A Neat Article on Social Security
May. 4th, 2005 10:16 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
ymarkovSocial Security's Progressive Paradox
Retirement "insurance" as a Rube Goldberg machine
Julian Sanchez
Casual observers of contemporary politics could be forgiven for wondering: Where are the goatees? First we had a "conservative" Congress and president pushing through expansions in Medicare and federal control of education that would make Lyndon Johnson blush. Now we have liberal pundits horrified at the notion that President Bush, by proposing progressive indexing of Social Security benefits, would contemplate transforming a universal social insurance program into a de facto welfare program. Progressives decrying welfare? Have we slipped into some strange mirror universe? How long before Al Franken is conjuring man-on-dog scare scenarios to oppose gay marriage?
While mystifying from a policy perspective, there is sound political logic behind the liberal horror at progressive indexing. In part, as John Tierney argued in his New York Times column this weekend, it robs those who oppose Bush's Social Security reform proposals of a potent rhetorical weapon: The image of sad-eyed septuagenarians scrounging Alpo for lunch because their benefits have been cut. It becomes harder, in other words, to cast the private accounts crowd as moustache-twirling villains indifferent to the plight of low-income retirees.
The deeper reason for the opposition, though, is that by laying bare the redistributive function of Social Security, it threatens a key to the program's popularity, what economist Charlotte Twight, in her book Dependent on D.C., has called the "strategic manipulation of political transaction costs." Again, from a pure policy perspective, Social Security makes little sense except as a modest welfare program. There is, after all, no earthly reason why most middle class or wealthy citizens need the government to garnish their wages for decades and then provide a retirement benefit later: People are generally perfectly capable of saving for their own retirements. Those who want to paint the program as indispensable are fond of pointing to the large numbers of retirees who rely almost wholly on Social Security for their incomes. But then, when you take a hefty 12.4 percent bite out of people's paychecks—leaving them with less to save—and tell them they can rely on a government benefit later, it's not exactly shocking that many people don't save and rely on a government benefit later.
Neither is the notion of Social Security as "insurance" terribly coherent, if it ever was. Even when Social Security was first instituted, over half of Americans who reached the age of 21 would survive past age 65. As of 1990 the percentages were over 72 percent for men and 83 percent for women. Aging is not a "risk" to "insure" against; it's a normal part of life to plan for.
But as Twight points out, casting the program as universal "insurance," and payroll taxes as "premiums," was a crucial part of the public relations campaign waged in favor of Social Security. Though the 1960 Supreme Court case Fleming v. Nestor made clear that Social Security was a "noncontractual...social welfare program," the rhetoric of insurance led people to see payroll tax as analogous to the purchase of a benefit, an insurance policy. Citizens were led to perceive themselves as each holding a stake in the system, rather than as simply providing aid to poor retirees.
What worries liberals about progressive indexing, and about the shift to a more overtly welfare-like Social Security system, is that welfare benefits tend to be politically unpopular—and much easier to cut than benefits perceived as universal. Social Security, in other words, is a massive Rube Goldberg device, an ornate and utterly superfluous system of transfers from the middle and upper classes to themselves, the sole purpose of which is to construct—and conceal—a much smaller welfare machine for elderly retirees nestled deep in the guts of the meta-contraption. Some defenders of the status quo are now attempting—though they scarcely seem to believe it themselves—to argue that Social Security is no less vital for the middle class. But corner a progressive over a quiet drink and he'll probably admit that, in fact, the only defensible purpose of Social Security is to ensure that nobody retires in poverty. There may be political reasons for cutting a monthly check to Bill Gates when he turns 65, but there are no sane policy reasons.
The Rube Goldberg universality of Social Security serves a broader symbolic function in the eyes of some communitarian liberals. In a January L.A. Times op-ed, Benjamin Barber defended Social Security as a lynchpin of public life, arguing that private accounts would threaten not just individual penury for old people, but a society-wide return to the Hobbesian war of all against all. This is Barber's trademark hyperbole at work, but the core idea is less insane than he manages to make it sound. Social Security's Rube Goldberg structure conveys the message that we're all in this together: Rather than most of us relying on our own prudence, or on our families, to take care of us, while a few of the less fortunate require public assistance, we will all take care of each other—with the government as the vital locus of our common affection and generosity. Dependence will be not the exception but the norm.
