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More On Social Insurance

Angry Bear has a good post up on the theme touched on at the end of the post below. Plus his coverage involves the phrase "the sum of 100 Bernoulli draws," so you know it's true. No Bernoulli draws here at MY.com where we remain in a state of mathematical semi-literacy.

December 30, 2004 | Permalink


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Matt...Thank you for devoting so much time and space to the social security issue. You are admirably performing a necessary public service by keeping it right in front of us! This is a fight we can win, but it will take energy from all of us.

Posted by: Deborah White | Dec 30, 2004 3:56:57 PM

Seems to me to be more an argument for income (or even wealth) redistribution generally than one for social security per se. Not that I'm averse to that, mind you, but why does this specifically relate to retirement as a phase of life, rather than, say, middle age? People with jobs can be poor too! Perhaps not surprisingly, the assumption behind Benthamite advocacy of redistribution of income -- diminishing marginal utility -- is precisely the same one that makes insurance (private or public) a good idea, if you accept the expected-utility interpretation of human behavior toward risk.

Posted by: Julian Elson | Dec 30, 2004 4:50:06 PM

Matt, Angry Bear is just describing some results from behavioral economics (people are risk-averse) combined with some basic probability. Can I recommend The Cartoon Guide to Statistics? It comes Crooked Timber-approved for getting Maria through her stats requirement, and my wife is currently using it as a precursor to digging into some (I think) sociology papers.

Posted by: Steve | Dec 30, 2004 6:00:23 PM

Also see: One man's retirement math: Social Security wins -- Christian Science Monitor -- Dec 27, 2004

Posted by: Mike Liveright | Dec 30, 2004 6:19:26 PM

His comparison with standard insurance is deeply flawed.

This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large.

This isn't a correct analogy because those with good outcomes tend to have had high incomes and thus get paid the most in benefits. Richer people also tend to live longer so they get paid more benefits over time.

My car insurance doesn't pay me more for not getting in an accident than it pays those who get in an accident.

Posted by: Sebastian Holsclaw | Dec 30, 2004 7:05:17 PM

Sebastion -- you're partly right. But you should consider the benefit as a percent of the retirement funds and you'll see that it pays out more to those with lower income and vice-versa. It smooths income at retirement, lowering risk, rather than the reverse. You're right that with means-testing, it would be even more like insurance (but that's an issue for another time.)

Still, SSI increases the minimum income at retirement from 0 to somewhere around $800/month. That's a big payoff to those with really with low wealth at retirement. So it actually is a form of insurance.

You could make a very similar case by citing diminishing marginal utility of income.


Posted by: AB | Dec 30, 2004 7:35:57 PM

"But you should consider the benefit as a percent of the retirement funds and you'll see that it pays out more to those with lower income and vice-versa."

Why would I look at it like that. So what if the richest third gets a smaller amount of Social Security as compared to their total retirement funds. They are rich. And the richer they are the smaller that percentage is. But they get a larger actual amount than poor people because they typically have higher incomes during their working years.

Why in the world should I feel comforted if there were a policy called "For the Hell of It Social Transfer" of giving $100,000 to multi-millionaires and $15,000 to destitute people just because destitute people were getting a higher percentage of income from the government? Would you like to defend "For the Hell of It Social Transfer"? I would prefer to give money to the poor and not waste it on the rich who can provide for themselves.

Posted by: Sebastian Holsclaw | Dec 30, 2004 7:42:10 PM

"I would prefer to give money to the poor and not waste it on the rich who can provide for themselves."

Ok, then advocate means-tested SSI benefits; privatization (which I don't know whether you support) would do the exact opposite of your stated preference.

I'm ambivalent about means-testing. Right now, SSI is popular because it's for everyone. With means testing it really becomes a welfare program. Right now, the program as it is in fine shape for the next 40 years. As that time approaches, if the situation so dictates, we can look at cutting benefits, means testing benefits, or increaseing the retirement age.


Posted by: AB | Dec 30, 2004 8:07:12 PM

I do advocate means testing (see here ). Why don't progressives?

Posted by: Sebastian Holsclaw | Dec 30, 2004 8:32:06 PM

The short answer on that is that a means-tested program is an unpopular program. Social Security is the third rail of American politics because affluent, politically powerful retirees get it too, and will fight to keep it. Because the affluent will fight to keep it, the poor remain secure. Once it's a program for the poor (shiftless, spendthrift, undeserving), it's much more likely to get cut.

