Will Wilkinson - Latest Comments in Misunderstanding Social Security

Re: Misunderstanding Social Security

Marcus Stanley — Sat, 12 Feb 2005 18:38:08 -0000

Just because you don't like pay-as-you-go social insurance schemes doesn't mean that you get to unilaterally define them as not being insurance. In exchange for my payment to *currently* retired, disabled, etc. people, I get a promise that the government will pay me such-and-such in the future when I retire, if I become disabled, etc. Not so different from putting money in a bank, really -- the bank uses my money immediately for *current* investments and promises to pay it back to me in the future when I need it. (Yes, there can be a macroeconomic difference in that the money goes to national investment instead of consumption with a bank, but that is not the point you were making).

As for the argument that the retirement portion of social security is not insurance because everyone gets at least some retirement payment from it, well, not all of it is insurance. The redistributive component (Joe Poor gets a much higher return on his payments than Bill Gates does) is insurance though.

Property rights -- SS is a promise from the government that you will get money back in the future in exchange for your payments. If government breaks its promise, then you will lose your right. As others have pointed out above, if government breaks its promise to enforce contracts you will likewise lose your property rights in private contracts. Right now it is libertarians who are lobbying for government to break the SS promise after 70 years in which it was fulfilled, so its a bit rich to appeal to the insecurity of the promise as a reason to break it.

Re: Misunderstanding Social Security

Timothy Waligore — Fri, 11 Feb 2005 16:38:50 -0000

And Hayek was wrong.

Re: Misunderstanding Social Security

Wild Pegasus — Fri, 11 Feb 2005 13:33:57 -0000

I think it was Hayek who said that putting "social" before a word completely destroyed its meaning:

social security
social justice
social insurance
social credit

- Josh

Re: Misunderstanding Social Security

Brian — Fri, 11 Feb 2005 13:00:08 -0000

"if social security were means tested, it would become much more politically insecure and probably a less effective program"

I don't see that. I would gladly support an SS program that means-tested benefits if it meant my payroll taxes would be substantially lowered, and I suspect this is true for a large percentage of those under 35 or so. (Obviously not among older workers, so it would have to be phased in very gradually).

To reiterate Will's point, it's insane that 20 years from now minimum wage workers will have 12% (at least) of their income taken and handed to Bill Gates, and I can't imagine that correcting that would make SS less popular. Sure, we don't like welfare, but we *really* don't like welfare for the rich.

Re: Misunderstanding Social Security

Will Wilkinson — Fri, 11 Feb 2005 12:57:38 -0000

Peter, The name is only part of it. The things that really dupe the public are the special payroll tax, the "trust fund", and the faux earning statements we receive from ths SSA (in the fine print it notes that benefits are contingent on congressional grace).

Re: Misunderstanding Social Security

Peter Caress — Fri, 11 Feb 2005 12:42:30 -0000

I see your point: it would be more precise to refer to Social Security as a universal pension or a universal entitlement, or better yet, "a transfer scheme that effectively acts as 'social insurance' for impoverished old folk by providing steady payments to all retired people, rich and poor, because we can't do anything for poor people in this country without bribing the middle class into going along with it." But that's a mouthful.

I'm less convinced by your claim that casually referring to Social Security as "social insurance" massively dupes the public. Most Americans today understand that Social Security is a benefit program that could theoretically be revoked tomorrow, just like Medicare or unemployment protection. That's why it's easy to demogogue the issue: if the benefits really were fixed by contract, it'd be much tougher to claim that Republicans are going to send your granny to the poorhouse.

Re: Misunderstanding Social Security

Gareth — Fri, 11 Feb 2005 12:26:22 -0000

Will,

Defeined benefit pensions are both savings and insurance schemes.

All pensions -- defined benefit and defined contribution -- are savings schemes.

The difference is that the defined benefit scheme shifts certain risks from the recipient to the scheme. That is an insurance feature.

