Arnold Kling  

Social Security a Diamond in the Rough?

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In this essay, I examine at length Peter Diamond's arguments for Social Security as it exists currently. An excerpt:


I doubt that elderly people who maintain their assets in lump sum format rather than as annuities are as irrational as Diamond and others suggest. In the real world, the elderly face many more sources of uncertainty than just their date of death. For most other sources of uncertainty, a lump sum provides better protection than an annuity.

For example, take the risk of a sudden jump in expenses, due to a medical problem or other crisis. If you have a lump sum, you can handle the spike in cash needs without having to take out a loan.


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CATEGORIES: Social Security



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/74
The author at Deinonychus antirrhopus in a related article titled Carnival of the Capitalists writes:
    Is up at Brain Brew Blog. Lots of good stuff there such as Insutlts Unpunished's look at the Benedict Arnold CEO flap. Arnold Kling's post on Social Security. If those don't catch your interest click the link and look at the other 21 entries. [Tracked on May 3, 2004 10:55 AM]
COMMENTS (4 to date)
Eric Krieg writes:

It strains your crediblity if you say that a 70 year old pension system that hasn't changed much over that 70 years is fine, and that if we were to begin such a system today, we would make it EXACTLY the same.

Come on! Get real. Social Security is outdated, as are all pension systems. The entire notion of retirement is outdated. We need something different, something affordable.

Arnold's criticisms are valid, and I don't care that Arnold's credentials don't smell as sweet as Diamond's. This is America, not France. Ideas are more important than where you went to school.

Mathew writes:

One problem with a lump sum is that people will lose it. Old people are ripe for scams. Remember when england privitized thier pension systems?

Anyway this is all extremely paternalistic, and I recognize that, but you can't ignore these problems, the moral hazard of this policy. It has implications.

Shank writes:

Right - if we're going to get rid of one form of paternalism (Social Security), we need to get rid of all forms of paternalism (welfare, medicaid, etc), so that people will be forced to bear the full weight of their decisions. If a senior gets a lump sum payment, he KNOWS that even if he blows the money in Vegas, the government will be there to support him with food stamps, housing, etc. to ensure that he doesn't starve to death in a gutter. He doesn't have to bear the full weight of his decision, which distorts his decision-making process.

We can think all we want to about theoretical models and rational people and rational decisions. But we have to think about the people who WILL blow their money, as well as the politicians who would give additional welfare payments to the people who were unwise with their money. We either need to eliminate paternalism altogether, or we need to keep elements in the system that protect the prudent from the imprudent.

Boonton writes:

Is there any reason the market couldn't supply lump sum SSI payments today? Consider this scenero: A bank offers 65 year old Mr. Smith a lump sum payment. In return Mr. Smith will have all his remaining SSI checks direct deposited into the bank's account where they will collect the annuity.

The SSI 'risk' (you don't live long & don't get many checks) is transferred to the bank in this case. On the flip side, the retired person will run the risk that he will live very long & end up with just his lump sum. A modified version of this could work by limiting the term of the lump sum...say a lump sum in exchange for the next 3-5 years worth of checks...

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