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How to Save Social Security Systems

Providing benefits to support a comfortable standard of living for retirees with just a modest rate of tax on the working population depends on there being a small number of pensioners relative to the number of taxpayers. That is no longer the case.

CAMBRIDGE – Every society faces the difficult task of providing support for older people who are no longer working. In an earlier era, retirees lived with their adult children, providing childcare and helping around the house. But those days are largely gone. Retirees and their adult children alike prefer living independently.

In a rational economic world, individuals would save during their working years, accumulating enough to purchase an annuity that finances a comfortable standard of living when they retire. But that is not what most people do, either because of their shortsightedness or because of the incentives created by the government social security programs.

European governments since Otto von Bismarck and US governments since Franklin Roosevelt have therefore maintained pay-as-you-go (PAYG) retirement pension systems. More recently, Japan has adopted such a system.

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