Bryan Caplan  

Making Populism Serious: The Case of Social Security

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Almost everyone thinks that Social Security is a great program.  Why?  Because they've been convinced by the kind of arguments Bastiat would mock.  Arguments like:

"Old people can't work anymore; government should give them money so they won't be poor."

"If Social Security didn't take care of our elders, we'd have to do it!"

These arguments are pleasantly convincing, perfect for a presidential debate.  All of the following reasonable retorts would cost you votes:

"Couldn't the elderly have saved for retirement when they were younger?"

"Gee, maybe government should give everyone money so no one will be poor!"

"'What do you mean 'We'd have to do it'?  You've never been legally required to support your parents, but you are legally required to pay Social Security taxes."

"Most old people aren't poor."

This doesn't mean that arguments in favor of Social Security have to be inane.  You could definitely craft an intellectually serious defense.  And it would look something like the following seven points.

1. Knowing that American elders live in poverty makes Americans feel bad.  But private efforts to alleviate their poverty suffer from a big positive externality; when one of us helps the elderly, everyone who pities them is a little better off. 

2. A reasonable solution is to impose a relatively efficient tax (ideally on a good with negative externalities; in practice on a good like labor with low supply elasticity) to fund transfers to impoverished seniors, thereby alleviating this externality problem. 

3. Factoring in seniors' wealth as well as their income, there aren't that many poor seniors, so a modest tax - with modest offsetting costs - could take care of the whole problem. 

4. Unfortunately, the public probably wouldn't eagerly support means-tested transfers to the elderly poor.  That seems too much like "welfare."  The only politically feasible way to solve the problem of senior poverty is to make Social Security universal.

5. To make the program universal requires pretty high taxes.  Depending on your definition of "poverty," we'll probably be transferring five to ten times as much income as necessary to provide for the destitute seniors we really care about (but strangely hate to single out for special assistance).

6. While these taxes and transfers will be substantial, the disincentive effects will still be tolerable.  Furthermore, the benefit formula will be so confusing that people won't realize the severe disconnect between what they pay in and what they take out.  See relevant neoclassical and behavioral econ literatures X, Y, and Z. 

7. Along the way, we'll also help people with the income - but not the self-control - to save for their own retirement.  Two birds with one stone!

If a presidential candidate made such an argument in a national debate, even I might vote for him, just to reward his suicidal candor.  But it's not going to happen.  If the issue comes up, both sides will defend Social Security with the crowd-pleasing arguments that Bastiat would mock.  After all, both sides are playing to win.



COMMENTS (35 to date)
Mark Bahner writes:
Almost everyone thinks that Social Security is a great program. Why?

Because it's a Ponzi scheme. People love Ponzi schemes until the number of "investors" can't grow anymore.

I'm sure Ida May Fuller (Social Security recipient numero uno) *loved* Social Security. She put in $25 and got out $22,900.

What a deal, right?

It's only the generations after the Baby Boomers who are not going to like Social Security.

wd40 writes:

Social Security does involve redistribution from the wealthier to poorer and from tomorrow's workers to today's. But the key aspect is that people are forced to save for their retirement years. In the absence of such a requirement, many people would not save and would be destitute in their old age. For whatever reason, our culture is not ready to let old people live in dire circumstances even if it is the person's fault. Instead, governments and charitable organizations would rescue the indigent. Forcing people to save for old age reduces the need for third parties to come to their rescue.

Jim Glass writes:

The real reason why Social Security has been so popular until now is much simpler: Up until now it gave participants $22 trillion in more in benefits than they put in -- that's over the market rate (on T-bonds).

Give people $22 trillion -- you're *not* going to be popular???

All those other statements are just the rationalizations justifying that happy transfer.

But the real rationalizations are starting now -- as participants now are getting back *less* than they put in, and these future losses will grow to equal $22 trillion in total to them. (In paygo programs, the gains of early generations must equal the losses of later ones, as a matter of arithmetic.)

Turn from gifting a $22 trillion gain on participants to imposing a $22 trillion loss on them -- that's a $44 trillion(!) swing, 44 trillion reasons for a program to *lose* popularity among participants. SS has become a money-loser, lifetime wealth-cutter for them that they could beat putting money in a bank savings account, or by buying T-bonds *directly* in their own IRAs and 401(k)s.

So NOW all the other justifications for it are a real political necessity. And we are seeing them.

Thus, Samuelson's praise of Social Security as "a Ponzi game that works"...