Two symmetrical purposes, then, are served by the Rube Goldberg setup: The narrower policy goal of protecting redistribution to our impecunious elders, and the broader goal of leading people to see themselves as bound together by the loving tendrils of government.
As Cato's Will Wilkinson has noted, however, this is a profoundly undemocratic way to justify policy. It amounts to saying: You must not vote away the otiose features of a program, for you may later be tempted to vote away, or at any rate radically reduce, the features that we support on their own merits. That may be a tenable strategy for Straussian conservatives convinced that the hoi polloi must often be fed a Noble Lie to preserve their support for good policy; it sits uneasily with a self-proclaimed commitment to populism and public reason.
This is the sad irony of the current debate: Most wonks on both the left and the right would probably agree that a modest, means-tested program designed to prevent the elderly from retiring in poverty would be superior to our current Rube Goldberg system. But liberals will block such an improvement, because there's no way for conservatives to credibly promise that, once Social Security is explicitly restructured as welfare, they won't gut it. All of which keeps in place another trademark Rube Goldberg feature of the system: The boot on a lever, kicking us all in the ass.
Julian Sanchez is Reason's Assistant Editor. He lives in Washington, D.C.
Retirement "insurance" as a Rube Goldberg machine
Julian Sanchez
Casual observers of contemporary politics could be forgiven for wondering: Where are the goatees? First we had a "conservative" Congress and president pushing through expansions in Medicare and federal control of education that would make Lyndon Johnson blush. Now we have liberal pundits horrified at the notion that President Bush, by proposing progressive indexing of Social Security benefits, would contemplate transforming a universal social insurance program into a de facto welfare program. Progressives decrying welfare? Have we slipped into some strange mirror universe? How long before Al Franken is conjuring man-on-dog scare scenarios to oppose gay marriage?
While mystifying from a policy perspective, there is sound political logic behind the liberal horror at progressive indexing. In part, as John Tierney argued in his New York Times column this weekend, it robs those who oppose Bush's Social Security reform proposals of a potent rhetorical weapon: The image of sad-eyed septuagenarians scrounging Alpo for lunch because their benefits have been cut. It becomes harder, in other words, to cast the private accounts crowd as moustache-twirling villains indifferent to the plight of low-income retirees.
The deeper reason for the opposition, though, is that by laying bare the redistributive function of Social Security, it threatens a key to the program's popularity, what economist Charlotte Twight, in her book Dependent on D.C., has called the "strategic manipulation of political transaction costs." Again, from a pure policy perspective, Social Security makes little sense except as a modest welfare program. There is, after all, no earthly reason why most middle class or wealthy citizens need the government to garnish their wages for decades and then provide a retirement benefit later: People are generally perfectly capable of saving for their own retirements. Those who want to paint the program as indispensable are fond of pointing to the large numbers of retirees who rely almost wholly on Social Security for their incomes. But then, when you take a hefty 12.4 percent bite out of people's paychecks—leaving them with less to save—and tell them they can rely on a government benefit later, it's not exactly shocking that many people don't save and rely on a government benefit later.
Neither is the notion of Social Security as "insurance" terribly coherent, if it ever was. Even when Social Security was first instituted, over half of Americans who reached the age of 21 would survive past age 65. As of 1990 the percentages were over 72 percent for men and 83 percent for women. Aging is not a "risk" to "insure" against; it's a normal part of life to plan for.
But as Twight points out, casting the program as universal "insurance," and payroll taxes as "premiums," was a crucial part of the public relations campaign waged in favor of Social Security. Though the 1960 Supreme Court case Fleming v. Nestor made clear that Social Security was a "noncontractual...social welfare program," the rhetoric of insurance led people to see payroll tax as analogous to the purchase of a benefit, an insurance policy. Citizens were led to perceive themselves as each holding a stake in the system, rather than as simply providing aid to poor retirees.
