Question

M7 discussion question The social security rate(OASDI) for employees was temporarily set to 4.2% but has been raised back to 6.2%. The amount was initially cut as a way to stimulate the economy. Please discuss whether this was a good idea to lower the rate or should it never have been lowered.

Answer 1

This is the retirement and disabled benefits of employees. Today’s contributions by both employer and employee in equal proportion accumulate funds for future benefits. Social security is already facing problem for future survival – life expectancy of people increases because of improved medical science, birth rate decreases, and working class of people decreases. All these give unfavorable effect.

It requires more funds to accumulate since people living more would be requiring retirement benefits more. A rate cut reduces contribution which may create more problems in future, although it is necessary for stimulating the economy today – by cutting rate employees would be having excess money in hand for consumption spending and employers would go for investment spending; this will increases GDP and growth. This can be benefited in the short-run but not in the long-run. Therefore, the rate should not be lowered.