DISQUS

Bob McGrew · 4 years ago

These are some nice points, but it's still true that outliving one's retirement savings is a random variable which one can place bets on in order to hedge one's risk. (Which is another way of looking at insurance.)

You can view SS as a very strangely-structured form of insurance that deals with this risk. Of course, in this sense annuities are also a form of insurance.

Whether SS is insurance or not is mostly irrelevant to the points being made. As insurance, it doesn't make a lot of sense in its current form.

Peter · 4 years ago

Bob is right that if you really want to stretch the definition, the partisans could argue that SS old age benefits resemble insurance. They involve the pooling of risk, broad participation, and in a sense indemnification for a loss (in this case the ability to earn a living). Its counterpart in the private sector would be "whole" life insurace plans.

Of course in the private sector they invest the premiums in real assets. Unlike SS they don't spend every penny of what they recieve in excess of their claims, then turn around and write an IOU to themselves to make up for it.

Paul Zrimsek · 4 years ago

Whatever you think of the idea of SS as insurance, it's very hard to square with the worry that means-testing the program would relegate it to the political unpopularity of "welfare". We can argue till the cows come home about whether paying out so much money to people who don't need it disqualifies SS from being insurance, but we should all be able to agree that a plan which pays out only to people who have had X happen to them has at least as strong a claim to being insurance against X as does a plan which pays you whether X happens to you or not. Assuming that X in the case of SS is "an impecunious old age", if existing SS is insurance then means-tested SS is insurance too.

So why are Krugman and the gang worried that so many voters who haven't yet reached the age where X will either happen or not happen to them will view SS as something that only benefits someone else? The only plausible explanation that suggests itself is that they know, ex ante that they're not going to need it. And doesn't that tell pretty strongly against the idea of SS as insurance?

monkyboy · 4 years ago

A little info from Met Life about whole life insurance, the most common form of life insurance sold in the U.S.

Whole life insurance is a permanent form of insurance protection that combines a death benefit with cash value accumulations. The face amount is constant, and this amount would be paid if the insured dies at any time while the policy is in effect. Premium payments are fixed and remain the same from the original effective date to the maturity date. The policy is designed to mature at age 100-the age when premium payments would end and the cash value would equal the face amount. At maturity, the face amount would be paid to an insured who is still living.

Although whole life policies are among the most common forms of life insurance sold, most individuals do not plan on paying premiums until age 100. Many of us do not expect to live until that age. More commonly, whole life insurance is used as a form of level protection during the income producing years. At retirement, many people then begin to use the accumulated cash value to supplement retirement income.

Kinda sounds like Social Security!

Wild Pegasus · 4 years ago

Actually, life insurance appears to be less like insurance, if we take this argument. After all, all of us die; it's something to plan for. It's true that we don't know when death will be, but then again, we don't know if we should save for 5 years of retirement or 35.

- Josh

Will Wilkinson · 4 years ago

Josh, You're right. The essential point is that premiums are actuarially determined and invested to ensure that's there's always enough to pay out projected benefits. The luck/wealth transfer still holds. People who live a long time and pay premiums forever end up subsidizing people who pay a couple premiums and then drop dead. SS screws over people who drop dead around the retirement age (especially unmarried or gay people), who get nothing much other than a lifetime of having their wages confiscated.

monkyboy · 4 years ago

So, Social Security isn't like insurance because...insurance isn't like insurance. Brilliant!

Let's see what benefits SS pays if you die around retirement age:

1. Your spouse inherits your benefits
2. If you had dependent children, they get benefits
3. Dependent parents receive benefits, too

Sounds like insurance to me.

I think Will is actually suggesting that Cato and Bush are going to trash SS to help out gay, married people.

Peter · 4 years ago

MB,

Reread Will's last comment slowly:

"The essential point is that premiums are actuarially determined and INVESTED to ensure that's there's always enough to pay out projected benefits." [emphasis added]

It's great you were able to look up the definition of whole life insurance on the MetLife site and point out some similarities with the Social Seucirty system, but the comparison must come to a screeching halt when you face the fact that MetLife can’t run their whole life insurance plans like a Ponzi scheme.

If they did, not only would the executives be in jail, but the company would be filing for Chapter 11. For some reason I think that’s a comparison you would shy away from.

