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Imagine...

Will Wilkinson offers a novel argument for eliminating Social Security. It's "simply bad policy" and a system of mandatory savings would be "better policy" so "we should replace" the former with the latter. The former is bad policy because under the payroll tax one's right to property is "straightforwardly violated" whereas mandatory investment merely "restricts liberty over some sticks in the bundle" of property rights. That there is an argument that's perfectly comprehensible to an intelligent, well-informed individual. So why can't the president and the other proponents of his plan offer anything that's even remotely similar?

But a question for Will, since he's normally attuned to these sorts of issues, but seems to turn his tuner off when it comes to Social Security. If we adopt a system of mandatory savings, some non-trivial number of people will wind up with investment portfolios that have performed much, much, much worse than average. Maybe they were stupid. Maybe they got ripped off. Maybe they were just unlucky. But with millions of people retiring every year, this will happen to a non-trivial number of people. In practice, won't we wind up constructing a secondary safety net of guaranteed benefits to take care of these people? And in practice, won't this result in a moral hazard that encourages the next cohort to undertake riskier investments, leading more people to require the secondary safety net? Why don't more libertarians take Tyler Cowen's worries of this sort more seriously?

To reiterate my position, Social Security is non-optimal. But it's not in crisis, or in anything remotely deserving the name "crisis." It's good enough and we have other, bigger problems to tackle. We ought to leave well enough alone, worry about national security, the general fund budget imbalance, the Medicare/Medicaid issue, and the health care sector generally.

December 30, 2004 | Permalink

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» What he said.... from Fester's Place
A satisficing solution is often good enough, and Social Security meets that criteria. [Read More]

Tracked on Dec 30, 2004 9:39:54 AM

Comments

"To reiterate my position, Social Security is non-optimal."

Everything in the world is sub-optimal.

Let's start by fixing the "truly fucked but probably fixable" stuff (budget deficit, maybe?) before we get to things that aren't quite totally 100 perfect and therefore require no massive overhaul which, after all, is dictated more by ideology than by policy needs. And which said overhaul will leave issues far worse than the minor problems social security will have in coming decades.

keef

Posted by: keef | Dec 30, 2004 3:11:29 AM

Practically every well known Social Democrat of the past decade (Clinton, Gore, etc.) has talked about the deep dark state of our current Social Security system. Why do we see now see a change in opinion? The Left must, even if it makes the look hypocritcal, oppose everything this president does.

Just Pathetic.

Posted by: Al | Dec 30, 2004 4:50:18 AM

First Matt you haven't proven Social Secrity non-optimal. In many cases intergenrational transfers that spread risk are optimal(as in highest utility), especially when we look at finitely lived generations.

Second Will's argument is crap. His basic point is that the governemnt can affect my life as long as it doesn't go about helping poor people while doing so.

Posted by: Rob | Dec 30, 2004 8:33:06 AM

Those who live in the more enlightened democracies (i.e. most of them besides ours) are flabbergasted that people here would argue for impoverishing a large segment of the population because of an economic "principle."

Where, they would say, is it written in these principles that life has to be miserable?

Posted by: wvmcl | Dec 30, 2004 9:00:03 AM

In practice, the social security system you defend does not solve the problem of bad investments. Some fraction of people going on social security will, through bad choices or bad luck, have debts (Just upside down investments, really.) which eat up their entire monthly check. Where's the secondary system to take care of THEM?

Of course, the moral hazzard inherent in taking care of such people is obvious.

The question is, why does a new system have to be perfect, to replace a system which isn't itself perfect?

Posted by: Brett Bellmore | Dec 30, 2004 9:02:37 AM

Why do we see now see a change in opinion?

what change in opinion is that, Al?

Posted by: cleek | Dec 30, 2004 9:07:43 AM

Why do we see now see a change in opinion?

what change? who's opinion?

Posted by: cleek | Dec 30, 2004 9:08:37 AM

sorry for the double... didn't think the first went through.

Posted by: cleek | Dec 30, 2004 9:10:06 AM

Matt:

With respect, the notion that Social Security is "'simply bad policy' and a system of mandatory savings would be 'better policy' so 'we should replace' the former with the latter" is not a novel argument. I've made it (for instance, on Obsidian Wings) and Brad DeLong has suggested a variation (though I suggest that he shares your timing concerns).

As for your criticism that coerced savings accounts accompanied by a safety net may induce risky behavior in those accounts: Sure, that's a valid concern. But it's a concern that can be mitigated. For instance, one could put initial restrictions on investment choices (keep the mony in certain designated index and bond funds), thereby saving the risk-taking from him or herself; one could call the extra-savings payments what they are -- welfare payments -- thereby stigmatizing them; one could adopt a combined approach of guaranteed payments and coerced savings accounts (my preference); etc.