What worries liberals about progressive indexing, and about the shift to a more overtly welfare-like Social Security system, is that welfare benefits tend to be politically unpopular—and much easier to cut than benefits perceived as universal. Social Security, in other words, is a massive Rube Goldberg device, an ornate and utterly superfluous system of transfers from the middle and upper classes to themselves, the sole purpose of which is to construct—and conceal—a much smaller welfare machine for elderly retirees nestled deep in the guts of the meta-contraption. Some defenders of the status quo are now attempting—though they scarcely seem to believe it themselves—to argue that Social Security is no less vital for the middle class. But corner a progressive over a quiet drink and he'll probably admit that, in fact, the only defensible purpose of Social Security is to ensure that nobody retires in poverty. There may be political reasons for cutting a monthly check to Bill Gates when he turns 65, but there are no sane policy reasons.
The Rube Goldberg universality of Social Security serves a broader symbolic function in the eyes of some communitarian liberals. In a January L.A. Times op-ed, Benjamin Barber defended Social Security as a lynchpin of public life, arguing that private accounts would threaten not just individual penury for old people, but a society-wide return to the Hobbesian war of all against all. This is Barber's trademark hyperbole at work, but the core idea is less insane than he manages to make it sound. Social Security's Rube Goldberg structure conveys the message that we're all in this together: Rather than most of us relying on our own prudence, or on our families, to take care of us, while a few of the less fortunate require public assistance, we will all take care of each other—with the government as the vital locus of our common affection and generosity. Dependence will be not the exception but the norm.
Two symmetrical purposes, then, are served by the Rube Goldberg setup: The narrower policy goal of protecting redistribution to our impecunious elders, and the broader goal of leading people to see themselves as bound together by the loving tendrils of government.
As Cato's Will Wilkinson has noted, however, this is a profoundly undemocratic way to justify policy. It amounts to saying: You must not vote away the otiose features of a program, for you may later be tempted to vote away, or at any rate radically reduce, the features that we support on their own merits. That may be a tenable strategy for Straussian conservatives convinced that the hoi polloi must often be fed a Noble Lie to preserve their support for good policy; it sits uneasily with a self-proclaimed commitment to populism and public reason.
This is the sad irony of the current debate: Most wonks on both the left and the right would probably agree that a modest, means-tested program designed to prevent the elderly from retiring in poverty would be superior to our current Rube Goldberg system. But liberals will block such an improvement, because there's no way for conservatives to credibly promise that, once Social Security is explicitly restructured as welfare, they won't gut it. All of which keeps in place another trademark Rube Goldberg feature of the system: The boot on a lever, kicking us all in the ass.
Julian Sanchez is Reason's Assistant Editor. He lives in Washington, D.C.
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Micro vs macro
Date: 2005-05-05 10:01 pm (UTC)http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO_Feb_2005.htm
Re: Micro vs macro
Date: 2005-05-09 07:04 am (UTC)DH, that's not what the author is doing. That's what he's charging.
Probably, I would do much better with an individual account. But I fail to see how it is relevant on the macro level.
The macro is comprised of all the micros. This is not a zero-sum game. The reform is not only about total numbers, but also about how they're comprised. It makes a difference to the economy whether money flows through governmental or individual hands.
state retirement plans are able to produce good returns with only a couple of dozen basis points in expenses.
I know, I work for one such plan.
Individual accounts collectively have below average return while paying at least 10 times as much.
That'd be about 5% annually. Really? Nor does it have to be that way; ever hear of low-cost mutual funds?
And I didn't know the Bill Gross is a closet Keynesian. His "Everything You've Learned About Investing Is Wrong!" is pretty brilliant, but amazingly, in the article cited he shows that he shares some Keynesian macro fallacies and anti-Bush biases.
Re: Micro vs macro
Date: 2005-05-10 08:20 pm (UTC)True. But you can judge the totals without regard to individual components. The derivatives markets do that all the time. And they do a pretty good job of it.
You bet it does. And although most of the jobs belong to the individuals, some of them belong to the government. If you define Social Security as the name implies -- social insurance, then you can build a very good case for pay as you go system. But to the quoted point, the problem that government creates is misallocation of resources from productive use to the use of political choice. This is a definition of retirement.
OK, now you are on your turf and I may make a fool of myself. I assumed that good state plans are able to squeeze 15-25 bp in expenses. If it is 50, then I should reconsider calling them efficient, and reduce my factor of 10 to 3-4. Still, very different.
As far as low cost mutual funds, they are easily available, well advertised and underutilized. The public, given a choice, spends on high fee funds. And statics from brokerage houses confirm the propensity to spend on actively managed funds. And if you remove the choice and limit investing to index funds, then individual accounts becomes just an accounting vehicle.