The long answer is that, while I (and I think most other progressives) oppose means-testing on the grounds stated, it's not a lunatic idea, just one I disagree with, and I certainly wouldn't object to exploring it. It has very little relevance in the context of the administration's current proposals, however.

Posted by: LizardBreath | Dec 30, 2004 9:07:57 PM

Progressives DO advocate means-testing as ONE of the ways to ensure the very-long-run solvency of Social Security, as should be evident from even a cursory reading of recent blogging on the topic.

However, I suspect what you're asking -- rhetorically -- is, why don't they/we make a big deal out of it? And the answer should be equally obvious: the Radical Right would equate means-tested Social Security with "welfare," to the (in their eyes desirable) detriment of both the program and the current dialogue about it.

The Right wants to destroy Social Security and lay its reserves open to unrestrained plunder by the financial "services" industry. The battle the progressive community is fighting is simply to preserve what we have, for the benefit of the elderly and those not fortunate enough to be rich Republicans. Actually making Social Security MORE progressive is a pipe-dream, given the power and determination of the forces attempting to destroy it.

Posted by: bleh | Dec 30, 2004 9:15:39 PM

Social Security is already means tested in that those with a high enough income are subject to income taxes.

Posted by: David W. | Dec 30, 2004 9:33:45 PM

"Right now, the program as it is in fine shape for the next 40 years. As that time approaches, if the situation so dictates, we can look at cutting benefits, means testing benefits, or increaseing the retirement age."

So the twenty yearold entering the workforce today can look forward to getting the shaft in 40 years. The crisis as it is called is simply that too many of folks of that age can see your handwriting on the wall writ large.

Posted by: abdul abulbul amir | Dec 30, 2004 10:30:30 PM

Why don't progressives?

Because it's really hard to call something "insurance" when it doesn't pay out equally to everyone who's put in.

Posted by: Kimmitt | Dec 31, 2004 4:41:16 AM

Uh, Kimitt, that's exactly how insurance does work.

Posted by: Barry | Dec 31, 2004 9:14:35 AM

I do advocate means testing (see here ). Why don't progressives?

Um, quite a few progressives do; I, for one, am a progressive and do.

OTOH, lots of progressives and liberals don't -- including those who did in the past -- because it has a history of being a political loser of an argument, and they've figured that payoffs to rich people are just the cost of keeping the SS system available for those who actually need it.

Posted by: cmdicely | Dec 31, 2004 10:02:06 AM

Because it's really hard to call something "insurance" when it doesn't pay out equally to everyone who's put in.

Not really; all insurance doesn't pay out equally to everyone who has put in. My collision insurance on my car, for instance, pays me nothing if I don't get in a collision.

The question about SS if it is viewed as insurance is what does it insure against? If it is insurance against old age itself (looking only at the "retirement" aspect, not the disability and other parts), then it makes sense to pay it without regard to age.

If it is insurance against having inadequate income in old age based on some standard, it makes less sense to do so.

Currently, SS takes a very weak means-testing approach by having SS income taxable if the recipients income is above a certain amount. Strangely, though, income tax collected on SS income in this case is not returned to the SS Trust Fund, but treated as normal income tax AFAIK. Which, it seems to me, is the wrong accounting mechanism.

Posted by: cmdicely | Dec 31, 2004 10:07:00 AM

Means testing Social Security also adds a significant element of moral hazard. This isn't necessarily reason not to do it, but it is something to keep in mind.

Posted by: J. Michael Neal | Dec 31, 2004 11:54:00 AM

The moral hazard is largely defined by where you put the cutoff point. Very few rich people will want to have a middle-class income.

Posted by: Sebastian Holsclaw | Dec 31, 2004 1:19:16 PM

Means testing Social Security also adds a significant element of moral hazard.

Moral hazard is, pretty much by definition, a feature to some extent of anything even remotely insurance-like anyway; whether means testing substantially adds to the moral hazard inherent in Social Security is probably a function of its structure. I wouldn't think it would substantially add to it if the loss of benefit eligibility was substantially less than $1 per $1 of income, particularly if it kicked in at some nonzero level. This is particularly true if you allow the reduced benefit eligibility to somewhat increase future maximum eligibility.

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