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ONE OF THE GREATEST fruits of high productivity and rising incomes in a country like the U.S. is the financial ability people have to retire. This possibility was beyond the imagination of pre-World War II workers and is still far beyond the expectations of most people living in Third World countries. For most of human history, people simply worked until their bodies gave out and then depended on their children to care for them in the last years of life. Now, in advanced economies, retirement figures into almost everyone's expectations.
However, an expectation does not by itself create an adequate financial base for retirement, especially when the expectation is based-as it is in the U.S.-on substantial Social Security benefits. The fact that Social security is in trouble has been trumpeted for more than a decade, but still no major reforms have been introduced to put things right. Because all potential reforms involve costs, politicians have deferred the necessary difficult decisions.
Social Security needs to be thought of in the larger context of retirement. Retirement is never a right. It is possible only through the fruit of productive labor, sacrificial saving, effective investment and responsible budgeting. Retirement depends on the willingness of families to routinely make sacrifices, setting aside some portion of their current income. Retirement also depends on firms using these savings to fund investment in new production facilities, better equipment, and research and development. The link between saving (by both governments and families) and retirement income is key to both a healthy economy and its ability to provide for senior citizens.
The connection between saving and retirement earnings is most obvious for those who contribute to Individual Retirement Accounts. It is visible also to those who work in companies that provide pensions for which employee contributions are required.
The danger of delinking retirement income from saving is that families come to count on a certain future retirement (as with retirement plans that promise a specific benefit) and therefore tend to save less themselves. This has consequences both for the individual and the economy. For individuals, inadequate saving can make retirement difficult, if not impossible, should expectations about future benefits not be met. For the economy as a whole, less saving by individuals means slower...