Social Security reform
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Suppose the following Social Security reform became law:
All current Social Security recipients will continue to receive their benefits, but no increase will be made other than cost-of-living adjustments.
US citizens, between age 40 and retirement, who are not yet on Social Security, can opt to continue with the current system.
Those who opt out can place what they would have contributed to Social Security in one or more government-approved mutual funds.
Those under 40 must place their contributions into one or more government-approved mutual funds.
Answer the following questions:
Who will be in favor of this reform and why?
Who will be against this reform and why?
What might happen to stock market indexes and why?
What additional risk is involved for those who end up in the private system and why?
What additional benefits are possible for people in the private system and why?
Which firms in the mutual fund industry might not be approved by the federal government and why?
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You don't have to make wild guesses about who would support social security reform. Gallup has already done that for you. You can see their poll here:
http://seniorjournal.com/NEWS/SocialSecurity/5-01-05GallupPoll.htm
So what's left is to understand why young people would favor this reform, while those closer to retirement would oppose it. Certainly some of it has to do with risk aversion. Young people have been exposed to fewer economic downturns. Since the 1980s, the US economy has been remarkably stable. Certainly we've seen some stock market downturns, but the market has always recovered and the economy as a whole has never been derailed like it was during the Great Depression. So certainly people who've seen the Great Depression are going to be more skeptical of using mutual funds than someone who's never personally experienced an ...
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