"The beauty of social insurance is that it is actuarially unsound. 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)!"
... becomes the Thoma/DeLong defense of Social Security as "fire insurance" ...
"Some people pay premiums for their whole lives and collect nothing. Others, the unlucky few who suffer a fire, collect far more than they contribute. Does that make it welfare? Of course not. Social Security is no different, it is an insurance program"
... and that's the way it always has been!!

Expect about $44 trillion of such revisionism to be coming.


Helen writes:

Or, you know, people are in favour of not letting people starve in their old age. Revolutionary, I know.

But presumably it would have been better had Ida May Fuller quietly euthanised herself. Much cheaper than social responsibility.

liberty writes:

That is a good argument - not perfect, there might be an economically/culturally/subjectively-preferably superior way to structure a programs that provides income to seniors and other people (a basic income for all, for example) but the 7 point defense is quite good. I'd also be persuaded to like a candidate who made such a defense.

Greg G writes:

Despite the sound advise of economists, the majority of people have never saved enough for their retirements and aren't disciplined enough, or good enough at investing, to be likely to be able to do so.

This situation is entirely foreseeable and creates externalities for those who do save and severe problems for those who don't.

Social Security has been a pragmatic and successful program to address this most predictable of problems. It combines features of a mandatory annuity purchase with features of a welfare program. It has kept huge numbers of people out of poverty by requiring them to save for their retirements when they can, and giving them extra help when they can't. Like all forms of insurance it will ultimately require the average person to pay slightly more in premiums than they receive in benefits.

It will require some reasonable adjustments like raising the retirement age but that kind of thing has been done before and could be done again.

Social Security is one of the most responsibly funded parts of the Federal budget (admittedly, this is like being the tallest midget) since it is mostly funded by a dedicated tax paid by those who benefit.

The finances of Social Security are public for all to see. It is one of the most popular government programs in history because it works. But if you hate government enough you will hate a successful government program even more than an unsuccessful one.

jb writes:

Bryan,
You've argued passionately and with intellectual rigor that children are genetically pre-disposed to behave in various ways - study (or not), play sports (or not), etc. That much of what we try to do as parents to 'enrich' our children's lives is pointless: We cannot teach them to be disciplined, or teach them to not eat the marshmallow etc.

And if that's true, it seems like 'incenting people to save for retirement by the spectre of poverty-after-retirement' wouldn't work any better.

But even aside from that - "bad luck" can completely ruin one's life, no matter how much discipline one has. For example, I have a pretty good retirement nest egg (and I still have 20+ years to go), and I pay out of pocket for disability insurance, etc. In any normal universe, I'm in pretty good shape. But in the universe where it turns out my next-door neighbor makes a bad choice of boyfriends, who then proceeds to kill her and plant evidence implicating me.... suddenly I'm facing catastrophic financial ruin, even if I'm eventually found innocent.

Incredibly unlikely, yes, but combine that with all the other incredibly unlikely scenarios and you get a small but meaningful chance of my savings getting completely wiped out. Knowing that there's a government program as the 'retirement option of last resort' is modestly comforting.

Jeff H writes:

Point 4 is demonstrably false. The Supplemental Security Income program (also run by SSA, by the way) includes a means-tested transfer payment for those over age 65 (under age 65 requires a disability). To my knowledge, nobody is clamoring for it to be done away with and it substantially reduces elderly poverty.

collin writes:

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RPLong writes:

Prof. Caplan,

People don't like Social Security because they're stupid and think it works perfectly.

No, people like Social Security because they WISH it would work the way they WANT it to work.

You're fighting bad logic when you should be fighting religious dogma.

Floccina writes:

Yes I think that those 7 points could lead to a debate about capping the SS checks at about $800.00 month and merging FICA into the income tax.

Do any other developed countries pay the same amount to all people over some age?

R Richard Schweitzer writes:

No one is addressing the most fundamental issue:

How, under any concept, especially those set forth in the Constitution, are the disbursements (which are entirely at legislative discretion) - a function of the Federal Government?

The disbursements are made to a specified, limited class.

They go to "survivors" who reach a specified age class, not for the "general welfare."

For years, the specifications discriminated (by reason of vital statistics) against African-Americans - part (about 11%) of what would have been the "general welfare."

The 3 major fiscal cancers of the U S all share the same defect: They are not proper functions of the Federal Government.