Social Security also has disability and death insurance features, as well.

Your Calculator is misleading because it compares a "rate of return" for a defined contribution scheme to a "rate of return" for Social Security without recognizing that the insurance features of Social Security would cost something if you tried to acquire them on the market.

The "Grace of Congress" point does not make SS any less insurance. In the UK, Parliament could, in principle, pass a law expropriating someone's house without compensation. Does that mean that UK citizens have no property rights? No, because, at least at present, it would be politically unthinkable for any Parliament to pass such a law.

Sure, property rights in the UK might be more secure if there was a justiciable constitutional right to them (although that would depend on whether the court system is more reliable in defence of property rights than political unthinkability, which is uncertain). So too, it would be better if Congress could not raid the trust fund for the general fund.

But how would you feel about a UK socialist who argued that there was nothing wrong with expropriating someone's house without compensation, since the right to the house only existed by Grace of Parliament? You would denounce the transparent rhetorical attempt to make thinkable what is properly unthinkable. Just because Parliament or Congress can do something immoral or stupid, does not mean it should.

Re: Misunderstanding Social Security

Will Wilkinson — Fri, 11 Feb 2005 10:53:47 -0000

Peter, It remains that the system isn't structured like one that is set up primarily to protect against economic hazards, since it pays even more money to people who do not need protection against than it pays to those who do. And, just let me repeat for emphasis, that the courts have determined that there is no legally binding right to benefits. So SS protects against hazards only to the extend that the Grace of Congress obtains, and there is no formal instrument to shield citizens against the risk that it won't. If my rich sister promises to pay my hospital bills if I fall ill, I am not therefore insured, even if she has a good record of keeping her promises.

Re: Misunderstanding Social Security

Peter Caress — Fri, 11 Feb 2005 10:12:42 -0000

I've got bad news for Will Wilkinson, but the phrase "social insurance" is generally understood to have a different meaning from the word "insurance". Merriam-Webster's definition of "social insurance" ( http://www.m-w.com/cgi-bin/dictionary?book=Dictionary&va;=social+insurance ): "protection of the individual against economic hazards (as unemployment, old age, or disability) in which the government participates or enforces the participation of employers and affected individuals"

So "social insurance" is an apt description of the Social Security program.

Re: Misunderstanding Social Security

Nicholas Weininger — Fri, 11 Feb 2005 08:22:39 -0000

No, the question is not *just* whether I'd prefer to see a little bit of paternalism or indigent old people, although you are correct that I prefer the latter. Even if you believe that some level of paternalism is justified, it doesn't answer the question of whether the level we have now is way too high.

I think it clearly is, since SS could be made a great deal less paternalistic (and more fiscally sustainable to boot!) without producing lots of indigent old people. For example, the current system pays more to people who need it less; Bill Gates not only will get SS benefits, he'll get *considerably higher* benefits than Joe Schmoe who worked menial service jobs his whole life. So if everybody's SS benefit were cut down to the level Joe Schmoe gets, you could cut taxes considerably without reducing the protections afforded to the Schmoes of the world. As far as I can see, the only social-minimum-ist excuse for not doing this is the "noble lie" argument.

Re: Misunderstanding Social Security

Javier Hidalgo — Fri, 11 Feb 2005 08:21:31 -0000

Javier: you do realize you're making a "noble lie" argument of precisely the type Will is lambasting, right? Your argument boils down to the contention that, since the middle class wouldn't be convinced to support a social minimum on its own, they ought to be bribed with massive amounts of their own money to trick them into supporting one.

Maybe, but I'm not sure. This is a tricky issue. I happen to believe that social security actually does benefit broad segments of the middle class in addition to the poor and it is for that reason that the program has such powerful support. While it might be misleading to view social security as insurance, I believe social security nonethless benefits most of the people covered by it and also benefits society more generally. Thus most citizens have reason to support social security for reasons independent of the issue of a social minimum.

