User:Nazarranjha

Social Security Solvency: The entry on social security does not address the issue from the perspective of public economics, although it discusses in detail from the constitutional and legal perspectives. In my opinion, it should have discussed the issue from the following perspectives: 1. Consumption smoothing and the annuity market; 2. Economize on decision making and administrative costs; 3. Income redistribution; 4. Saving behavior; and 5. Improved income status of the aged. I will discuss only first one among these five. Consumption smoothing and the annuity market: Social Security (Rosen and Gayer 2008) provides insurance for the possibility of living longer than expected, when a person has consumed all the resources saved for retirement. Annuity[[1]] is one answer to such an eventuality. A person will buy an annuity and will pay a certain amount during his working life up to around 65 and then receive benefits in return upon retirement. The larger the premium, the larger the benefits he will receive when all the other things remain same. The second concept of consumption smoothing means that a person reduces his consumption when he is earning at the highest level and saves for the years when he will be old and not able to earn at this level but wants to achieve a certain level of consumption for him or his family. A risk averse person will be willing to buy an annuity and reduce his consumption in return for a guaranteed level of income after his retirement and for his family after his death. But this has some problems like adverse selection[[2]] due to asymmetric information[[3]]. Reference: 1. Rosen, Harvey S., and Gayer, Ted, Public Finance, 8th edition, McGraw Hill companies, 2008.