He is a voting republican and has endorsed and presumably voted for Bush. But more important, his article is making real arguments. You may disagree with them; you may find them wrong. But you just chose to dismiss them, as if it was Howard Dean and he has an agenda of opposing Bush; the guy is in the bond business. He lives this stuff. He is just smarter, more thorough and honest than political hacks like the original author.
Re: Micro vs macro
Date: 2005-05-11 07:43 am (UTC)Of course. My point was about private vs. gov't spending/investing, on which it seems you agree.
you can build a very good case for pay as you go system
Sure you can - for the bottom 10%, maybe. Not what we have now.
I assumed that good state plans are able to squeeze 15-25 bp in expenses.
In public markets, yes. My fund is at 52, but we're also invested in expensive vehicles like private equity and hedge funds.
limit investing to index funds, then individual accounts becomes just an accounting vehicle.
I do not understand what this means. I do believe that a mandatory savings scheme has to be limited to index funds.
He is a voting republican
And therefore he can't be wrong on economics? :-) There are many conservatives that have anti-Bush biases (and some very legitimate gripes). Nor do I dismiss his arguments; I simply don't have the time to knock down the neo-Keynesian case, which is well-built, for all its wrongness.
It seems to be popular davka among the bond guys, probably because they work on a very abstracted macro level, and tend to regard the economy as a black box. It works for them, but it's a bad policy tool. (Nor do I see why you're calling the assistant editor of a libertarian magazine "a political hack.")
no subject
Date: 2005-05-11 07:58 am (UTC)With broad-based Social Security reform, there's no reason why more such funds - private pensions, really - couldn't appear, an extension of the "lifecycle funds" already peddled by Fidelity, Vanguard, etc. The fiduciary control apparatus necessary to administer them is already in place.
no subject
Date: 2005-05-14 08:12 pm (UTC)How would you define that? And why 10? And on a pragmatic level - bottom 10 % don't really pay FICA taxes. They have an earned income credit scheme to refund those and then some, depending on number of kids. Now making Social Security a low income old age program will make it an extension of SSI, and turn all poor (financially) seniors into social outcasts. But that doesn't make it bad economics, it would just redefine the status quo. Anything that removes universal aspect from the program will doom it.
What is the point of having an individual account where there is no choice? Then the plan, whatever legal vehicle that would mean, should set up accounts and issue credits based on performance, flow of funds, contribution and other criteria it deems relevant. Why this obsession of individuals "investing". That is what most pension plans, including yours, do anyway. The history of 401(k) plans can be described as follows - keep money in cash, then buy high, sell low, go back to cash. Of course, there is a company stock wrinkle, but it is not relevant to Social Security.
Then you need to define that for me. I always understood such bias to mean that "biased" person does not agree just because it comes from Bush or what he stands for. If you have a definition that would fit those conservatives you mention in the previous post, let me know.
But most importantly, to the main point of Bill Gross. The problem of Social Security is a real and demographic one. The way you account for it does not solve it. On a personal note, I believe in a private accounting of one's pension, and believer that state run funds that hire corporate investment manager is a best way to invest surplus money. But I never will agree that the federal government should borrow funds from the private sector to invest it on behalf of its citizens. Or distribute to it's citizens to invest themselves.
no subject
Date: 2005-05-15 12:04 pm (UTC)Could be 5%, could be 15%. Whatever we democratically decide. Can be defined the same way it's done for SSI or Medicare. You're right about the bottom 10% or so not paying FICA taxes because of the EITC, so for them it's already welfare, really.
I wasn't aware that SSI recipients are social outcasts. I know quite a few of them.
What is the point of having an individual account where there is no choice?
Choice of index funds. I don't understand the rest of that paragraph - seems like you believe that the only index funds are gov't bond ones.
I'll concede the point on the anti-Bush bias; it's not really that important.
The main point is definitely a valid one - the problem is demographic. That's not an excuse to do nothing, though. We also agree on pro funds (incl. state-managed ones like mine) managing money better. Like I said above, no reason why more such shouldn't appear. And I agree about the feds not borrowing to invest or distribite - but the transitional borrowing that will be necessary is not that.