All 3 create obligations (every entitlement for some requires obligations by others). The imposition of obligations through government impacts individual liberty. Reason enough to have a defining Constitution; more reason to adhere to its limitations.

Trespassers W writes:
Social Security is no different, it is an insurance program

I guess they're just making up stuff now, which is encouraging.

But it's an interesting idea to explore. What if insurance companies were to offer a product that was the opposite of life insurance -- insurance that only pays off if you live to a certain age? And why don't they?

Premiums would be lower if you were a smoker, or a skydiver, or an astronaut--one of the important ways in which Social Security isn't like insurance, and is plainly unjust.

Tony writes:

I still see this as just one particular case of a more general phenomenon--"Making Politics Serious: The Case of Everything". Are there any examples in which the strong, serious arguments also carry the most rhetorical weight with the median voter? I suspect you could listen to many hours of presidential debates without hearing any (though I have not yet entered the circle of hell in which I would be forced to gather this data).

Yancey Ward writes:

To some of the commenters:

SS is not a forced savings program. If it were, you would have property rights in the collected funds.

Slim934 writes:

@ wd40

"Social Security does involve redistribution from the wealthier to poorer and from tomorrow's workers to today's."

That is a wildly absurd load of nonsense. Empirical evidence shows that the old as a class are unquestionably richer than the young. Yet SS works by taxing the young and giving to the old.

Furthermore, the forced savings idea is a non-sequitur argument. How does it follow that poor savings habits MUST lead to a system of pay-as-you-go where you have absolutely no property claims to the monies that you are forced to "contribute" into the system. The MOST a forced savings argument can say is that because individuals do not save over time, the government must withhold their money and divert it into PRIVATE savings accounts. There is no basis to say that it must go into a fictional government fund which really holds no money.

@ Helen.

It is my understanding that Ida May Fuller DID save for her retirement before accepting payments from the Social Security system. This hardly implies she was going to starve to death. Absurd assumptions about reality are no substitute for reality as it is.

I also fail to see how it is socially responsible to be legally extorted to pay money to perfect strangers when no such obligation exists to give to one's parents. It is most certainly hypocritical and contradictory.

I'm curious as to why no one has pointed out the obvious effect that SS has had on capital investment. This is I think one of SS's worst effects. Let's assume the government decided to end pay-as-you-go, but still did a "forced savings" scheme where one simply puts his money into a private savings account. Not only would he get a significantly higher nominal return, but he would then have the benefit of there having been trillions of dollars more investment in the economy, with the subsequent increases in living standards that investment would have brought with it. Compare that to the obvious waste that the government used it for in taking intragovernmental debt on the general trust fund.

The actual costs of social security are significantly higher once you take this into account.

Mike writes:

Following Helen's comment, I looked up Ida May Fuller, and followed some links.

The SSA has its own history department. Since 1963.

They even have a history of their history department, and a museum, which includes a (I presume) specially commissioned mannequin of a past administrator. Check it out! As Arnold says, you paid for it.

Jim Glass writes:

Or, you know, people are in favour of not letting people starve in their old age. Revolutionary, I know.

Thank the Lord! Warren Buffett is being saved from starvation by collecting above-market returns on his SS contributions, transferred to him out of the paychecks of his employees at Dairy Queen.

As for today's young workers a couple generations younger than him -- such as his Dairy Queen employees -- it is interesting how they will be "saved from starvation" by being made *poorer* on a lifetime basis via their transfers to Warren and his peers, *losing* money on their contributions.

R richard Schweitzer writes:

Social Security is not insurance.

There is a tax (FICA). There is no transfer of risk.

Disbursements are nothing more (legally) than legislative appropriations, arbitrarily determined, for the benefit of a specified portion of a limited class. They can be (legally) terminated at any time.

The use of actuarial factors to determine fiscal exposures from those political commitments to the disbursements does not constitute a function of insurance.

Indeed insurers have offerred annuities that do not specify a minimum return of (or on) premiums paid. Thus, if one so contracted, and paid a set premium for 20 years, for the benefit of receiving a fixed annual amount for each year of survival after age 65, for a maximum of 20 years, but then died at age 72, the actuarial balance would favor the insurer. Something similar applies to Long Term Care policies. The shorter the long term is the less is paid out.

