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February 04, 2005

Why Is Social Security The Right Vehicle For The Social Safety Net?

Yesterday brought an informative exchange between Don Boudreaux at Cafe Hayek and the host of Calculated Risk

The essence of the argument at Cafe Hayek:

So even if you are unalterably in favor of Social Security, if you're honest and frank you, too, should reject descriptions of it as a safety net. Such a description is used for the added, unthinking emotional umphh it adds to the arguments of those who press to keep Social Security in its current form. That may be good, or, as I believe, it may be bad – either way, it’s no safety net.

And at CR:

I’ve argued before that Social Security should be considered retirement insurance. It should be intended to insure against the vagaries of life...

So when we reform Social Security, we should design it to catch those people that do “fall from life’s ordinary and expected institutional supports”. If we consider Social Security as "retirement insurance", then obviously Bush's plan of forced savings accounts is moving in the wrong direction.

And finally, Boudreaux’ final paragraph is inappropriate to the debate. Social Security should be a safety net, so lets work together to make it one.

My take is somewhere between the two.  Let me motivate my comments by way of the following scenario.  Suppose the Great Planner in the Sky has every American who will ever live congregate together at the beginning of time.  We are told the following: After the meeting breaks up, we will all be randomly assigned a birth year, indicating our arrival time on earth.  But there is a catch.  Some of us are going to be surprised by a really bad event -- let's call it the Great Depression -- that will wipe out a great deal of the financial planning of those alive at the time. And one more thing.  After that Great Depression thing, the number of us arriving on earth will, for awhile, explode.

Behind the veil of ignorance, I bet most of us would choose an intergenerational transfer system -- a safety net, if you will --  with "rates of return" that look something like this:


One thing this picture does not look like is a sensible mandatory savings plan.  It looks like what it actually was (and still is): An intergenerational transfer program.

I suppose that there were other ways to implement the intergenerational insurance scheme represented by this picture -- a plain-vanilla deficit plan would seem to have worked, for instance -- but I have no real quibbles with the plan that was implemented.  An implicit social contract that shares the burden of cohort-specific systemic disaster seems like the right thing to me.

My question is this: What is the rationale going forward?  The demographics, the present-value imbalance in the current system, and, as Andrew Samwick has made completely clear, the cost of delay in making adjustments to rectify those imbalances, mean that the burdens will be increasingly pushed to future generations.  I don't get how those of us who drew the good number in life's temporal lottery can think that's a good idea.

If we were to start a mandatory saving scheme from scratch, I don't think we would ever pick the one represented by a pay-as-you-go social security system.  We would choose a defined contribution program, coupled with a progressive income tax system to implement the socially agreed upon intracohort transfer program.  If a forced retirement-planning scheme is what we need, why not begin the process of cashing out those payments made to generations past, and reconstruct the system into something sensible?

I completely agree that phrases like "bankrupt" and "insolvent" are not very useful descriptions of transfer programs run by the U.S. government.  I also agree there are lots of relatively simple ways to bring the current system back into long-term balance.  But I ask: What's the point?

February 4, 2005 in Social Security | Permalink


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Excellent points. Pay-as-you-go was sensible in the '30s, but today much less so. Funding the insurance portion of the social contract out of a progressive income tax sounds has always sounded like a better idea to me than funding it out of payroll taxes on the first $90,000 of income. It's time to decide what we want and go from there. The tail has been wagging the dog for some time now.

Posted by: William Polley | February 04, 2005 at 12:12 PM

Thanks for your feedback. Dan Froomkin makes many of the same points today:

Also on excerpted on DeLong's blog:

I think Social Security should be a safety net and not a retirement program. As Froomkin wrote today: "Social Security is a complex social insurance program that uses payroll taxes from current workers to pay benefits to the elderly, the disabled and their families in a progressive manner that guarantees an income floor below which the least fortunate are not allowed to sink."

I would like a debate on the purpose of Social Security and how it should be funded. But first I'd like to address the more pressing issues of the Medicare shortfall and the General Fund deficit.

