Arnold Kling  

Social Security Opt-out?

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Economics and Autism... Real Electoral Reform...

Kyle Markley writes,


Social Security should be a voluntary program. Every individual should have the right to opt out, without any restrictions on eligibility and without any requirement to justify their decision.

...Would individuals who opt out be reimbursed for past Social Security contributions?

The simplest answer would be "no," individuals who opt out would permanently forfeit all past OASI contributions. Many people (myself included) experience the desire to opt out of Social Security with great intensity and would accept the loss of all past contributions in exchange for the opportunity to opt out of the system.

Some form of reimbursement would be more fair.


Immediate reimbursement would raise the near term Budget deficit, so my guess is that the most politically palatable form of reimbursement would be in the form of retirement benefits. That is, if you opt out at age 35, then when you reach age 65 you might be reimbursed for your paid-in Social Security taxes using a formula that incorporates compound interest. Most people are under the illusion that Social Security works that way now--that the benefits they receive represent principal and interest on their paid-in taxes. If only.


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CATEGORIES: Social Security



COMMENTS (15 to date)
SL writes:

Like any other insurance program opt out guarantees adverse selection. The rich and the well endowed will opt out because they don't have the need for the insurance. The poor, who needs the insurance, will have to pay a higher premium to get the insurance, making the whole deal a bad deal. The result is the collapse of the program.
If we agree that a safety net for old age poverty is needed in this country, the program has to be mandatory.

Mr. Econotarian writes:

Most poor people (of working age today) would benefit from opting out of Social Security and investing their payroll tax into a reasonable form of investing for retirment (equities early on, then a transition to bonds in the decade before retirement).

The "insurance" argument doesn't hold water beacause rich people pay more into Social Security but also receive higher benefits. There is a very slight redistribution from rich to poor with Social Security benefits, but it is small.

Andy writes:
If we agree that a safety net for old age poverty is needed in this country, the program has to be mandatory.

But since "we" don't agree that a safety net for old age poverty is needed then the program should be optional. If I need to provide them with a safety net then it is only fair that they provide me with a down payment for a home purchase.

Chris Bolts writes:

There is a reason that Roosevelt had made paying "contributions" compulsory on all Americans: to avoid the adverse selection problem described by the first poster. However, the hypocrisy of Social Security's founders and its irony is that it uses two conservative ideals to help it achieve its goals: to ensure broad support amongst the rich to prevent it from looking like a "welfare" program the more taxes you pay into the system the higher your benefit and the employment of the flat tax to ensure that everyone contributes the right mix according to their income level. Unfortunately this has a perverse effect upon the poor because there is no way that the poor will ever pay as much as the rich, but if the poor didn't pay the tax then they wouldn't have anything left for retirement. If you happen to be a poor person who lives a very long time, then you can actually "come ahead" with Social Security because the way the program is designed the longer you live the more benefits you can extract. That's about the best annuity that the poor can buy.

On a different note, I have read one reasonably made argument as to why government shouldn't be providing private accounts. The irony is that it doesn't come from a liberal, but from a conservative. Here's the link:

http://www.aei.org/publications/pubID.22245,filter.all/pub_detail.asp

However, I do agree that it is high time that we stop acting as if Social Security is only meant for the old who exist now. When Roosevelt created the program, he no doubt was only thinking about the old, but in reality when you create a program with broad effects such as Social Security, it doesn't just belong to one group of people, but instead it belongs to ALL Americans, existing and nonexisting alike.

Christian writes:
If you happen to be a poor person who lives a very long time, then you can actually "come ahead" with Social Security because the way the program is designed the longer you live the more benefits you can extract. That's about the best annuity that the poor can buy.

The problem with that statement is the statistical evidence shows that poor people typically do not live longer, so in the end, they get screwed over even more. And, to note, that most low income earners go to work earlier in their life, most likely from dropping out of school, so they will start paying at a younger age. What would happen to someone that starts working at 18 and dies before reaching 65? I’m sure you can guess. And while I think the opt-out plan is best, the “private” accounts are still better then a failing pay-as-you-go system.

Bill writes:

To me, the worst thing about SS is that it taxes labor, which means that the government is stealing life from me (labor takes my time, which is finite), but excludes capital gains. A trust-fund baby can go through life living on capital gains (which are taxed at a very low rate) and never pay a single cent into SS. Personally, I'd like to opt out (and I'm 35 and make roughly $75,000 per year, so I'd lose quite a bit of money), but if I can't have that option, I'd like to see the cap removed and capital gains included (which would completely annihilate the future SS budget shortfall). The second worst thing about SS is that it is essentially inheritance insurance. I grew up extremely poor (disabled mother, absent alcoholic father; I've worked since I was a child), so I'll not be receiving any inheritance. (I will likely have to help my aging parents financially.) Those that have wealth can keep it while living on SS and using Medicare instead of divesting to pay for their maintenance and health care. (Reverse mortgages, anyone?) Therefore, the children of these people with receive inheritances that should have been used up. Essentially, SS protects the inheritances of the upper middle class. God, government is evil!

