Hence, the high dependency ratio due to demographic changes will burden the working population since more often than not payroll-taxes will be levied upon the working population. Moreover, this increased dependency ration will stifle investment by a majority thus derailing development.
Furthermore, the rapid shift to a technological paradigm has improved the medical services offered in most hospitals. As a result, the life expectancy of the retired generation dependent on social insurance has been lengthened. Therefore, as more people retire, they meet with other retirees, who are also dependent on a shrinking working population. Such an instance can be avoided by an overhaul in the social security insurance that allows for the creation of a personal retirement account (PRA). The engineering of a PRA can act as an incentive to their owners to invest and save more in order to guarantee a sustainable future livelihood. This will in effect create employment and do away with the dependability culture of the retirees on the government. Private accounts are beneficial in the sense that they cause a behavioral change with regards to savings and investment as opposed to a social security system where workers simply own a collective political promise of some future benefits (Genetski 2005).
Another ripple effect that will be felt as a result of many retirees depending on the social security system is that the government will be forced to borrow money from other countries or reserves in order to support the social security budget to pay the retirement beneficiaries. This will definitely deal a country’s GDP a great blow. In addition, the tendency of fraudulent behavior is bound to escalate as some beneficiaries think that an indication that they earn less will prompt more governmental reimbursement. Among the list of fraudsters are illegal immigrants, who add burden to the social security budget, and as a result, tip the insurance budgetary-beneficiary scale to depletion. Further, some cost is incurred in setting up anti-fraudulent bodies that are mandated to investigate any mishap suspected or identified (Fuster 2002).
In support of this paper, the model economy employed by Auerbach and Kotlikoff (1987) to quantify the effects of the US social security on savings or capital accumulation realized a 24% increase in capital stock if social security was not implemented. This model implied that on elimination of social security, individuals’ mental disposition is geared towards labor supply and savings beginning at the age of 20 years and continue for some 55 years more. Since the labor productivity of individuals at 65 years takes a nosedive to an assumed zero figure, they do not receive any revenue even if they work. Consequently, a fear that they will lack revenue during retirement induces the younger generation to accumulate capital. The contrast that social security discourages private savings because individuals expect to earn from their pension benefits on retirement and consequently reducing the capital market by 24% is true.
At this juncture, a consideration of the cost of unemployment insurance (UI), will suffice a wrap up for this paper. According to the John McCall’s (1970) “search model”, a job seeker (worker) occasionally receives job offers randomly. The number of times the worker receives an offer hinges on the effort put to look for work; on finding an offer, the worker will decide to accept or reject it. This model holds that the higher the UI benefits, the more lengthened the period of the job search will be given that the worker will put less effort in the job search due to the higher benefits he or she receives by virtue of the unemployment status. Further, the worker may deliberately wait for a higher-paying job compared to the UI benefits and hence the worker’s waiting period in the unemployment bracket is lengthened. Consequently, a moral hazard effect is fostered (the increased benefit level from the UI) thus affecting the labor supply. A skyrocketing dependency ratio relative to a shrinking labor force will in the long run affect the GDP.
From the above discussion, it is therefore evident that a cost-benefit analysis of social security and unemployment insurance reveal clearly that the costs outweigh the benefits. Therefore, the government should either rethink its position to redesign the social insurance system or throw it out of the window altogether.