However, I think we need to realize how important the idea of a social minimum is to the justification for social security. Social security has played a major role in reducing the poverty rate among the elderly from 65% to 10%. If doing away with social security would bring the poverty rate among the elderly to anywhere near its old level, then it is the case that social security functions as a social minimum for the majority of old people. So it seems to be in the interest of most elderly people to support social security on the grounds that it provides them with a social minimum on top of any other reasons they have for doing so.

Re: Misunderstanding Social Security

Gareth — Fri, 11 Feb 2005 08:09:30 -0000

BTW, yesterday's Financial Times noted that Cato shadow boxes with Krugman all the time, but hasn't proposed debating him. What about it? Will you debate him?

Re: Misunderstanding Social Security

Gareth — Fri, 11 Feb 2005 07:47:38 -0000

Will,

I think you need to make a distinction between having a legal entitlement which could be altered by Congressional legislation, and not having a legal entitlement at all. As a matter of positive law, they are different. And, as a matter of practice, they are different too, especially if it would be politically impossible for Congress to enact the legislation abolishing the entitlement.

Nicholas:

I don't deny that SS forces people to pay a premium to eliminate a risk they might prefer to take. That is why it is social insurance, not voluntary insurance. The question is whether you would rather see a little bit of paternalism or indigent old people.

I realize that you have firm philosophical commitments which mean you would rather see indigent old people. But the point here is really one of rhetorical hygiene. Your side has put forward these calculators as a fair comparison: our side is pointing out that you implicitly value the insurance aspects of a defined benefit at nothing, which is quite a bit less than the market would value them. I know you understand this, so who's engaging in the "noble lie" now?

Re: Misunderstanding Social Security

Nicholas Weininger — Fri, 11 Feb 2005 04:44:28 -0000

Re: Misunderstanding Social Security

Nicholas Weininger — Fri, 11 Feb 2005 04:32:47 -0000

monkyboy: the fact that government programs ignore individual preference is an excellent reason to have as little government as feasible-- indeed, none at all if we can get away with it. You're certainly correct that defense ignores preferences as much as SS; so much the worse for defense! But at least national defense is (arguably) a true public good, nonrivalrous and nonexcludable, and thus provision on the private market would pose huge free-rider problems.

Retirement insurance is both rivalrous and excludable and is provided all the time on the private market-- indeed it was provided to millions of people before SS was enacted. None of the excuses for having government provide defense apply to SS. (I agree with you, BTW, that we could be just as safe with 1/10 the defense spending).

Sure, some insurance companies fail. On the other hand

1. there are plenty that have stuck around longer than SS has existed, and some have lasted longer than most governments-- think of Lloyd's of London

2. there are many huge, stable reinsurers in the world

3. the risk of government default is low but not zero, and even without default Congress could legally abolish SS tomorrow.

So the risk of insurance company failure thus cannot be a sufficient justification for SS.

Re: Misunderstanding Social Security

Timothy Waligore — Thu, 10 Feb 2005 21:14:50 -0000

Jon- I may have slighted the differences between a Universal Basic Income and Negative Income Tax. But no matter. My point is not about Friedman, but whether there is a proposal that would be called a social minimum but is not means-tested. Suppose we say the program we are talking about gives every American, say, $2000 a month. Perhaps we pay for the program by raising income taxes and cutting welfare. I suppose you can say that under the negative income tax, he does not get anything, but here Bill Gates gets this check. Is this not a social minimum? (I haven't claimed it or S.S. is social insurance)

Re: Misunderstanding Social Security

monkyboy — Thu, 10 Feb 2005 20:55:13 -0000

"Oh, 'meltdown'. It's one of those annoying buzzwords. We prefer to call it an unrequested fission surplus." - Mr. Burns

Does it really matter how Social Security is defined? It doesn't look like any 'reforms' are gonna get passed this year. Maybe as a consolation prize, congress can hold a contest to rename Social Security...

