Why do People Disagree about Social Security Reform?
Our discussion of Social Security deliberately used a simple framework. Using that framework, we first showed that, in the simplest case, the Social Security system actually has no effect on the lifetime consumption of households. We also explained that, once we move away from this simple setup, there are some arguments both for and against a Social Security system. Complications The world is much more complicated than our simple framework, and we need to make sure that our analysis has not left out some important feature of the real world that would change our conclusion. In this section, we briefly discuss some complications to our model. Some of these complications provide some additional reasons to support a Social Security system; others identify additional costs of the system. However, these additional costs and benefits are much less important than those we have already identified. Positive Real Interest Rates We based all our discussion on an assumption that the real interest rate is zero. When the real interest rate is zero, it is legitimate to add real income in different years and consumption in different years. With a real interest rate of zero, adding income levels in different periods is not a problem. But if the real interest rate is positive, this is not correct. To add income and consumption in different years, we have to calculate discounted present values. Toolkit: You can review discounted present value in the toolkit.
