Arnold Kling  

Is Social Security Insurance?

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In the New York Times, Robin Roner and David E. Rosenbaum write,


The average retirement age in 1940 was 68. As recently as 1965, about two-thirds of workers did not begin drawing Social Security benefits until they were 65 or older. Now, more than half retire at 62 or younger, and three-quarters receive their first benefit checks before they are 65.

The article says that raising the retirement age is the least popular option for dealing with Social Security. This tells me that people do not view Social Security as insurance.

The insurance aspect of Social Security is that, like any annuity, it protects you against the risk of outliving your assets. If you were buying Social Security as insurance, then the premiums would be lower the later the age at which you chose to collect it. And if what people valued were the insurance aspect, then most people would prefer low premiums and benefits that kick in when they get really old. That would be better than high premiums and benefits that kick in when you are 60.

From the resistance to raising the retirement age, I conclude that what people value about Social Security has little or nothing to do with insurance or risk aversion.


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The author at Economics and Liberty in a related article titled Is Social Security Insurance? writes:
    It seems to me that one of the attributes of social security as insurance would be that not every person who had "paid into the system" would receive a monthly income check. A person would receive a monthly check only if he or she had suffered the ad... [Tracked on June 14, 2005 2:21 PM]
COMMENTS (14 to date)
Randy writes:

Arnold,

Re; And if what people valued were the insurance aspect, then most people would prefer low premiums and benefits that kick in when they get really old.

I think people would value this if it were an option - I know I would. But it isn't an option. The premiums are high regardless, and there is no increased benefit for retiring later. The check is bigger, but the overall payout is exactly the same. The risk of receiving nothing at all, however, increases greatly with every passing year.

Mr. Econotarian writes:

The confounder is the continually reducing age for obtaining Social Security is supposed to be a way of reducing the total fiscal burden of Social Security by encouraging people to take it earlier for less payout.

In that way, I suppose it is acting a bit like an annuity. Of course, those are generally available on the open market.

Bob writes:

I'd love a pointer to a survey on the preferred strategy for "saving" SS, something like:

Would you choose to:

a. Cut benefit levels 10% for everyone
b. Cap the max benefit at $1500/month
c. Raise the payroll tax 10%
d. Raise the retirement age to 69 over the next ten years

with the results broken down by age. I suspect that "b" would be the most popular, but I'd be curious whether "d" would be better receive by the under 30-yr olds.

Personally, I like "d" but suspect it would produce less-than-expected savings (later retirements being offset by more disability claims).

Rick Stewart writes:

I believe people like Social Security for two reasons, neither of which is insurance or risk aversion for themselves.

The first is the belief that there are a lot of people who will simply not survive without it. This belief is never supported with any accurate information as to who, exactly, these people are who are so incapable of providing for their own retirement. There is just an assumption that a lot of people need a lot of help and Social Security provides it. Insurance that I don't need, but somebody else does.

The second is laziness. People are just too lazy to accept full responsibility for their own retirement, so if the government offers to do it for them, they accept. Sure, everybody plans to save, but letting the government do it for them is easier. Although this is similar to risk aversion, I believe it is not the same. It is just plain laziness, subcontracting my financial future so I don't have to do it myself.

Tom writes:

I conclude that what people value about Social Security has little or nothing to do with insurance or risk aversion.

Of course. What people value about Social Security is the illusory comfort of having some sort of "guaranteed" retirement income. Most people are too economically illiterate to understand that they'd be better off if they could put their SS taxes into a fairly riskless vehicle (e.g., investment grade corporate bonds). It just makes them feel better to think that the government is going to "give" them something.

Dewey Munson writes:

SS is a plain good investment.

I am 83 and contributed at max all my lfe and based on these contributions inflation adjusted I am getting a 25% return -partially COLA adjusted.

Ridiculous! I have been a non-producer for 20 years.

I don't know how to discuss with economists, but adding higher incomes to the systems will just add more rip-offs.

REMEMBER! The FICA tax is greater than necessary to support benefits (called the Fund) which is just another source of tax money supporting spending.

Even the economists are being conned.

James writes:

Actually, Dewey, SS is an incredibly poor investment. You don't need economics, just arithmetic to see that the average rate of return on SS is equal to the total recieved from SS by all participants minus total paid into the system by all participants, the quantity divided by the total paid in by all participants. Due to the structure of the program, the numerator in that fraction is never greater than zero and so the average return is, at best, zero. The people who have been recipients thus far have received returns on their investment greater than zero. Guess what side of zero the returns will be on for future participants.

