33). They cover the rest of funds by borrowing money, thereby raising the debt burden on taxpayers by trillions of dollars over the next 50 years. With market-based accounts, the risk of an enough retirement is put entirely on the individual. The outcome indicates that, with the right initial conditions and the right choice of fiscal tool during the transition, privatization can largely reduce labor supply distortions and, thereby, raise economic efficiency. But if the first conditions aren’t right or if inappropriate fiscal tool are used during the transition, privatization can end up reducing economic efficiency in the long run. d) At a glance, Chilean social security’s privatization in my critical analysis has left present retirees in their pre-privatization place. At the same time has transformed inherent liability to reward principal and interest on recognition bonds (Myles, 14). Under Chilean method, workers receive random rate of returns on private pension contribution. The Chilean workers annual contributions in the private pension fund are totaling to about 3.5% of gross domestic product. The pension contributions from the pension funds are relatively low, mainly since yet just a few depositors have attained the retirement age. All citizens who have injected to a fund for at least 20 years are assured a minimum pension (Matthews and Dorothy 42). Government provides the contrast between the minimum pension and the pension title from the investment fund. If the pension fund is incapable to perform a defined minimum gain, it will be liquidated, and the obtained assets will be transferred to another fund. If it is bankruptcy of a pension fund, the authority pays out the pensions on the public cost. In Sweden, employees and employers contribute a pooled 16 % of payroll toward a pay as you go retirement methods like Social Security and a further 2.5 % toward own retirement accounts. Those individuals born after 1954 are fully in the new technique, while older workers are wiped out. In Sweden, workers must put 18.5 % of their income aside for retirement, but now able to invest 2.5 % points of that value in an individual account. Workers choose the pension fund that best suits own investment preferences. In Swedish system that America can learn from (Auerbach, 77). The Swedish system of centralized administration minimizes the additional paperwork burden for workers; permit the government to negotiate lowering management fees by fund providers and facilitates broad finance choice (Matthews and Dorothy 88). II (a) president Obama advocates expansion in Medicaid. It is expanding Medicaid eligibility to all families and individuals below the 138% Federal Poverty rate to include even those who were not previously eligible. By doing this health insurance, will provide relief for almost half of American’s uninsured. The plan does face a long-term financing shortfall. Social Security’s compact remains progressive and strong for future generations and restores long-term solvency (Matthews and Dorothy 12). b) Winners who are tens of millions of uninsured will obtain access to quality and affordable health insurance through the marketplace. Small firms can get tax credits for up to 50% of their workers’ health insurance premium costs. Insurance firms must cover sick individuals, and this increases the cost of everyone’s insurance. One con to the plan is in order to obtain the money to help insure tens of millions there are new taxes, mostly on high-earners. The taxes that may impact American directly are the individual mandate and employer mandate (Auerbach, 37). C). Distribution of losers and winners don’t explain the basis of political support for the programs. Political support for and Medicaid tends to rise with age for the similar reasons as social security. Support for the program tends to rise as the median voters age increase. Taste distinguishes voters over-consumption of health care and income. For this program the analysis details the typical voter will have little direct information about allocation and the level of their governments program rollout expenditures or their ultimate impacts on individuals life in the short run. So, there is unusually large scope for interest group interventions of the plan (Auerbach, 45). $/B MTC c MBc MB b MBa MTC a and b yc yb ya Benefit level A simple median voter model of the demand for social security benefit may help analyze the levels of contributions given these taxes can be characterized with one of net benefit maximizing diagrams. Assuming a, b and c are voting on benefits level they yield, b is a median voter, and yb can be taken as benefits level. In considering the level of difference in benefits reflected in reflected rates and diminishing marginal Utility of income. Meaning that a is poorer and older than b and c. C is the youngest and richest. Their median voter model shows that benefit levels reflected the fiscal constraints of the median voter, such as private pension income, labor income age, real interest rate, growth rate, and effective tax base per elderly, the number of retirement benefit recipients, their private pension income, and the size of the program administrative expenditure. Winner b as the median aged and has a median income (Matthews and Dorothy 18). Work cited Myles, Gareth D. Public Economics. Cambridge [u.a.: Cambridge Univ. Press, 2002. Print. Auerbach, Alan J. Handbook of Public Economics: Volume 5. Amsterdam: North Holland, 2013. Internet resource Matthews, J. L., and Dorothy Matthews Berman. Social Security, Medicare, and Pensions. 7th ed. Berkeley, CA: Nolo.com, 1999. Print. Read More