Tuesday, March 08, 2011

Welfare or Insurance?

Bob Samuelson and Mark Thoma are at it again. Samuelson claims that Social Security is welfare, while Thoma says that it's just plain old insurance. He repeatedly compares it to fire insurance.

Let's start with a list of "Why Social Security is NOT like fire insurance":

1. It pays off the same amount whether you need it or not.

2. The "premia" are not risk based in any meaningful way.

3. If you don't "buy" it, you go to jail.

4. There is only one company that "sells" it.

5. The "insurer" can unilaterally change the terms of both the premia and the payouts with no recourse for the "insured".

Ok, so it's not really insurance. Then what is it?

Well it's two distinct components. The first is the payroll tax, the second is the retirement benefits. The payroll tax falls on the relatively young, and the benefits are paid to the relatively old.

The confounding problem is that many people believe the payroll taxes they pay go to fund the benefits they will receive, which is completely untrue. The payroll taxes go to pay current expenses of the US government. They are just a tax on labor. The government is spending every penny of those payroll taxes to pay for current expenditures. There is no meaningful economic sense in which the current payroll taxes can even be said to be exclusively funding the current retirement benefit payouts!

Going back to the (bad) insurance analogy, the insurer is free to use your premia to buy fighter jets and space shuttles!!

So, is Social Security welfare then? Well the payroll tax component certainly isn't. The retirement benefits part certainly is.

But I will say this; it's a type of welfare that I think we should have! Not in it's current form, but as a means-tested safety net, and without the strange fiction that it's financed by the payroll tax.

Keep a modified (for the poor only) safety net, drop the payroll tax.

Replace the revenue by cutting spending elsewhere (you're on your own President Karzai!!).

A 12.4% tax on labor is a dumb tax in an era where we are worried about employment and middle class incomes and sending social security checks to Warren Buffett and Bill Gates is, if anything, even dumber!


15 comments:

John Thacker said...

The retirement benefits are themselves a confused melange of several goals:

1) It's a forced savings program, making people put money aside at something like Treasury rates;

2) It's an insurance program against people outliving their savings;

3) It's a welfare program ensuring that people aren't too poor.

The "strange fiction" fuels interpretations 1) and 2). Goal 1) gives people the strong conviction that they should get as much in Social Security payouts as they would if they invested the money, if they live to an average age. Goal 2) gives people the strong conviction that they should continue to get payouts if they live longer than average. Goal 3) gives people the strong conviction that Social Security should pay out enough so that someone who was poor doesn't have to be really poor in retirement and has enough to live on.

What this adds up to is a consensus that:

1) Everybody should get what they paid in, plus inflation/wage growth/what they could get off a safe investment, but

2) Many people should get a lot more than that.

It's fairly obvious that this math doesn't work, and why Social Security isn't sustainable (without a lot more people entering than leaving at any point, but that isn't sustainable over any long run.)

As you note, the thing is, liberals as well strongly reject any idea of modifying the first goal so that the upper middle class aren't sustained in an upper middle class manner, and are expected to save on their own. They say that it will weaken support for the program; the alternative is an essentially unsustainable program.

Pelsmin said...

"Welfare" has the connotation of a transfer, moving money from people who are earning money and paying taxes to people who aren't doing either. Social Security was presented as something very different. It's forced savings that only resemble Welfare in a personal sense; your money is collected when you're earning it, and paid back to you later in life when you aren't.
It is the ultimate paternalistic program, forcing people to save their money because they're too stupid to do it on their own.
Given the reality of the situation, they ought to just acknowledge it is wealth transfer/welfare and initiate means testing and remove contribution limits.

Anonymous said...

Means test?! Then how will my parents afford gas for their RV? They park it outside my house for eternity!

--anonyman

Anthony said...

I mostly agree: drop the payroll tax, drop the refundable tax credits, add a safety net program which isn't run through the tax system (which is easy to manipulate - for one thing there are no asset limits since assets aren't listed on a tax return), and *keep* social security benefits (they will gradually phase out over the next 100 years or so once people stop making contributions, though they may have to be reduced prematurely in the mean time).

I would be opposed to simply dropping the non-means-tested portion of social security benefits all at once. People who have paid in their entire lives under the expectation that they would get something back, deserve something back, even if they wouldn't be destitute without it.

Anthony said...

What I meant by the "easy to manipulate" comment was that the current system of refundable tax credits (EITC being the prime one) is easy to manipulate. You can have millions of dollars in assets and still receive EITC, if you have a few kids and not much income.

John Thacker said...

People who have paid in their entire lives under the expectation that they would get something back, deserve something back, even if they wouldn't be destitute without it.

Something back, sure. But the problem is that we collectively believe that everyone deserves to get back at least what they put in (adjusted for inflation or whatever), but some people (poor, people who live "too long") deserve to get back a lot more. That just doesn't work.

If you want to keep people from being destitute, you have to accept that some people, preferably the upper middle and upper class, get back less than they put in.

Aaron Aardvark said...

John Thacker mentions in his first post the consensus is that everybody should get back what they put in. How to convince the middle class that they will get less than they put in? Is DC going to be honest and say "we lied to you?" I'd love to see SS means tested yet at the same time I get a pit bull-like response when I think about thousands and thousands of dollars potentially taken from me simply because I have worked hard in a middle class job and planned carefully for my retirement.

eightnine2718281828mu5 said...

The military draft puts the enlisted man's life at risk so that everyone else's lives can be more secure.

Was WWII a welfare program?

BR said...

If a "safety net" is advantageous, negative income tax is the only way to go.

Anthony said...

"Something back, sure. But the problem is that we collectively believe that everyone deserves to get back at least what they put in (adjusted for inflation or whatever), but some people (poor, people who live 'too long') deserve to get back a lot more. That just doesn't work."

I don't believe that anyone "deserves" any more than what they put in (adjusted for inflation or whatever).

But even that "just doesn't work".

Except maybe if the US Government starts selling stuff. What's the fair market value of 92% of Nevada?

Anthony said...

Wow, all the homes in the US are only worth 22 trillion. The total private net worth of the nation is only 52 trillion. Social securities unfunded liabilities are over $17 trillion. (Medicare's unfunded liabilities are over $89 trillion.)

Damn, we're screwed.

John Thacker said...

I'd love to see SS means tested yet at the same time I get a pit bull-like response when I think about thousands and thousands of dollars potentially taken from me simply because I have worked hard in a middle class job and planned carefully for my retirement.

If it's going to be means tested, I'd rather the benefit formulas changed to decrease how much you're owed based on what you worked in your prime, rather than tax or reduce benefits based on having savings in retirement. There's no point in penalizing people for saving for retirement; why should people who were upper middle class and frittered everything away be rewarded for that above people who were poor and people who were upper middle class but saved?

John Thacker said...

I don't believe that anyone "deserves" any more than what they put in (adjusted for inflation or whatever).

So you think that if someone lives to 90 or 100, their Social Security should be cut off? So you think that someone who was poor all their life should not get enough to live on? In the latter case, if you move it out of Social Security, you'd end up increasing other forms of welfare to compensate.

In any case, even if you believe that, the polls show that the vast majority of the American people don't.

eightnine2718281828mu5 said...

---
unfunded liabilities are over $17 trillion
---

http://en.wikipedia.org/wiki/Stock_and_flow

Anonymous said...

Nice post