The Stock Market

 They point out that, on average, the stock market provides a better rate of return than is provided by the system. This argument is correct: people may be able to do better. We need to recognize, though, that these higher returns would come at the cost of higher risk—which brings us right back to the original argument for why we need a Social Security system. Moral Hazard Finally, because Social Security serves as a form of insurance, it is subject to problems that are faced by all insurance systems. One of these goes by the name moral hazard, which simply means that the presence of insurance may cause people to change their behavior in bad ways. For example, if people have fire insurance, they may be less likely to keep a fire extinguisher in their homes. Similarly, because people know that the government will provide them with Social Security, they have less incentive to manage their own saving in a careful manner. Why Do People Disagree about Social Security? President George W. Bush’s suggestions for reforming the Social Security system encountered a lot of opposition and rapidly became a partisan issue in US politics. Yet it seems as if Social Security is a program that we could analyze completely and carefully using the tools of economics. Why is a basic economic program such as Social Security so politicized? Some people, of course, will view any proposal from the perspective of politics. There are undoubtedly people who supported President George W. Bush’s proposals not on their merits or demerits but just because they support the Republican Party. Likewise, there are surely Democrats who opposed the president’s proposals simply because they came from a Republican. But leaving such extreme partisan viewpoints aside, there are still good reasons why reasonable people might have different opinions on Social Security:  People differ in their assessment of the importance of market failure in insurance markets. A key argument for Social Security is that private markets do not permit people to insure themselves against the risk of poverty in old age. Insurance and annuity markets do exist, so some people argue that this failure of markets is no longer very significant. At the same time, it requires financial sophistication to take advantage of these markets. Many people do not have the expertise to use these markets or access to financial professionals who could advise them.