Now, admittedly, the foregoing options have no place in a SS reform effort that takes place in a libertarian utopia. But since we don't live in any king of utopia -- much less the libertarian kind -- that seems a weak objection. The "perfect" should not be the enemy of the good (or the fanciful the enemy of the practical). If we can do better, we should.

Posted by: von | Dec 30, 2004 9:12:31 AM

"some non-trivial number of people will wind up with investment portfolios that have performed much, much, much worse than average."

It is actually far more dire than that. Roughly, every generation has a small but real chance (on the order of 10%) that the entire generation's accounts will underperform historical norms. Thus, the entire retiring population for a generation will have much less money than they need to live off. That would be a crisis.


Al - your odd assumption is that Social Security is a static entity. As others (including MY) have pointed out, in the mid to late 90s, the projections for SS looked much more dire than they do today and, as Clinton and Gore argued, some action needed to happen. In the intervening years (mostly catching up with the impact of the economy in the 90s), the projections now look much better and are poised to become better still.

The Democrats are adhering to the same position: keep an eye on SS and make sure that it remains healthy and solvant. You claim of the opposite is, as best I can tell, your knee-jerk reaction to lambast everything you percieve as liberal.

Posted by: Scott Pauls | Dec 30, 2004 9:18:42 AM

Looking again at how Fox News is framing the debate makes it clear that there are many people on the right who simply want to destroy the program and will tell any lie to achieve their goal.

It kind of reminds me of the media push on Iraq.

Posted by: Paul | Dec 30, 2004 9:20:25 AM

Al, you really, really need to read the reports. In 1992 Social Security was in deep trouble, in 1997 it was mildly ill, by 2000 it was totally healed. Why? Because the economy performed much better between 1992 and 2000 than predicted by the Trustees. Hello? Does this remind you of something? Like the transformation of "deficits as far as the eye can see" to "surplus"? Why people didn't clue in to how the economy that transformed our general budget crisis might, just might, have had some effect on Social Security is puzzling.

Clinton, Gore et al were perfectly justified talking about "crisis" because the numbers of the Trustees Reports backed that up. The economic numbers required to fix the problem entirely in 1997 were above the historical average. By 2000 they were below that average, by now they are ridiculous.

And that is the difference. Clinton and Gore may have been overstating the problem, but would have been crucified if they simply asserted the economy would grow faster in the future than it would in the past. Bush et al are simply lying in embracing numbers that show the economy growing much slower than it historically has, and yet still claiming that returns on stocks will save the day.

Your position is much the same as saying "How can you say that grandpa is cancer free? Why five years ago you said he would die without treatment!" Al, the treatment worked.

Social Security is not Broke: by the numbers

Posted by: Bruce Webb | Dec 30, 2004 9:27:15 AM

Brett, we have a system for saving those people who have limited income and excessive debts due to bad investments. That's what bankruptcy protection is for. Anyone eligible for social security can get that protection if they need it and continue eating and living in their home. Take away social security, and bad investments will lead to homelessness and malnutrition.

Posted by: old guy | Dec 30, 2004 9:55:26 AM

All of you people are missing one thing. The same statistic (the bump of the baby-boomer generation retiring), that creates the "crisis" with Social Security, is NOT going to happen in a vacumn. It's going to have other vast impacts on the economy at large. To discuss this "crisis" without discussing those other changes, is an intellectual dead end. Here are the three biggies.

#1. Strain on an already overloaded health care system is going to vastly increase.

#2. There's going to be a lot of job positions opening up, creating a more competitive labour market, raising wage increases.

#3. As the baby boomers sell off their 401ks and other investments, the value of their stocks and investments are going to drop. How signifigantly? Nobody knows. I suspect that once the drop starts, it's going to develop into a free-fall once people realize what's happening and take steps to get out themselves.

The thing is, not all those three factors are in line with one another, #2 in particular, is a good reason to be optimistic about the future. Mind you, #3 could result in the same cut and slash economic that decimated the US economy in the late 80's...


Posted by: Karmakin | Dec 30, 2004 9:57:40 AM

First, optimality depends upon what you're trying to optimize. Second, there are almost always trade-offs between different goals that force choices or compromises. Third, since the context of possible effects and values can always be enlarged, it isn't clear that even in principle one can understand what is truly optimal. And, finally, all evidence points to the fact that in response to these constraints, in actual decision-making people "satisfice" rather than optimize, because of lack of knowledge and/or lack of time, attention, etc.

People often appeal to maxims to justify decisions under these circumstances. In this case, I'd point to two. From the practical world, "If it ain't broke, don't fix it." From the medical world, "First, do no harm."

As far as I can tell, opposition to Social Security is based on opposition either to the fact that it is social or to the fact that it provides security. Since I don't have a problem with the idea that societies need to take social action -- and since, on the evidence of things like the Defense of Marriage Act, Republicans don't either -- I believe we've all already agreed upon the social part (except for Libertarians I suppose and there aren't very many of them). So maybe it's the security part that bothers them?

