Arnold Kling  

Feldstein on Social Insurance

Pseudo-currency... Social Security Ad Nauseum...

I recommend David Warsh's coverage of this year's American Economics Association meetings, which just concluded. Among other things, he mentions Martin Feldstein's Presidential Address, Rethinking Social Insurance. Feldstein writes,

The impetus for broader social insurance reform comes from the recognition that existing programs have substantial undesirable effects on incentives and therefore on economic performance. Unemployment insurance programs raise unemployment. Retirement pensions induce earlier retirement and depress saving. And health insurance programs increase medical costs.

...Noneconomists who write about social insurance programs often implicitly assume that social insurance programs do not affect the behavior of beneficiaries or the overall performance of the economy. Evidence shows that the opposite is true. Social insurance programs have important and sometimes harmful effects on the economy that are not fully recognized by the public, the Congress, or the politically responsible officials.

To me, this is the point that journalists most often miss about the Social Security debate. They tend to get so caught up in the distributive aspects of Social Security--how it affects the Budget, whether benefits are going up or down, or what have you--that they forget the incentive effects. It is the duty of economists to keep those effects in focus.

How does Social Security affect work and thrift? Feldsten says,

Who among you is confident about even the most basic Social Security rules that determine benefits at retirement? If you are a man, what benefit would your wife receive if she collects on her own rather than as your spouse? How would that change if she earned more or worked another year? If she retires at age 62 rather than 65? I’m told that there are more than 2500 separate rules in the Social Security handbook.

The complexity of the rules weakens the perceived link between the payroll taxes paid and subsequent benefits. Many employees may simply regard their Social Security payroll tax as similar to the income tax, thereby increasing the perceived marginal tax rate and raising thedeadweight loss of the tax.

I recommend reading Feldstein's entire essay.

For Discussion. How can economic analysis improve the design of social insurance programs?

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CATEGORIES: Social Security

COMMENTS (3 to date)
Deb Frisch writes:

How can economic analysis improve the design of social insurance programs?

Step 1: Recognize that "social insurance" consists of Social Security, health care and possibly other current activities. Frame "social insurance" as a single policy issue.

It could get pretty big:

Housing insurance (homeless shelters, HUD)
Physical safety insurance (Shelters for abused children and spouses, military, healthcare)
Financial insurance (DOE, unemployment insurance, social security)

Lawrance George Lux writes:

How can economic analysis improve the design of social insurance programs?

Real economic analysis could disprove many current theories on social insurance. Study of the last years since the 2001 Recession would state SS Benefits indexed to Prices(approx. to current welfare benefits provision) during the Period would have led to loss of 23% of Consumption, loss of an additional 7 million Jobs, and loss of 62% of the interim Business Profits. (This loosely estimated by the expectation that Senior citizens maintained 40% of the Consumption for themselves and gift expenditures to Children, estimate they would have cut their expenditures in half, and eliminated all but absolutely necessary health care)lgl

Dewey Munson writes:


Where do you get your assumptions?

I am 83 and 19 yrs retired. I recd SS at max contribution from the start.

This year $1144 mo. $13728 yr.

I assure you that all this and more is being used as the delayed Consumption from prior years and is providing or sustaining jobs for someone.

Checking the current starting SS at max earnings I find that in spite of the annual COLA I have been "losing" 2+% per year.

Most of the postings on SS which presumably come from formal Economic backgrounds are seriously deficient in basic homework.

My most recent source on monetary value indicates that the dollar has lost 6 times its 1967 value.
In all the "ad neuseum" discussions no one discusses the difficulties presented by such a monetary condition as it relates to saving for the future.

Take my case for instance. My first man-sized job paid $.85 per hour(1938). With a monetary system which maintained purchasing power,deferring some of those early earnings for consumption today would have been a breeze(actually it paid for college).

If you are economist based you know where I'm going.

I am (was) a reasonably successful engineer. I have done homework on the original intent of Social Security and have lived thru its lifetime. I do not believe I am on welfare and add that the same monetary problem affects my other efforts at delaying consumption for the future.

I know that FDR for all his other errors insisted that when Govt gives out money it is necessary that such giving be means tested.This fundamental never happened so the actual system has never existed and therefore cannot be properly judged.

Combining the stock market which is the beneficiary of inflation with future security which is adversely affected by inflation is a serious mismatch which economists should be in the forefront of correction.

I close with a question.

What would you recommend when the stock market tanks 50% and unemployment goes to 25%?

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