the social security system would be a powerful incentive for individuals to save more; however, the public choice economists continue their claim to the contrary. Further, the public choice economists who condemn social security as a cause of the decline in the personal savings rate in this country appear to have a blind spot where the relationship between employer funded retirement plans and the personal savings rate is concerned. Again, to the naive observer, it would appear that both social security and employer funded pensions should affect the personal savings rate in generally the same manner.
This essay will argue that the existence of social security, when viewed in a narrow context, does adversely affect the personal savings rate, but that social security is but one of several factors that adversely affect the personal savings, and further, that it is not the most important of these several factors. This essay will also argue that the existence of social security, when viewed in a broad context, does not adversely affect the personal savings rate.
The narrow context of viewing social security is the consideration of social security as a tax. During the first term of the Reagan Administration, the federal government tumbled to the fact that the baby boom generation would one day become eligible for social security retirement benefits. When a closer look was taken, it was discovered that the retirement funds would not likely be able to remain solvent when the baby boomers retired, unless changes were made to the system. As a consequence, a new contribution structure was developed, which the Administration and the Congress assured the American public would provide for the fiscal integrity of the retirement trust funds to a point at least mid way through the next century.
The new contribution structure for social security suited the Reagan Administration to a tee, because it enabled the federal government to increa...