Tuesday, March 02, 2004
302 Of social security
302 Of social security
Today in my financial economics class, conducted by a hilarious visiting professor from Vanderbilt University, for the first time there was a hint of politic in it.
It all started with the discussion of investment companies and from there, the topic gradually moved on to pension fund and all the way to social security system. Currently, the social security system is the largest pension fund in the whole world and it is sort similar to the Employees' Pension Fund back in Malaysia. More precisely, the social security is a defined benefit plan, where the employer is responsibled to set aside part of its employees’ income into a pension fund and then hand out a stream of income for its employees after their retirement. In reality, a small part of the company assets is aside for the purpose, not part of the employees’ income. Therefore, the money that is supposed to be there to pay future retirees is not actually there but rather, will be paid through future wealth that will be put aside when the time to pay up comes.
Currently, the baby boom generation that came into being in the 70s is still in the workforce and the generation is slowly pushing themselves towards retirement. Right now, the social security works because there are more people in the workforce versus people that is out of them workforce due to retirement. And presently, in practice, the baby boomers are paying the income stream for current retirees.
The problem arises when the baby boomers retire. As Professor Rousseau put it in a serious but yet entertaining tone, “And guess who is going to pay for it?”
Well, guess who?
Hint, USD 500 000 000 000 budget deficit; for the mathematically deficient, that’s half a trillion dollar.
Answer, us. Well, actually us excluding me unless I continue to stay here after 2005.
There are a few solutions to this problem. One is to scrap the social security system. Interestingly, the professor said this may not be the solution due to moral hazard – we won’t allow our parents to live in the street. Well, would us?
It all started with the discussion of investment companies and from there, the topic gradually moved on to pension fund and all the way to social security system. Currently, the social security system is the largest pension fund in the whole world and it is sort similar to the Employees' Pension Fund back in Malaysia. More precisely, the social security is a defined benefit plan, where the employer is responsibled to set aside part of its employees’ income into a pension fund and then hand out a stream of income for its employees after their retirement. In reality, a small part of the company assets is aside for the purpose, not part of the employees’ income. Therefore, the money that is supposed to be there to pay future retirees is not actually there but rather, will be paid through future wealth that will be put aside when the time to pay up comes.
Currently, the baby boom generation that came into being in the 70s is still in the workforce and the generation is slowly pushing themselves towards retirement. Right now, the social security works because there are more people in the workforce versus people that is out of them workforce due to retirement. And presently, in practice, the baby boomers are paying the income stream for current retirees.
The problem arises when the baby boomers retire. As Professor Rousseau put it in a serious but yet entertaining tone, “And guess who is going to pay for it?”
Well, guess who?
Hint, USD 500 000 000 000 budget deficit; for the mathematically deficient, that’s half a trillion dollar.
Answer, us. Well, actually us excluding me unless I continue to stay here after 2005.
There are a few solutions to this problem. One is to scrap the social security system. Interestingly, the professor said this may not be the solution due to moral hazard – we won’t allow our parents to live in the street. Well, would us?