The recent GAO report shows Social Security with a $3.7 Trillion actuarial shortfall. But the report shows Medicare has a $27.8 Trillion actuarial shortfall. Shouldn't we address the more pressing issues first?
GAO report: http://www.gao.gov/new.items/d05282sp.pdf

Thanks again for the feedback.

Posted by: CalculatedRisk | February 04, 2005 at 03:58 PM

Americans' Future In One Plan
I know that most of you are busy to read my book. As I explained previously that Taman Health Plan (www.trafford.com) takes care of all the health care, Medicare, Medicaid and social security. It will threw away all bureaucracies out of window. Let me explain shortly how it works:
1- there will be no more health care insurance companies, no Medicare, Medicaid or Social Security. My plan will take care of all.
2- Basically will be only one Big Health care organization (Taman Health Plan or THP).
3- The center of the plan will be in Washington while the health departments in every state will be the branches.
4- One organized body will be taking care of the Health Care and long term care of all Americans replacing 1500 insurance companies, Medicare, Medicaid and Social Security.
5- This will allow us to provide a uniform service to all Americans every where in both inpatients, outpatients and long term care.
6- When you go to any Duncan Donuts branch your expectation is to have a fresh coffee and a donut with no long wait. We will try to provide a similar predictable service everywhere as Duncan Donuts. With having only one body will be able to do that.
7- The Capital of the plan will be the funds of Medicare and Social Security (before the bankruptcy of both systems). The maintenance will be a yearly tax from each of us (will replace our yearly social security and Medicare holding taxes). A percent of each of us go to his account cards and a percent go to THP itself. The money of the plan will be invested by the investing sector of the plan very likely in Wall Street.
8- We will have 5 ATM cards with a corresponding accounts. Card A (children), Card B (working group 18-65years old), Card C (Medicare card >65 years old), Card D (Medicaid card), Card E ( expensive medicines or investigations).We will have the health cards devoted to health care and long term care. Thus we will have: health cards, banks with accounts to each card and credit card machines in outpatients care and hotelling part of hospitals and nursing homes.
9- Cards will pay for the outpatient medical care including doctors, emergency room visits, investigations, medical supplies, pharmacies and the hotelling part of hospitals and nursing homes. While the medical part of hospitals and nursing homes will be budget by the plan itself.
10- In the first year of issuing cards: Card B and C (most of people) will have a bonus it could be a percent of their Medicare and social security withholding (70 % or so). We will try to be fair to every one but every one has to now that most of us already lost a lot of money with the HMO's. For next year new comers to card B at age of 18 when first issued will have a bonus of 50,000 dollars. It will change every year by a percent a according to inflation.
11- every one of us will get a statement every one or two months of his card account. Card B account will phase in card C at the age of 65. If card C account is vanished Card D will be issued (hoteling part will be less luxurious). Only few of Card B will have card D if there account vanish most likely those with severe medical problems.
12- So basically most of us will have our own account Card B then card C. Say you are 45 and you have now in your account $ 200,000 you can take one or more years out of work, you Can retire early if you like and with your card you will control all the medical services and its prices.
13- With this card system we will end all bureaucracies of health care, Medicare and Medicaid. No one will stand between you and any medical or long term service (only your card). Shop around with you card, have early health care security and responsibility and invest in your health.
14- We will not need Social Security since after age of 65 we will be able to use our cards to stay in any nursing home each according to his account in card C or card D. So when you invest well in your health you will be able to enjoy a nicer nursing home when you get old (actually it will be also a kind of tourism).
15- The money in cards do not get inherited when we pass away but recycle in the plan to support the next generations.
16- The plan will have very positive effects not only in simplifying our care, save a lot of waste in health care, give early health care security and responsibility to Americans it will also have a positive effect on the economy, saving billions of dollars to Americans, creating jobs in health care and cutting outsourcing.
Very likely, you figure it out by now I could have sold the plan to one of the presidential candidate before the 2004 election for millions of dollars (they already spent 2 billion dollars). It is my gift to the American people (it will help the healing process of the two worlds America and the Muslim/Arabs).

Maged Taman.

Posted by: maged taman | February 21, 2005 at 11:45 AM

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