Greenspan's Right: Social Security Replaces Savings

Friday, 25 Oct 2013 07:40 AM

By Michael Carr

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Former Federal Reserve Chairman Alan Greenspan recently told The Wall Street Journal that he was surprised to discover that an increase in entitlements coincided with a decline in personal savings. This is one of those statements that seem obvious after someone points it out.

Social Security was intended to provide a safety net to senior citizens who could no longer work. In 1975, Social Security benefits were linked to inflation. Fed data show that the savings rate has been declining ever since.

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The average Social Security retirement benefit is $1,270 a month and the average 65-year-old retiree has a life expectancy of 21 years. To fund an annuity that pays $1,270 a month indexed to inflation would require at least $250,000 in personal savings.

Instead of saving, many people spend their income knowing that Social Security will provide monthly income. From the perspective of an economist, this is rational behavior.

For example, a 35 year old would have to save about $350 a month to retire with $250,000. Or that $350 could be used to make a car payment. Knowing that Social Security is guaranteed, many 35 year olds would choose to make the car payment or use the $350 to fund some other current living expenses.

Low savings rates mean the country will need to increase borrowing to obtain capital for investments, leaving the United States dependent on other countries in the world where savings rates are higher.

Future retirees have no incentive to save when Social Security is available and the nation's economy will suffer from a lack of savings unless savings rates increase.

Hopefully Alan Greenspan or other policymakers will find a solution to the problem now that they understand the cause. But, there is no easy fix to this problem.

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