I wonder why?

monkyboy · 4 years ago

Peter,

Social Security is expected to be in the black for the next 15 years or so. In anticipation of the projected shortfall, trillions of dollars are being put away by the SSA. How is this a Ponzi scheme? If the trustfund is in question, a law could be passed to sell the bonds SS is holding on the open market.

Why do the LINOs continue to vent their impotent rage at the most popular and fiscally responsible government program?

Real libertarians should battle true government waste and fraud, even if it costs them contributions from the right-wingers who are looting the treasury.

Gareth · 4 years ago

Libertarian: It's not an insurance system because people want to live to be old. That's not a risk.

Socrates: But outliving your savings is a risk. And an actuarially predictible one. So it makes sense to pool that risk. Which is what insurance is.

Libertarian: OK. I can imagine a private company providing that kind of service. But they would have to fund their future liabilities.

Socrates: Dude, Social Security funds its liabilities for years and could do so in perpetuity using slightly more optimistic assumptions. Anyway, if that's your problem, we can tinker a bit and solve it.

Libertarian: But Social Security can't have real assets...

Socrates: US Government Bonds aren't real assets? Would it bother you if the insurance company was 100% invested in US Government Bonds?

Former Libertarina, now anarcho-capitalist crazy: Beer funds! Repudiate the debt and give bondholders a share of Yellowstone!

Jeff Licquia · 4 years ago

But outliving your savings is a risk. And an actuarially predictible one.

In a sense, I believe you. I think I can predict how quickly someone will spend their savings after having bought an insurance policy that pays out when your savings run out.

But I don't think you can insure for "as quickly as possible".

Gareth · 4 years ago

Jeffrey:

I'm not sure whether you are putting forward a serious point or not.

If you are saying people can't insure against the risk of living longer than average, then you are just wrong. People can (for a price) trade capital for a life annuity.

If you are saying that these contracts have problems of adverse selection, then you're right, but that's an argument for compulsory universal insurance.

Peter · 4 years ago

“US Government Bonds aren't real assets? Would it bother you if the insurance company was 100% invested in US Government Bonds?”

Mandatory reading for Gareth and MB:

http://www.scrivener.net/2005/01/on-stuff-and-nonsense-about-social.html

Here are some highlights:

[Trust fund] bonds -- despite frequent claims along the lines that "they have the same status as U.S. bonds owned by Japanese pension funds and the government of China", as per Krugman -- are in fact very different from Treasury bonds held by the public (including foreigners and foreign governments) in a good number of ways.

One such way is that the trust fund bonds are demand bonds. That is, although they nominally are 15-year bonds for such purposes as setting the interest rate on them, they can be cashed in at the Treasury on demand, before they mature -- and if they aren't cashed in on demand they simply roll over for another term.

You cannot buy US Treasury bonds like this, and neither can Japanese pension funds nor the Chinese government.

…nor can insurance companies. Nor can insurance companies simply spend all their revenues and write IOUs to themselves fund future outlays.

It’s really amazing we’re still having this debate.

PJ Doland · 4 years ago

Birthdays **ARE** insurable events. Why do you think people buy lifetime annuities?

They're buying insurance that they'll have enough to live on until they die.

Will Wilkinson · 4 years ago

That's not birthday insurance. It's a kind of lifespan income insurance. The insurance company is betting you'll die before you recoup what you put in plus the interest they've earned on the money. If you "win" you'll have an income past the date when you would have otherwise run out. The end of life is definitely uncertain, and so is the date you'll run out of savings. If it happens, it happens at some date or other, not a particular date, which is what a birthday is. The event that you're insuring is thus running out of money, not turning a certain age.

PJ Doland · 4 years ago

Not withstanding, any event of uncertainty is an insurable event.

If you wish, you can buy an insurance policy on the size of the royal pooches litter.

Birthdays, which are inarguably uncertain events, are therefore insurable.

Will Wilkinson · 4 years ago

PJ, Agreed. You can bet about anything. Of course, the point of social insurance isn't to insure against anything that could in principle be insurable. I was talking about events that incur losses, cause suffering, etc. Birthdays aren't that kind of thing.

