Tracey Rochelle, in her study of social security and savings, set out to examine the effects that social security has on savings rates across nations with different levels of savings. The findings of the study indicated that “social security spending only depresses saving in countries with high savings rates.” However, Rochelle also concluded that social security does not essentially reduce savings in every country. Consequently, these results imply that it is not necessary to have social security programs in all countries. In countries with low saving rates, a compulsory saving plan will make sure that people save for their retirement. Hence, social security programs are expected to boost economies that have low savings rates as growth is dependent on savings. Conversely, social security programs may not be necessary in countries that have high household savings rates as they are already saving even without the presence of social security. Hence an increased spending on social security will only result in decreased national and household savings rates.
Considering the impact of the induced retirement effect, I agree with Rochelle’s conclusions. Social security is a motivation for people in the labor force to retire at an earlier age than usual. This effect is termed as the ‘induced retirement effect’, and it encourages employees to retire bearing in mind that the social security program will amass a sufficient amount of savings to guarantee that the employees can achieve their desire level of consumption upon retirement. Hence, the induced retirement effect negatively affects savings. This is because employees believe that they will be able to avoid an impoverished life of retirement through social security. They are of the view that the savings in social security will be sufficient to sustain them in their older years. From Rochelle’s conclusion, the induced retirement effect only affects employees on countries where the saving rates are high. I agree with this finding owing to the fact that such employees are already saving even without a social security program and the introduction of such a program will result in reduced saving rates.
The saving replacement effect comes from the notion that employees presume that the government has taken the responsibility to save for them under the compulsory social security scheme. As a result, private savings are consequently diminished given that the government is saving for individuals. People assume that the sum of money deducted from their earnings will be adequate to ensure they live in a comfortably in their retirement years. In countries with low saving rates, a large percentage of people are dependent on Social Security as their main income in retirement. The aim of Social Security programs is to help the retired population to secure its economic condition by compelling them to make sufficient saving now so as to benefit in future. However, there is concern that many people are still not saving enough to make adequate funds available for their retirement. As Rochelle concludes, social security programs are expected to encourage saving and boost economies that have low savings rates as growth is dependent on savings.
Works Cited
Hamermesh, D. S. (1984). Consumption During Retirement: The Missing Link in the Life Cycle. The Review of Economics and Statistics , 1 (66).
Moschis, G. P. (1987). Consumer socialization: a life-cycle perspective. New York: Lexington Books.
Rochelle, T. Social Security and Savings. Elon College.