Re: Misunderstanding Social Security

Jonathan Dingel — Thu, 10 Feb 2005 20:28:53 -0000

Timothy -

Not that this is my area of specialty, but I'd say that Friedman's negative income tax would be means tested, as the negative tax rate applies to people below a certain threshold of income, while the tax rate is positive for persons above that level of income.

Such an approach passes the "is Bill Gates receiving government money?" test. It's means tested, by Micha's definition of "only the poor collect."

Re: Misunderstanding Social Security

Timothy Waligore — Thu, 10 Feb 2005 20:02:45 -0000

My impression was that Milton Friedman's Negative Income Tax was called a social minimum. If unconditional basic income is a type of social minimum, then there is nothing in the definition of social minimum that say it need be means tested. If so, then the fact that social security is not means-tested does not mean it is not a social minimum. Whether or not it is social insurance is another story.

Re: Misunderstanding Social Security

Javier Hidalgo — Thu, 10 Feb 2005 19:54:08 -0000

This is not clear at all. It is false. If the purpose of social security were to create a social minimum, it would be means tested. Only poor old people would be able to collect. This is not the case. Instead, all of us are forced to save in order to pay for our own retirement, regardless of whether we are poor or not.

Social security does create a social minimum, although as you say it does other things besides this. And means tested programs are notoriously unviable from a political perspective, at least in American but I suspect in Europe as well. The reason that social security and other universal welfare programs survive is because they are in the interest of the middle class (or at least broad segments of the middle class percieve them to be in their interest). If social security were mean tested, it would probable lose massive political support and face severe budget constraints as the middle class would not longer have an interest in maintaining it. Thus is it necessary to make social security a univeral program in order to ensure that it maintains broad political support.

So my basic point is this: (1) social security has done a great deal to alleviate poverty among the elderly and has thus helped create a social minimum, (2) if social security were means tested, it would become much more politically insecure and probably a less effective program.

Re: Misunderstanding Social Security

Will Wilkinson — Thu, 10 Feb 2005 19:18:22 -0000

I mean, Bill Gates has Social Security benefits coming to him. Insurance? Really?

Re: Misunderstanding Social Security

Micha Ghertner — Thu, 10 Feb 2005 19:15:18 -0000

People don't participate in insurance schemes because they want to help other people, they buy in because it's in their best interest to do so. Insurance is valuable for beneficiaries and non-beneficiaries alike because it insulates against catastrophic risk.

If Social Security is valuable and in our best interest in the same that insurance is valuable and in our best interest, then why make it mandatory? Why not let those who wish to insure themselves purchase insurance, and those who don't , don't?

Re: Misunderstanding Social Security

Micha Ghertner — Thu, 10 Feb 2005 19:10:32 -0000

Regardless of whether social security is a form of insurance, it is clear that the purpose of social security is to create a social minimum, a floor below which no one should be allowed to fall.

Re: Misunderstanding Social Security

Will Wilkinson — Thu, 10 Feb 2005 19:06:03 -0000

And no. It is not closer to insurance. (1) I have no legal entitlement to any sort of payment whatsoever, no mater how bad I need it. Geico, on the other hand is legally bound to pay out if I get into an accident. We have a binding contract. (2) If the SS system stays constant, I will get the money whether or not I need it. Geico, however, will not pay me anything if I never file a claim, no matter how much I pay in premiums.

My mutual fund is a lot more like insurance than SS in that there there is a legally binding contract. And AS insurance, dollar for dollar, my well diversified 401k mutual fund would more reliably shield me against various kinds of risk than SS.

SS isn't remotely like insurance. And predicate nominalism is false. Calling a cat a lamp doesn't make it a lamp.

Re: Misunderstanding Social Security

Will Wilkinson — Thu, 10 Feb 2005 18:47:43 -0000

Wittgenstein would wack you with a stick and glower at the grievous misuse of ordinary language by politicians.