Why have Social Insurance? How can government intervention improve efficiency? Social insurance programs are compulsory the adverse selection problem is avoided because the low risks are forced to purchase the insurance policy as well In the private market, the low risks would be less likely than the high risks to purchase the insurance policy
6 Why have Social Insurance? • How can government intervention improve efficiency? – Social insurance programs are compulsory: the adverse selection problem is avoided because the low risks are forced to purchase the insurance policy as well. – In the private market, the low risks would be less likely than the high risks to purchase the insurance policy
Why have Social Insurance? Other justifications Lack of Foresight / Paternalism For example, some individuals do a poor job of planning for their retirement Moral hazard “ Gaming the system Economize on Decision-making costs Income distribution
7 Why have Social Insurance? • Other justifications – Lack of Foresight / Paternalism • For example, some individuals do a poor job of planning for their retirement. – Moral Hazard • “Gaming the system” – Economize on Decision-making costs – Income distribution
Structure of Social Security Many details of Social Security laid out in the following slides One motivation for presenting these details is that virtually all college students are affect by Social Security, thus, it is important to understand the details
8 Structure of Social Security • Many details of Social Security laid out in the following slides. • One motivation for presenting these details is that virtually all college students are affect by Social Security, thus, it is important to understand the details
Structure of Social Security Basic Components Pay-as-you-go Financing Explicit transfers Benefit structure Age at which benefits are withdrawn Recipient's family status Financing
9 Structure of Social Security: Basic Components • Pay-as-you-go Financing • Explicit transfers • Benefit structure • Age at which benefits are withdrawn • Recipient’s family status • Financing
Structure of Social Security Basic Components Pay-as-you-go Financing Benefits for current retirees come from payments made by current workers Early recipients received very high returns on their contributions 10
10 Structure of Social Security: Basic Components • Pay-as-you-go Financing – Benefits for current retirees come from payments made by current workers. – Early recipients received very high returns on their contributions