1. Social Security is a very important element for the well-being of workers, their families and
the entire society. It protects people from a sharp decline of living that may occur when they
lose their regular earnings by lifting, among other things, the lowest income elderly out of
poverty.
A well designed social security system should have several features. First of all, it should
be adequate. The social security adequacy means to insure a certain living standard in the old
age, that requires income transfers from high-earner workers to low-earner ones. Second, a
social security system should provide pension benefits which are commensurate with worker’s history of
contributions. The optimal balance between social adequacy and individual equity is exactly what
one expects from a developed system.
It is not possible to improve or even to maintain the adequacy without the financial
sustainability of the system. That is why a provision of benefits which are sustainable and
robust to major shocks is among the primary goals of each pension system. In its turn, the
financial sustainability is indirectly influenced by the equity of the Social Security since the
latter plays a crucial role in individuals’ incentives to participate and contribute.
Pension provisions impact the behavior of both the young and aged population and can
create deadweight losses according to the standard economic models that are used nowadays
to study households’ consumption and labor supply intertemporal decisions. While balancing
protection and distortions, a well designed social security program should minimize the
negative effects.
The influence of the social security system on individuals’ retirement, saving and labor
supply decisions is a very important issue to analyze both theoretically and empirically.