SL writes:

I pay car insurace premium for years but never filed a claim. Does the insurance being unfair to me? No. It is perfectly fair. And I am not complaining for not having an accident. Social Security should act the same way. Old age poverty is a risk and can be devastating. If I die young, my spouse and children are covered. If I die young without a survior, I don't need the money anyway.

The problem with social security is indeed the pay as you go funding. Social security trust fund is being used for other purpose. And because the program is not funded, the financial drain is unavoidable as the population is aging.

The solution, in my opinion, is to increase the social security covered compensation from $90,000 today to maybe $160,000, and include captial gain in the earning. If that is not enough to pay the promised benefit, some benefit cut across board should also be considered, such as raising the normal retirement age, a deeper cut for early retirement, and lowering the cost of living adjustment.

Everyone should have an individual retirement account. This is in addition to social security, and not by government mandate. Social security should provide only minimum standard of living, not a comfortable retirement. It serves an important purpose - insuring against old age poverty. Allowing the poor senior citizen to die in the street should never be seen in this country.

Tom West writes:

Given that the the American public in general (no, the Libertarian contingent doesn't count as the public in general), are not willing to let the elderly starve in penury, what incentive is there for those in contrained circumstances (i.e. all of us at some point or another) *not* to opt out?

Swami writes:

Social security taxes affect the H1B workers even more. We pay the taxes but we are not entitled to the benefits (unless we become green card holders or citizens). If I am given the right to opt-out, I'll do it the next minute. Till then I will have to continue paying what in effect is an "international" tax.

Andy writes:
I pay car insurace premium for years but never filed a claim. Does the insurance being unfair to me? No. It is perfectly fair. And I am not complaining for not having an accident. Social Security should act the same way.

The difference is that a car accident is unpredictable. You could go your entire life without having a car accident. Getting old is a given, there is no uncertainty. As a result, there is no need for "old age insurance". It isn't insurance if it is guaranteed. You are in effect, pre-paying an expense. Even the poorest of the poor would be better off taking their SSN contributions along with their employer's contributions and investing it in a private account. The real issue is that certain people want to continue to foster a dependency on the government.

SL writes:

To Andy,
The risk is that you may outlive your saving to say 120 years old.

To Swami,
You can file for a refund of your taxes if you permanently return to you country. Check this with Social Security Adminstration Website.

Dewey Munson writes:


to figure the SS return for someone retiring this year having earned SS max through life.

the site http://www.ssa.gov/ has program


today's retiree will have paid $98807 into SS and will receive $1939/mo. $23268 /year 23.5 %

Assuming an employee would really get the Co. contribution that would be 11.7% /yr

That's a pretty good inflation protected annuity and it's possible that a non-working wife would get 50% of that.

That's for someone whose final salary was >$90000. hardly destitute.

My point is that

1. this is unaffordable and certainly calls for means testing.

FDR made following statement at the outset -

"..............It takes so very much money to provide even a moderate pension for everybody, that when the funds are raised from taxation only a "means test" must necessarily be made a condition of the grant of pensions...................."

2.REDUCTION of the salary limit. Increasing the salary limit ADDS to the annuity costs much faster than tax increases.

3. Also little attention is paid to the excess tax rate which is running other parts of the Govt.

4. Meanwhile, none of the economists are paying attention to the elephant in the room - The steady decrease in the value of "Money" which creates the impediment to saving . My 1939 nickle loaf of bread wouldn't go far today.

Oh well. . . . . .

Andy writes:
The risk is that you may outlive your saving to say 120 years old.

Two words...immediate annuity

An insurance company will gladly assume the risk of me, or anyone else for that matter, living to 120. There is no need for the government to force that risk onto all tax payers.

this is unaffordable and certainly calls for means testing.

So then it is really a welfare program?

The better option is to allow people to voluntarily opt out. If they just let people opt out, the program would become sustainable because those who chose to opt out would not be accruing future benefits.

Bill writes:

Comparing SS and car insurance is ridiculous. Car insurance is voluntary. (Even in states that require it, you could go without a car.) SS is coerced from workers at gunpoint.

Seth writes:

While I am limited in my knowledge, it does seem to me that creating a fund to 'insure against old-age penury' is a goal worthy to unify. (I am not saying that the government should make that choice for us.) This type of group fund is based on the synergistic idea that the end distribution is based not on fair returns to the original investor but on actual need. In most cases, is the channeling of monies efficient to this end? A point to be made is how our government is defining 'a minimum standard of living'.

I very much thank everyone who contributed to this posting. Reading through I learned a good deal- discussions are so good for that.

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