Social Security and Unemployment Insurance

Why do we care? SS is one of largest government programs SS is one of largest government programs Important element of social welfare Important element of social welfare Important distribution impacts Important distribution impacts Important efficiency impacts Important efficiency impacts

Increasing share of government budget

Growing Percent of GDP

Growing Burden on Workers

= problems funding SS over time

And Future Deficits

What makes these programs unique? Non-discretionary spending Non-discretionary spending Compulsory participation Compulsory participation Benefits depend on prior contributions Benefits depend on prior contributions Benefits triggered by identifiable occurrence Benefits triggered by identifiable occurrence Not means tested Not means tested

Why is the Government Involved?

Adverse selection Asymmetric information and private insurance Asymmetric information and private insurance Private sector knows little about individuals, must charge everyone more than average payout Private sector knows little about individuals, must charge everyone more than average payout Those who expect to use less than average payout not interested Those who expect to use less than average payout not interested Those who are interested get more than average payout, driving up average Those who are interested get more than average payout, driving up average Many people who would want insurance can’t get it at reasonable cost Many people who would want insurance can’t get it at reasonable cost

Other reasons Lack of foresight Lack of foresight Moral hazard Moral hazard Economize on decision making Economize on decision making Tool for income redistribution Tool for income redistribution

How is SS financed? Pay as you go Pay as you go More coming in than going out More coming in than going out Impact on savings Impact on savings Covers some of government deficit Covers some of government deficit Is it a labor tax? Is it a labor tax? Why doesn’t it come out of general funds? Why doesn’t it come out of general funds?

Distribution issues Is it regressive? Is it regressive? Flat tax on first 87K, then 0 Flat tax on first 87K, then , 1995, , 1995, 2015 Intergenerational distribution Intergenerational distribution Other idiosyncrasies Other idiosyncrasies

SS Reform Increase payroll tax, or apply it to all income Increase payroll tax, or apply it to all income Decrease benefits Decrease benefits Increase retirement age Increase retirement age Mixed public private Mixed public private What would be impact on stock prices? What would be impact on stock prices? Who would benefit most? Who would benefit most? Will stock market always grow? Will stock market always grow? Do stock market increases equate with increases in real output? Do stock market increases equate with increases in real output?

Unemployment insurance Why won’t the private sector provide it? Why won’t the private sector provide it? Asymmetric information and adverse selection Asymmetric information and adverse selection Why do we need it? Why do we need it? Stability Stability We eat every day, not on average We eat every day, not on average Textbook argues that it might increase unemployment, but Keynesians argue that it will actually decrease it. Textbook argues that it might increase unemployment, but Keynesians argue that it will actually decrease it.