Bill Woolsey · 4 years ago

Private retirement accounts involve capitalism--private ownership of the means of production. Having the government take care of the retirement of elderly workers appears more consistent with complete government ownership of the means of production. Workers are provided with consumption goods for government when they work by wages, and then they are provided with consumption goods by govenment when they become too elderly to work. Ideally, consumption goods should simply be distributed according to need--with work being done by ability. So younger people work and the elderly do little or no work.

Private accounts, on the other hand, promote a principle that saving (refraining from consumption now) creates an entitlement for future consumption. This is exactly the excuse bloated capitalists use for living in luxury without work!

So, the status quo of social security would look better than private accounts from the point of view of those liberals who had been most influenced by the socialist critique of capitalism. Or perhaps by real socialists who found it useful to pretend to be liberals.

While real socialism has been discredited with the fall of Communism, it seemed like a more desirable economic model in the first 3/4 of the 20th century. And attitudes can outlast their causes.

R.J. Lehmann · 4 years ago

"Socrates: US Government Bonds aren't real assets? Would it bother you if the insurance company was 100% invested in US Government Bonds?"

In fact, most insurers are invested overwhelmingly in government bonds, and many invested solely in them.

I find the entire line of argument somewhat strange. Like most traditional pension systems, Social Security takes the form of an annuity, which is itself a form of insurance. Risk (in this case, the risk of outliving one's retirement savings) is transferred to a pool, and like most annuities, payouts then proceed from a given starting date until death.

In terms of long-term solvency, Social Security is not a particularly well-structured annuity plan, since the price is not rated according to the size of risk. If it were, then smokers would pay less than non-smokers, men pay less than women, etc. Although arguably, since payout adjustments are progressive with respect to income even without indexing, and the rich tend to live longer than the poor, that's at least one risk factor that is partially accounted for.

But that Social Security is a poorly structured annuity program doesn't mean it is NOT one. Most insurers, including life insurers who offer annuities, hedge against the risk of insolvency by way of reinsurance. The Social Security program's reinsurance is the American taxpayer.

That said, what the decision to call it insurance or not-insurance has to do with the desirability of changes to the system remains somewhat beyond me.

R.J. Lehmann · 4 years ago

"More commonly, whole life insurance is used as a form of level protection during the income producing years. At retirement, many people then begin to use the accumulated cash value to supplement retirement income.

Kinda sounds like Social Security!"

Not really. The cash values of whole life policies are more like what you would accumulate in a private savings account. The insurance product that Social Security most resembles is a fixed annuity. The insurance product that Social Security + personal accounts most resembles is a variable annuity.

R.J. Lehmann · 4 years ago

"I was talking about events that incur losses, cause suffering, etc. Birthdays aren't that kind of thing."

But outliving one's savings is. Annuities like Social Security do not directly indemnify for losses, but that just means that they are not indemnity plans, not that they are not insurance. Insurance involves the transfer and pooling of risk. To hedge against the risk of dying early and leaving one's family without support, you purchase (whole/term/universal) life insurance. To hedge against the risk of dying late and either outliving one's accumulated savings or placing a serious strain upon them, you purchase a (variable/fixed) annuity.

Social Security represents an annuitized form of insurance. Participants pay in with payroll taxes, and they will begin drawing out at some future date, until their death. Some will draw out less than they paid in, or won't live to see retirement. Others (most) will draw out more than they paid in.

R.J. Lehmann · 4 years ago

"If it happens, it happens at some date or other, not a particular date, which is what a birthday is. The event that you're insuring is thus running out of money, not turning a certain age."

I'm not sure exactly what you're getting at there, but if it's to suggest that a lifetime annuity only behins to pay out when you run out of money, then no, that is not the case. Variable annuities typically enter the payout phase exactly when Social Security, at 65, or whenever else one decides to retire. Fixed annuities begin payout IMMEDIATELY, and then continue either until a predetermined expiration, or more commonly, until death.

Bjorn's Premium Bonds Resource · 1 year ago

In some ways, social security does resemble insurance. I only have one concern. Is it relevant to our life today? I means looking at the decades of economic changes, will it still help us financially when we retire? I rather have some other investments just to make sure I have enough when I retire. You just can't depend on social security alone.