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World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
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Chapter 24: The political threat to Social Security

James Tobin


* President Clinton has asked for a national debate this year on the future of Social Security. If the debate would match the high quality of the papers that Aaron and Shoven prepared for this symposium, we could be hopeful about the policy outcome. Right now, however, the greatest threat to Social Security as we know it is the campaign for extreme privatization, allowing workers to invest their payroll taxes for themselves in IRAs. As critics of Old Age and Survivors’ Insurance (OASI) incessantly point out, those IRAs would very likely earn much higher returns on retirement than OASI can promise. If current payroll taxpayers opt out, the OASI Trust Fund won’t be able to pay benefits due participants now retired or soon to retire. Advocates of privatization who entice workers with promises of stock market rates of return are inviting them to break the intergenerational compact on which the system depends. These critics of Social Security also propose to convert OASI in whole or in large part into a defined-contribution (DC) pension system (like TIAA-CREF, beloved of academics). Social Security is instead a definedbenefit (DB) scheme. More important, it is social insurance, insurance against the general human risk of economic adversity in old age and incapacity to earn a living by employment. Social insurance requires universal participation, in which the premiums of the fortunate pay the claims of the unfortunate. This is the rationale for compulsory participation. Indeed, once society has recognized responsibility for aged citizens...

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