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Social Security Reform

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What are the concerns with Social Security at the macroeconomic level? What options do Americans have in protecting their Social Security and dealing with these issues? How are these done on the microeconomic level?

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Annual spending on Social Security will exceed the system's tax revenue in 2018 and the trust fund will be empty in 2042, at which point the system will be insolvent. Under current law, the benefits the system will be able to pay from that year on will be only as great as the revenues coming in. Retirees would receive only about 75 percent of scheduled benefits. The reason for this shortfall is twofold: firstly, Americans are having fewer children and living longer. Secondly, adjusted for inflation, benefits increase each year. This is called "indexing" and was introduced in 1977.

As currently structured, social security reduces national savings. If social security taxes were invested by the government and returned to workers with interest, social security would essentially be a system of ...

Solution Summary

Social Security's impending shortfall and options for keeping it solvent.

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Social Security Reform

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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