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Story - acrobat - 06/08/2008 - 11:38 - 0 comments - 0 attachments
Currently, and in most countries, the government, through the social security system, insures retirees against inflation and longevity risk. At retirement, the state pension that each retiree is entitled to receive is computed based on his lifetime earnings. The retiree is entitled to receive this pension for as long as he lives, and in this way obtains insurance against longevity risk. In addition, and in most countries, nominal state pensions are indexed to a measure of consumer prices such as the consumer price index (CPI), so that the real purchasing power of retirees is relatively unaffected by inflation movements.
In recent years, economists and politicians in most Western European countries have become increasingly worried with the sustainability of the current social security system and its current level of benefits. The ageing of the population has led to a dramatic and unsustainable increase in liabilities. Unsurprisingly, governments have started to reduce the level of benefits and have warned the public not to rely too much on state pensions for their consumption when old. Some governments have also provided tax incentives for households to save for their retirement (for example ISA’s in the United Kingdom).
Money is the medium used to transfer resources on the spot, while liquidity refers to the availability of a medium to transfer resources over time. The monetary search literature initiated by Kiyotaki and Wright (1989) has been successful in providing a solid micro foundation based on trade frictions for the emergence of money as a medium of exchange. On the other hand, a recent growing literature emphasizes the importance of financial frictions and liquidity constraints for the emergence of a medium to transfer resources over time. In particular, Kiyotaki and Moore (2001b) study the effect of limited supply of liquid assets on investment. Although, intuitively, money and liquidity would seem to be linked, these two approaches take them as separate issues.
The United States has become a nation of card holders. The 1983 Survey of Consumer Finances found that only 42 percent of households had a general purpose credit card, such as a MasterCard or Visa. The most recent survey found that two-thirds of Americans, the large majority, had one.
This wider distribution of credit cards, what some have called the Democratization of credit, surely has benefits. The new card holders get a convenient form of payment and a line of credit, while the banks earn fees and interest. Democratization may have a downside, however: higher risk.
