David R. Henderson  

Social Security: The Importance of Being Unimportant

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The Tautological Fallacy... Ronald Hamowy, RIP...

Commentator Floccina, writing about my post on Social Security yesterday, states:

SS is a way for the recipients (old people) to tax workers, therefore the more people getting SS the stronger the program is.

That seems obvious, but let me apply a little public choice reasoning to argue that it goes the other way: the more people getting Social Security, the weaker will be the support for the program. Rather than start from scratch, I'll just quote from a piece I wrote on this in Policy Review, April/May 2006. The article is titled "Why Spending Has Got to Give."

The excerpt:

Consider, for example, one way the political dynamics of Social Security might change as more and more baby boomers (those born between 1946 and 1964) start collecting benefits. One of the most important insights from "public choice" economics is what I like to call "the importance of being unimportant." Translation: If an interest group is suitably small, its members can be relatively cohesive. They can get together to obtain a special subsidy, regulation, or import barrier that costs members of a much larger group a little each in order to give members of the small group a lot each. One reason the farm lobby has been so successful at getting subsidies for its members is that there are so few farmers. This means that each farmer can get a substantial gain at the expense of consumers and taxpayers (in the form of higher prices and higher taxes, respectively) and that the consumers and taxpayers don't bother organizing to fight the wasteful farm policies because each pays a much smaller amount than the gain per farmer. This "importance of being unimportant" explains a phenomenon that has surprised many observers: Even as the farm population has shrunk, the lobbying success of the farm lobby has grown.

But the reverse also holds. All other things being equal, the larger the interest group becomes relative to the size of those paying for its special privileges, the bigger becomes the loss to the payers. The case of Social Security and Medicare now becomes relevant. One reason there has been relatively little resistance by the working population to increased subsidies to the elderly is that for a few decades there have been about three to four workers for every elderly beneficiary. But as the number of workers per beneficiary falls to 2.2 by 2030, as noted above, the resistance among workers will grow because the cost per worker will grow. This could imply a new political equilibrium in which the amount of benefit per elderly person would not grow as quickly as planned and might even fall somewhat. Readers of Malcolm Gladwell's The Tipping Point might think that that is what I'm describing here. But it's not necessarily a tipping point. Rather, increased political pressure by the relatively young will lead, along a continuum, to a different outcome.

Now, the above does not mean that there would be an across-the-board reduction in benefits or in the growth of benefits for all the elderly. Instead, a new political coalition might form between the working-age population and, say, the oldest Social Security beneficiaries to rein in benefits for the relatively young seniors who can most afford to give some up. Or it may be a coalition between the working-age population and the younger elderly. Which coalition comes about is difficult to predict -- that there will be a coalition seems likely.


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COMMENTS (5 to date)
Greg G writes:

So then, Public Choice Theory can explain a result where Social Security continues to grow or one where coalitions change and it begins to shrink. The problem is that a theory that explains all possible results really doesn't explain anything.

The impossibility of being disproven is a weakness, not a strength in a theory.

James writes:

Greg,

I count at least two testable predictions:

1. The larger the portion of the population receiving Social Security, the less support there will be for the program.

2. If the dependency ratio continues to increase, there will be a political move to support a reduction in benefits, either across the board or specifically targeting some group of people who would receive SS benefits under the current version of the system.

You could probably find opinion poll data and dependency ratio data from many countries to test the first claim now. The second claim will become more testable as the world generates more data.

Anyway, your problem is not with public choice which is really just a subject area that gets miscalled a theory. You probably have a mental picture about how the actions of citizens, politicians, bureaucrats and lobbyists all influence eachother. Guess what: you then have a public choice theory too. Does your theory of public choice meet your own standard of testability?

Greg G writes:

James

If this is to count as a falsifiable prediction I will want to have some idea how many years or decades we need to give it. The prediction is six years old already.

As for public choice being "just a subject area that gets miscalled a theory" I guess I was influenced by the fact that the post is listed (right above where comments start) as within the "CATEGORIES: Public Choice Theory, Social Security"

I'm sure it is true that every theory is about its subject area and most subject areas have their theories.

I am sure it is true in some sense that every "mental picture" of how things work relies on a theory of some sort. I am more inclined to use the term "theory" to refer to a way of generating non-trivial predictions. I have no non-trivial predictions that I am confident of making about future political coalitions.

Blissex writes:

OASDI/Social Security is not a tax, it is a voluntary insurance scheme against various risks, one of them becoming poor in old age, others being sick or becoming temporarily ill.

OASDI membership is an entirely voluntary bargain of mutual advantage, and even more so than the local and federal taxes, because:

* If you don't want to join it you can TAKE PERSONAL RESPONSIBILITY leave the country and move to a country without it.

* If you don't like it you can TAKE PERSONAL RESPONSIBILITY and earn a living without being an employee, for example from capital.

* If you don't like it you can TAKE PERSONAL RESPONSIBILITY and work as an employee in an exempt occupation or place.

And it is insurance (to a limited extent) plus assurance because you pay a premium and get eventually an annuity, an annuity that is a bit more advantageous at lower than higher level of premiums, insuring against the risk of poverty.

It also has amazingly low overheads, more than an order of magnitude lower than private sector schemes, delivering excellent value.

But again, if you would rather not join OASDI, just TAKE PERSONAL RESPONSIBILITY and shop somewhere else for your insurance products.

Anthony Vazquez writes:

The health of the Social Security program is inversely related to the amount of people that are currently receiving Social Security benefits. As a generation as large as the baby boomers has started to age Social Security is being collected at an accelerated rate as they retire rapidly and there are not enough young workers to take their place in the system. Social Security is one of the key social programs in the United States and for many years it was running smoothly and effectively due to the baby boomer generation creating a large work force that could easily sustain the amount of retirees per year. As one of the largest generations in history has begun to age however there is suddenly a drastic increase in the amount of retirees who are collecting benefits through Social Security. As the drastic increase in retirees occurs there is also a drastic decrease in the amount of workers to fund Social Security which is only made worse by the current recession and the high unemployment rate across the country. Social Security is in need of an influx of workers to compensate for an aging work force and to ensure that Social Security will not run out as more and more workers retire each year and fewer positions are being refilled by new workers. Social Security spent many years with more workers funding the program than there were retirees collecting benefits but now as retirees are collecting benefits faster than money can be put into the program its health is in jeopardy and something must be done to preserve the program for future generations.

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