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According to current projections, Social Security and other entitlement programs will soon be severely underfunded. If...

According to current projections, Social Security and other entitlement programs will soon be severely underfunded. If the government decides to cut social security benefits to future retirees and raise Social Security taxes on all workers, what will probably happen to the supply of funds available to the capital markets? What will be the effect on interest rates?

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Answer #1

The reduction in social security benefits to future retirees will lead to a reduction in consumption. The increment in social security taxes will reduce the savings of the individuals. Therefore, the government's decision will lead to a reduction in the lessor disposable income to the individuals. The individuals would focus on saving the money to offset the future drop in benefits.

The savings would lead to an increase in the supply of loanable funds in the market. The increase of supply in the loanable funds would reduce the interest rate.

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