Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Monday, February 21, 2005

Pensions and the Aging Population

Steven Landsburg has written the best piece, by far, explaining the case for creating public policy toward pension plans that will induce people to save more. It points out that
  1. There are going to be lots more retired old people wanting lots of goods and services.
  2. There are going to be fewer younger people, as a proportion of the entire population, producing stuff for themselves and all the old people.
  3. As a result of 1 and 2 above, either people will have to consume less per capita in the future or economies will have to produce a whole lot more per worker.
  4. One of the best ways to get more output in the future is to encourage more saving and investing now.

Others have said this, many times, but he said it so well.

The looming bankruptcy is both absolutely real and absolutely insignificant. You could reverse it in an instant by changing a definition or two. Keep benefits exactly as they are, but call only half of them "Social Security benefits"; call the rest something else, like, say, "Geezer Pleasers." Social Security taxes would exceed "Social Security benefits." VoilĂ , no more bankruptcy.

That's just what we do in Canada, only we call it "Old Age Assistance" instead of "Geezer Pleasers"; nice name, though.

The true crisis lies elsewhere. It has nothing to do with bankruptcy, nothing to do with definitions or accounting tricks, nothing to do with
lockboxes or anything else about the way the system is structured. Instead, the crisis is completely defined by the fact that in the future (as in the present) there will be only a finite number of goods to go around, and in the future (unlike in the present) there will be a lot more old people clamoring for a share...

If you want to address the Social Security crisis of the future, you must adopt laws that encourage saving in the present. There's nothing else you can do.

Big tax breaks to induce people to save for retirement will go a long way toward this goal.....

because, after all, people respond to incentives.

For a good take on U.S. Social Security reform, read what Kip has to say.

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