Mike Rulle writes:

Somewhere along the way, SS became a defined benefit, instead of a defined contribution. The Feds, thru utter corruption supported by mind blowing stupidity ("lock box") still made it look like a defined contribution (Trust Fund), and then "invested" those funds into.........increasing the defined benefit, plus whatever other "investments" we made into education, green energy, sugar subsidies, corn subsidies, tax deductions for massively wealthy private universities, subsidized mortgages, subsidized school loans, excess military bases and so forth.

SS of course should be junked. The cost of junking it sooner rather than later, although enormous, will still be less expensive now than later.

MingoV writes:

wd40:

... But the key aspect is that people are forced to save for their retirement years. In the absence of such a requirement, many people would not save...
Social Security payroll deductions are NOT forced retirement savings. Instead of establishing the Social Security Ponzi scheme, the federal government could have required employees and self-employed workers to divert some of their earnings into IRAs. That would still be an inappropriate use of force, but it would be less inappropriate than the current generational wealth transfer scheme we have today.

Randy writes:

@Helen,

Re; "But presumably it would have been better had Ida May Fuller quietly euthanised herself. Much cheaper than social responsibility."

I was thinking along those lines just yesterday. Specifically, that the way that the debt will be resolved is that eventually a generation must be sacrificed. My bet is that the generation sacrificed will be mine (boomer). But then, why not? We could have and should have put a stop to this in the early 80s. We didn't. Our bad.

Brian Donohue writes:

At current tax rates (12.4% combined), which have been in effect for almost 30 years, there is little "intergenerational transfer" and the system is close to long-term viable.

Ponzi beneficiairies were those paying into the system more than 30 years ago- they won WWII and built this country, so it feels like a net win to me (generation X.)

People don't save even though they know they should. This is one of those behavioral conundrums that libertarians struggle with: I want to save for retirement, but I also want that shiny car. Humans have a hard time opting for the deferred good, but that doesn't mean they don't know that's what they really want, they just have poor impulse control.

Social Security helps them make the choice they know they should make. People voluntarily bind themselves to these kind of arrangements all the time.

Mike W writes:

I don't understand the reasoning in number four: the public would not support means-tested transfers to the elderly poor because "that seems too much like welfare". Is that code for, the public just doesn't want to pay for a benefit they are not going to share in? And so the solution is to give it to everyone? So the public could not be convinced that rather than pay 12.4% and receive a future benefit themselves they might prefer to pay, say, 3% and not participate unless they themselves qualified as poor in their senior years?

Even as I write it I realize the "welfare" alternative probably would not have sold.

Jim Glass writes:

there is little "intergenerational transfer" and the system is close to long-term viable.

If by "close" you mean cash-flow short by 1.5% of GDP annually starting next decade and forever after (which discounts to the $22 trillion by which the Trustees say benefits for current participants are under-funded).

For practical context, 1.5% of GDP is about $225 billion today, and would require a 16% increase in income tax revenue to cover it. That's quite a tax hike.

For historical perspective, the largest tax increase of the last half-century, the Clinton increase of 1993, was 0.8% of GDP, barely over half the increase needed to cover the coming SS shortfall ... and that passed the Democratic House by just one vote, and the Democratic Senate only on Al Gore's tie-breaker.

Add the simultaneous need to increase taxes by around twice as much to cover Medicare's cash flow, and that 1.5% of GDP doesn't look so "close" to me. Though I guess opinions may differ.

Ak Mike writes:

A minor point for Prof. Caplan - you are mistaken that there is no legal duty to support your parents. In most if not all states the law does require that adult children provide financial support for their impecunious parents.

For example, in Virginia, which I believe is your state, Title 20, Sec. 88 of the Virgina Code provides: "It shall be the joint and several duty of all persons eighteen years of age or over, of sufficient earning capacity or income, after reasonably providing for his or her own immediate family, to assist in providing for the support and maintenance of his or her mother or father, he or she being then and there in necessitous circumstances"

Shayne Cook writes:

What disturbs me about the Social Security debate is that it always framed in an "all or nothing" way, as Bryan indicates.

I would propose a "choice based" alternative - and this is an alternative I would gladly avail myself of, if it were available.

I pay into Social Security (and have) for all my working life. At age 55, a choice becomes operative: At 55, I can choose to fore-go any and all future SS benefits for the rest of my life, in exchange for a removal of any and all limits on my contributions to my own Roth-type IRA for the rest of my life.

By "Roth-type", I mean funded with fully taxed income on the input, and no tax burden on withdrawal - as is the current Roth IRA.

