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March 11, 2005
Values and Ends in the Social Security Debate
Josh Marshall over at Talking Points Memo makes the following argument with regards to Social Security reform and private accounts:
The real point, though, is that when you set aside all the practical matters of debt and transition costs, this is an ideological debate -- or to put it less antiseptically, a debate over different sets of values.
The idea behind private accounts is that people should rely on themselves alone and bear the consequences of their successes and their failures and random chance on their own shoulders. If things don't pan out for you in retirement, that's something to take up with your children.
The concept behind Social Security is fundamentally different. The first premise is that if you put in a lifetime's work there is simply a level of destitution below which society will not let you fall. Maybe you made so little during your working years that there wasn't enough to save. Or maybe you just didn't plan ahead well enough. Or maybe you suffered some misfortune. Whatever. If you worked you won't be destitute when you retire. People who made big bucks through their lives don't get a particularly good 'deal' from Social Security, if you insist on seeing it in investment terms. But that's a distorting prism, sort of like thinking you got a rotten deal on your medical insurance if you never have a catastrophic illness.
To which Tim Lee responds:
This is just a flat-out misrepresentation of what the various privatization advocates have proposed. Cato's plan, for example, includes a minimum guaranteed annuity of 120% of the poverty line, subsidized from general revenues for those whose personal accounts are too small to cover the amount. The Johnson bill, which is based on Cato's plan, guarantees a minimum annuity of 100% of the poverty line. The Sununu-Ryan bill guarantees workers the current promised level of Social Security benefits.
Tim continues his post with a detailed critique. But I want to stress a few points. Why should someone who has "made big bucks through their lives" get any sort of "deal" from Social Security at all? To put it in more personal terms, every year I contribute the max to my Roth IRA account. Now, if this account grows to $1,000,000 plus by the time I'm 65 (very feasible), why should I be collecting a Social Security check in the first place?
A related claim you will hear over and over again is that Social Security is an insurance program that guarantees everyone a certain level of income at retirement. But Social Security does not only go to those who fall through the cracks so to speak, it is paid to everyone once they hit the age of 65, even Warren Buffett. This distorts the definition of insurance, which should be used to cover rare and unexpected events.
I pay a $45 monthly medical insurance premium along with hundreds of thousands of others in California. Now if I break my leg tomorrow, I have the security of knowing that Blue Shield will cover all my expenses above a certain level. But this works because everyone paying into the system doesn't break their leg each and every month. Our $45 payments are pooled to cover unforeseen and rare emergencies for the unlucky few who do need to collect.
Now, Social Security works in the way that everyone who reaches the age of 65 collects a check paid for by the payroll taxes of the younger generation. This isn't insurance for those who would be "destitute" without their Social Security check. It's a redistribution of payroll taxes from everyone that is working, to everyone that is retired, regardless of their financial circumstances.
But Josh implies that we're ultimately dealing with two sets of values here. There is one group who wants to preserve Social Security as is in order to ensure "a level of destitution below which society will not let you fall," while the other group wants individuals to "rely on themselves alone" and if things go wrong, and they don't have kids to support them, well… looks like you starve homeless.
Tim calls this a "flat-out misrepresentation," but I'll take it a step further and call it flat-out offensive. The reason I support private accounts is not to feed the impoverished to the wolves, but because due to the power of compounding, everyone is going to have the opportunity to accumulate real wealth. I see a world where future retirees have the security of relying on their own savings which has grown to extraordinary levels, instead of relying on the tax dollars of their children and grandchildren for their retirement. That's a powerful concept as less people will need to rely on a social safety net in the first place.
It's always easy for partisans to assume when debating these issues that because their parties are opposite, so are the ends that they are trying to achieve. While that's an easy intellectual route to confirm your own beliefs, I believe it rarely, if ever, holds true. More often than not much of the debate is really about struggles for political power. If we would all wake up to that fact it would be easier to tackle this problem head-on instead of pushing it off for another generation of politicians to deal with.
Update: Reader Gerald Hanner writes in that we've ignored other components of the safety net Social Security provides that are separate from Old Age benefits. While they too face financial difficulties ahead, plans to reform the system leave these benefits unchanged:
Josh Marshall seems to be under informed in his comments on Social Security. Like most commentators, he ignores all the components of the Social Security System other than Old Age benefits. As a reminder, the other components are Disability, Survivorship, and Medicare. A worker who becomes totally disabled qualifies for Social Security benefits, provided that worker meets participation requirements; the surviving spouse and young children of a covered worker who dies also receive Social Security benefits. Medicare is in a class by itself. In fact, my sister-in-law, who is disabled by Parkinson's Disease, is on Social Security even though she is more than a decade short of age 65. She has been on Social Security for a few years now; because of her illness she may never see age 65.
Hanner and I also got to discussing the insurance aspects of Social Security's Old Age benefits. He correctly points out that 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).
With that in mind, I stand corrected as the Old Age benefits could in fact resemble "whole" life insurance (above, what I refute is the claim Social Security resembles what is called "term" life insurance). But there is still a key difference. Companies that offer whole life insurance invest the premiums in real assets. They do not spend the premiums they collect and in place of saving write IOUs to themselves. Unfortunately, this is exactly what the government is doing.
Posted by Peter Mork at March 11, 2005 9:57 AM
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» Social Security from San Diego Politics
This is a great summation of the Social Security debate. From The New Republic - ..."On a deeper level, though, Bush's line of reasoning is illuminative. Privatizers portray Social Security as a kind of low-performing 401(k) plan. But the program... [Read More]
Tracked on March 15, 2005 3:26 PM
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