ABSTRACT
This chapter examines social security systems with the ideal of the optimal system. It analyzes the economic and political problems of transition to the optimal system. The chapter summarizes the policy implications of the analysis: it sketches a blueprint for reform. Mandatory social security is required to prevent those who could save for old age during their working life from relying on public assistance when they have to retire. To rally a majority in a democracy it is necessary for the young merely to bribe a sufficient number of middle-aged voters by offering them compensation for the social security benefits which they expect to receive on the basis of their past contributions. Social security is designed to prevent public assistance from generating moral hazard; for just as, say, unemployment insurance reduces the incentive to seek employment, public assistance reduces the incentive to provide for one's old age.