That allows those with the resources and wherewithal to "opt-out" of receiving (and burdening) the SS system on retirement. But it allows those who don't have resources or wherewithal, or just plain haven't provided for their own retirement, the option of receiving SS in retirement.

The only changes at Federal level would be to:
1.) Make the option available for anyone 55 or older.
2.) If the participant elects the option, remove current limits to IRA contributions.

Unfortunately, the Federal Government is not a "Choices-R-Us" type of organization.

Lord writes:

The reason there aren't many poor seniors is because of SS though. Most were quite poor before its enaction. The problem with means testing is that it discourages saving for retirement making the problem worse. As it is, the median SS check is $1100 a month, those high rollers.

Brian Donohue writes:

@Jim Glass. Based on this link:

http://www.ssa.gov/oact/TRSUM/tr12summary.pdf

the OASDI trust fund has a long-term deficit of 2.67% of covered payroll. The payroll tax is 12.4% of covered payroll.

The shortfall (2.67%/12.4%) is 21%.

An increase in the normal retirement age to age 70 amounts to a 20% benefit cut.

AS insoluble problems go, this doesn't rank.

Mark Bahner writes:
But presumably it would have been better had Ida May Fuller quietly euthanised herself. Much cheaper than social responsibility.

Yes, it's much better that she was a beneficiary of a Ponzi scheme that dwarfs anything Bernie Madoff ever dreamed of.

Mark Bahner writes:
Disbursements are nothing more (legally) than legislative appropriations, arbitrarily determined, for the benefit of a specified portion of a limited class.

In other words, the benefit goes to what James Madison would call "objects of benevolence" (as in, "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents").

Mark Bahner writes:

Hi Jim,

But the real rationalizations are starting now -- as participants now are getting back *less* than they put in, and these future losses will grow to equal $22 trillion in total to them. (In paygo programs, the gains of early generations must equal the losses of later ones, as a matter of arithmetic.)

That's also true of a Ponzi scheme...the wins of the first "investors" must be exactly balanced by the losses of the later "investors."

I completely agree with your assessment. Social Security may indeed be popular now (all Ponzi schemes start off popular), but it will become unpopular very soon, and its unpopularity will continue to grow.

Lord writes:

Wishful thinking. SS is popular among both liberals and "keep your government hands off" conservatives. It is only unpopular among libertarians and some wealthy and would bes who think they could do better and would prefer everyone else work until they die. They control one party and pundits to advance their agenda but have been unsuccessful, for all they can offer are "solutions" that are worse than any problem.

Jim Glass writes:

Hi Jim ... That's also true of a Ponzi scheme...the wins of the first "investors" must be exactly balanced by the losses of the later "investors."

Yup. Three Nobelists who applied the "Ponzi" adjective to Social Security. (Note how much the funding shortfall has increased since that was written.)

I completely agree with your assessment. Social Security may indeed be popular now (all Ponzi schemes start off popular), but it will become unpopular very soon, and its unpopularity will continue to grow.

Yup. Social Security is eating up its political capital now. To the extent that voters like programs that give money to them (on the order of $22 trillion) and don't like programs that take money from them (on the order of $22 trillion), it's hard to even imagine how its "approval rating" can avoid going into reverse in coming years.

Plainly the process has already started. Nobody was knocking SS in the 1980s when the all-time payouts were highest -- and the 1983 re-write kept them there by sticking the cost to the not-voting-yet young, driving their returns straight down into negative territory.

Since then the complaints about SS have been incrementally growing and growing. Go to the message boards at AARP and anywhere young people post, compare the difference of opinions about SS on them, and you will have no doubt that this process will continue. And the *big* losses for the young are still years away.

Peter H writes:

"7. Along the way, we'll also help people with the income - but not the self-control - to save for their own retirement. Two birds with one stone!"

I think you're underrating the value of this point. Social security is, during the working period of a worker's life, protected from bankruptcy, lawsuits, foreclosure, judgment liens from other debts, con artists, identity theft, friends and relatives asking for money, giant medical bills, and all the other things that can destroy someone's savings.

Other retirement programs do provide some of these protections, but none do it as well as social security. 401(k)s and IRAs are protected from bankruptcy and lawsuits, but not from con artists and identity theft.

Social security sucks with regard to rate of return and security from government confiscation, but it is excellent in terms of absolutely under no circumstances letting you take out the money early, which is a virtue in terms of savings. You can't even take out a loan secured by future payments, since the future payments are secured against judgment liens.

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