SOCIAL SECURITY AND THE SAVINGS RATE

To pose the question of whether the existence of social security in the United States has led to a reduction in the rate of personal savings in this country is like asking if the apple one ate after dinner last night caused one's stomach ache, considering that one had also consumed a whole pizza and a six pack of beer just prior to eating the apple. In the latter instance, the apple probably contributed to the overall level of discomfort, but whether the apple would have had any undesirable effect at all in the absence of the pizza and beer is quite another question. The same phenomenon occurs with respect to the relationship between social security and the personal savings rate. Social security, within the economic environment in which it exists, likely has contributed to the lower personal savings rate in the United States. Whether the effect of social security on the personal savings rate would be of any consequence in the absence federal income tax, cycles of unemployment, consumer installment debt, and an American penchant (actively promoted by the federal government and the country's major corporations) to spend heavily on current consumption (each of which dwarfs social security as a proportion of total personal income) is, again, quite another question.

The argument of the public choice economists who contend that the existence of social security is the cause of a lower personal savings rate in the Unite

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r, the existence of social security does have an adverse effect on the personal savings rate. The personal savings rate is defined as the proportion of disposable personal income that is not devoted to personal outlays (Council of Economic Advisers, 1990, p. 326). Disposable personal income is defined as personal income less personal tax and personal non tax payments. In this context, social security contributions are considered to be a non tax payment. Personal outlays are defined as the total of personal consumption expenditures, interest paid by consumers to businesses, and net personal transfer payments to foreigners. Personal income includes all wage and salary disbursements, other labor income, proprietor income adjusted for inventory valuation and capital consumption, rental income of persons adjusted for capital consumption, personal dividend income, personal interest income, and transfer payments less all personal contributions for social insurance. Thus, within this framework, social security contributions are not considered to a personal savings. Data pertaining to the relationship between the personal savings rate and disposable personal income in the United States is presented in Table 1, which may be found on
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Approximate Word count = 3967
Approximate Pages = 16 (250 words per page)

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