In response to Arnold's topic, SS is only insurance in the sense that politicians see it as a way of insuring against the risk of losing office. Really, I see no difference other than motive between a state of affairs where politicians steal from the few to buy the votes of the many and a state of affairs where a representative democratic government creates a broad network of entitlement programs.

Jim Glass writes:
"SS is a plain good investment. I am 83 and contributed at max all my lfe and based on these contributions inflation adjusted I am getting a 25% return -partially COLA adjusted."

SS was a good investment, back in the days when Paul Samuelson was using the word "Ponzi" in regard to it as praise.

But as Paul Krugman noted some while back...

"Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in)."

Not a good investment anymore.

Jim Glass writes:

Of course people don't want the retirment age put back -- that's a benefit cut that makes clear and obvious to many that they will get back less from SS than they put in, and that SS is the bum investment it is.

That's why this simple, obvious fix has never been broached by the politicians -- they know how people will react.

It runs counter to the entire history of SS as it has been sold to the public for 50 years, as Samuelson once put it...

"Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!"

Wow! We all still want THAT!! Free Money!!

And that's what the Democrats are still selling whenever they say "SS is the most effective social program in the US ever, and we want to preserve it as it's always been". Ha. Ha.

OTOH, there's another reason for being against increasing the retirement age which is a good one: It is regressive. It hurts people with the lowest incomes who will be most dependent on SS the worst.

Increasing the retirement age often at first thought seems like the logical fix, but it's really not.

dsquared writes:

You don't need economics, just arithmetic to see that the average rate of return on SS is equal to the total recieved from SS by all participants minus total paid into the system by all participants, the quantity divided by the total paid in by all participants. Due to the structure of the program, the numerator in that fraction is never greater than zero

Surely not? It's greater than zero as long as population growth is positive in the steady state.

aaron writes:

d^2, I think it's not as simple as population growth, it depends on median salaries, productivity growth, and population growth. As a highly productive economy, the number of high paying jobs may not grow as fast as population growth. I think people may need to rely more on investments to supplement their income as less jobs are required to sustain our economy. Plus, as a highly productive economy, it makes sense to invest in foreign countries where productivity growth can be achieved for less investment (more jobs outside the US, less inside).

The current system seems to assume that most of our productivity comes from labor and manufaturing within the US and that population and productivity growth are always posetive. I think that the risk of shortfalls that this system creates can easily be avoided my moving to a system that relies on markets which may track economic growth better than payrolls. I think this would address problems of wealth distribution better than the current system also. Currently, if payrolls don't keep up with cost of living it will be continue to become more and more difficult to accumulate wealth and assest which generate additional income and relative upward mobility will continue to decline.

James writes:

D^2,

Is number of total past, present and future participants in SS finite or infinite?

Put another way, it's presently illegal for an investment company to run a program like the government operates SS. Do you think this law is a good idea or a bad one?

Dewey Munson writes:

James

If you retire this year you will have paid in $ 98807.

You will get $1,939/ mo $23268/yr
Wife will get $11634

It's conjecture whether eliminating Fica would actually result in a 6.2% raise

If this wasn't a good business deal it wouldn't have to be corrected.

Complex matter but I say that more high earners should not be put into the system -payouts are based on earnings.

The benefit which is now lifetime should be adlusted - reduced - as it is used .

The real farce is the FICA tax being higher than necessary to pay each year's benefits which makes the excess just another tax.

Both SS and the stock market depend on the future economy and I never see projections of the same economy for both objectives.

The real value of the SS system is that it is a forced savings plan for the half of the country with less than $25000/yr incomes.

Will your broker talk to someone making $25000

James writes:

Dewey,

You'll notice that I made no projections regarding the performance of "the" economy. I see those discussions as peripheral and mostly unfruitful. Now if you want to argue that a number less than or equal to zero (the total money all SS participants receive minus the total money that all participants contribute) divided by a positive number (the total number of participants) can possibly be greater than zero, then let's have that debate.

When I first started working in 1995 for about $11k per year I had no trouble establishing an account with a broker. No one had to force me to do so. The only force involved is that I'm forced to subsidize the retirement of someone else who wasn't so prudent and as a consequence I couldn't save even more.

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