July 28th, 2011
Econintersect: A study by the NY Federal Reserve on USA social security concludes "The social security is not sustainable as it is" due to the coming demographic shift.
The Trust Funds will start to decline soon and be exhausted eventually. The solution is to restore the balance, either by reducing benefits or by raising taxes. The question is what the options are, how big the adjustment has to be under each option, and what the economic consequences are.
Follow up:The paper reviewed four different options:
- increase payroll taxes by 6 percentage points,
- reduce the replacement rates of the benefit formula by one-third
- raise the normal retirement age from sixty-six to seventy-three, or
- means-test the benefits and reduce them one-to-one with income.
The study concludes:
While all four policies achieve the same goal, their economic outcomes differ significantly. Options 2 and 3 encourage own savings, and capital stock is more than 10 percent higher than in the other two options. The payroll tax increase in option 1 discourages work effort, but means-testing the benefits as outlined in option 4 yields the worst labor disincentives, especially among the elderly.
Interestingly, the study dips its oar into other entitlement issues:
There are public programs other than social security that pose similar or possibly greater sustainability risks such as Medicaid and Medicare. It would be interesting to extend the study to explore these issues in future research.
Source: NY Fed