Posted by: larry birnbaum | Dec 30, 2004 10:06:44 AM

"The question is, why does a new system have to be perfect, to replace a system which isn't itself perfect?"

Posted by: Brett Bellmore

It doesn't, Brett. I don't think that anybody here has made that argument.

However, nobody has been able to show that a proposed replacement would be as good as the current system, let alone better. Current arguments rely on things like (a) equating the US government having to repay the debt owed to SS with bankruptcy, or (b) assuming that the US government borrowing hundreds of billions of dollars and pushing it into the stock market wouldn't affect returns.

In addition, two conflicting sets of economic assumptions have been used (a pessimistic set for SS, and a more optimistic set for the stock market). Further in addition, the effects of a generational 'bump' on the stock market have not been addressed by the SS 'reformers'. Even further, SS 'reformers' tend to disregard the components of SS - disability insurance, and the annuity aspect of SS.

Posted by: Barry | Dec 30, 2004 10:20:42 AM

Practically every well known Social Democrat of the past decade (Clinton, Gore, etc.) has talked about the deep dark state of our current Social Security system. Why do we see now see a change in opinion? The Left must, even if it makes the look hypocritcal, oppose everything this president does.


Hey, Zizka! How are ya? Thanks for posting while I was asleep. You pretty much got it right, although I don't think I usually capitalize "Left".

Posted by: Al | Dec 30, 2004 10:21:04 AM

Who cares about keeping social security consistent with libertarian principles? Libertarianism is bollocks.

Posted by: superdude | Dec 30, 2004 10:24:33 AM

As others (including MY) have pointed out, in the mid to late 90s, the projections for SS looked much more dire than they do today and, as Clinton and Gore argued, some action needed to happen. In the intervening years (mostly catching up with the impact of the economy in the 90s), the projections now look much better and are poised to become better still.


This is absolutely, totally, and completely false.

In fact, the situation today is almost exactly the same as it was in the early to mid-90s: Social Security will be bankrupt in 35-40 years.

If it was true, when Clinton said it, that bankruptcy of the system 35-40 years hence was a "crisis", then it is equally true today that bankruptcy of the system 35-40 years hence is a "crisis".

Posted by: Al | Dec 30, 2004 10:27:11 AM

For the 'What, me worry?' crowd, here are the actual numbers:

http://www.scrivener.net/2004/12/you-thought-2004-federal-deficit-was.html

Posted by: Patrick R. Sullivan | Dec 30, 2004 10:31:57 AM

n fact, the situation today is almost exactly the same as it was in the early to mid-90s: Social Security will be bankrupt in 35-40 years.

This is false; in 1998, the projections showed that insolvency was about 30 years off and the date of insolvency in the projections had been steady for 5 years. Since then, the date of projected insolvency has moved forward by 13 years.

That is, the problem is getting further away faster than time is advancing. That makes it far less rational to describe it as a crisis.

IT has not been steadily 35-40 years off, and even if it was always 35-40 years off, that wouldn't be a crisis. If the projections showed us getting closer to insolvency with each iteration, rather than farther, that would be a minimum requirement for their to be a crisis.

Personally, I thought that insolvency 30 years off in 1998 made "crisis" a hyperbolic description, but since it was a fairly steady date, it was clear that it was an issue that needed addressed before it became a crisis. When the date is moving out faster than we are approaching it, its not even that.

Posted by: cmdicely | Dec 30, 2004 10:38:11 AM

One benefit of SS that I don't hear much in these debates is that it keeps paying until you die. Unless the privatization plan includes options for something like annuities or insurance (and all I hear about from privatization buffs is the wondrous long-term performance of the stock market), what happens if your private account runs out due to unforseen circumstances like, say, long life?

Obviously this problem already exists with private retirement savings, but that's one of the reasons we have Social Security in the first place.

Posted by: chilly | Dec 30, 2004 10:43:26 AM

Even further, SS 'reformers' tend to disregard the components of SS - disability insurance, and the annuity aspect of SS.

There must be some rule of blogs that in the time it takes you to type a comment, someone else will say the same thing before you post.

Posted by: chilly | Dec 30, 2004 10:47:28 AM

Well, personally, my objection to Social Security is the 10th amendment:

"The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

I don't see anything in the Constitution that delegates the power to create a Social Security program to the federal government. Ergo, it doesn't have that power.

I'd be a lot more comfortable with the program, if it were run at the state level, since that at least would be constitutional.

Posted by: Brett Bellmore | Dec 30, 2004 10:54:44 AM

This is false; in 1998, the projections showed that insolvency was about 30 years off


No, the 1998 report showed insolvency in 2032, or 34 years away. The 2004 report showed insolvency in 2042, or 38 years away.

So apparently, according to today's left (see Zizka, small "l"), when insolvency is 34 years away, we have a "crisis", but when insolvency is 38 years away, we have no problem whatsoever!

Posted by: Al | Dec 30, 2004 10:56:21 AM

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