Misunderstanding Social Security

by Will Wilkinson on February 10, 2005

Elizabeth Anderson, of the University of Michigan and left2right, has heroically taken up the thankless task of very clearly illustrating the fact that mainstream contemporary academic American liberalism is, at its core, an essentially reactionary creed built around the conservation of the institutions of the “New Deal” and the “Great Society,” and the protection of the interests of the affiliated political rentier class. One would thus imagine that Anderson would at least understand the institutions she is trying to conserve against the forces of reform. But, no, not so much with the understanding.

Anderson argues that whatever the other faults of Social Security benefit calculators like Heritage’s, “It forgets that Social Security is a form of social insurance, not a simple retirement plan. So it’s comparing apples with oranges.”

Of course, readers of the Annals of Improbable Research understand that apples and oranges are eminently comparable. But more importantly, Social Security is emphatically not a form of social insurance — unless we arbitrarily stipulate that any redistributive transfer is ipso facto a form of insurance by providing people with resources that they could use to protect themselves from risk. Social Security is: a tax and a transfer. That’s it. It’s not insurance, not legally, not in structure, and not in fact.

The Roosevelt administration defended the constitutionality of the Social Security Act in part by arguing before the Supreme Court in Helvering v. Davis that it did not establish a social insurance program. The Court agreed, and reaffirmed this point 23 years late in Fleming v. Nestor where it determined that Social Security taxes are just taxes, and that individuals have no right to any benefit on the basis of having paid these taxes.

It is true that successive governments have maintained a deceptive program structure and system of admininstration intended to trick citizens into believing that there is a connection between their so-called “contributions” and their benefits, and that Social Security is a kind of insurance. Roosevelt fully intended for citizens to mistakenly believe that their payroll tax constituted a kind of insutance premium. He vehemently opposed paying benefits out of the general fund because that would impede the goal of deluding taxpayers. No one thinks they are entitled to some kind of cash transfer from the government simply because they have paid their taxes. And the SSA to this day continues to encourage the systematic deception of the citizens of the US.

You would imagine that a liberal would deplore a system of paternalistically motivated noble lies and would forcefully argue against this kind of deception as a transgression against democracy, which is what it is. We are angry when the government uses lies in order to circumvent the democratic process by causing citizens to misrepresent their options. Think of Bush and the WMD. We ought to be incensed when the government entrenches lies into the very structure of the welfare system.

Anderson has either been taken in by the lie, is trying to perpetuate it, or has a notion of insurance so broad that anything that cushions people against risk, such as exercising regularly, wearing a bicycle helmet, or cultivating a network of altruistic friends and family, counts as “insurance.” In any case, she ought to admit that Social Security is not an insurance program according to the law or according to ordinary usage, and she should stand up for transparency and democracy by condemning the purposefully deceptive structure and rhetoric of the American Social Security system.

  • Marcus Stanley
    Just because you don't like pay-as-you-go social insurance schemes doesn't mean that you get to unilaterally define them as not being insurance. In exchange for my payment to *currently* retired, disabled, etc. people, I get a promise that the government will pay me such-and-such in the future when I retire, if I become disabled, etc. Not so different from putting money in a bank, really -- the bank uses my money immediately for *current* investments and promises to pay it back to me in the future when I need it. (Yes, there can be a macroeconomic difference in that the money goes to national investment instead of consumption with a bank, but that is not the point you were making).

    As for the argument that the retirement portion of social security is not insurance because everyone gets at least some retirement payment from it, well, not all of it is insurance. The redistributive component (Joe Poor gets a much higher return on his payments than Bill Gates does) is insurance though.

    Property rights -- SS is a promise from the government that you will get money back in the future in exchange for your payments. If government breaks its promise, then you will lose your right. As others have pointed out above, if government breaks its promise to enforce contracts you will likewise lose your property rights in private contracts. Right now it is libertarians who are lobbying for government to break the SS promise after 70 years in which it was fulfilled, so its a bit rich to appeal to the insecurity of the promise as a reason to break it.
  • Timothy Waligore
    And Hayek was wrong.
  • Wild Pegasus
    I think it was Hayek who said that putting "social" before a word completely destroyed its meaning:

    social security
    social justice
    social insurance
    social credit

    - Josh
  • Brian
    "if social security were means tested, it would become much more politically insecure and probably a less effective program"

    I don't see that. I would gladly support an SS program that means-tested benefits if it meant my payroll taxes would be substantially lowered, and I suspect this is true for a large percentage of those under 35 or so. (Obviously not among older workers, so it would have to be phased in very gradually).

    To reiterate Will's point, it's insane that 20 years from now minimum wage workers will have 12% (at least) of their income taken and handed to Bill Gates, and I can't imagine that correcting that would make SS less popular. Sure, we don't like welfare, but we *really* don't like welfare for the rich.
  • Will Wilkinson
    Peter, The name is only part of it. The things that really dupe the public are the special payroll tax, the "trust fund", and the faux earning statements we receive from ths SSA (in the fine print it notes that benefits are contingent on congressional grace).
  • Peter Caress
    I see your point: it would be more precise to refer to Social Security as a universal pension or a universal entitlement, or better yet, "a transfer scheme that effectively acts as 'social insurance' for impoverished old folk by providing steady payments to all retired people, rich and poor, because we can't do anything for poor people in this country without bribing the middle class into going along with it." But that's a mouthful.

    I'm less convinced by your claim that casually referring to Social Security as "social insurance" massively dupes the public. Most Americans today understand that Social Security is a benefit program that could theoretically be revoked tomorrow, just like Medicare or unemployment protection. That's why it's easy to demogogue the issue: if the benefits really were fixed by contract, it'd be much tougher to claim that Republicans are going to send your granny to the poorhouse.
  • Gareth
    Will,

    Defeined benefit pensions are both savings and insurance schemes.

    All pensions -- defined benefit and defined contribution -- are savings schemes.

    The difference is that the defined benefit scheme shifts certain risks from the recipient to the scheme. That is an insurance feature.

    Social Security also has disability and death insurance features, as well.

    Your Calculator is misleading because it compares a "rate of return" for a defined contribution scheme to a "rate of return" for Social Security without recognizing that the insurance features of Social Security would cost something if you tried to acquire them on the market.

    The "Grace of Congress" point does not make SS any less insurance. In the UK, Parliament could, in principle, pass a law expropriating someone's house without compensation. Does that mean that UK citizens have no property rights? No, because, at least at present, it would be politically unthinkable for any Parliament to pass such a law.

    Sure, property rights in the UK might be more secure if there was a justiciable constitutional right to them (although that would depend on whether the court system is more reliable in defence of property rights than political unthinkability, which is uncertain). So too, it would be better if Congress could not raid the trust fund for the general fund.

    But how would you feel about a UK socialist who argued that there was nothing wrong with expropriating someone's house without compensation, since the right to the house only existed by Grace of Parliament? You would denounce the transparent rhetorical attempt to make thinkable what is properly unthinkable. Just because Parliament or Congress can do something immoral or stupid, does not mean it should.
  • Will Wilkinson
    Peter, It remains that the system isn't structured like one that is set up primarily to protect against economic hazards, since it pays even more money to people who do not need protection against than it pays to those who do. And, just let me repeat for emphasis, that the courts have determined that there is no legally binding right to benefits. So SS protects against hazards only to the extend that the Grace of Congress obtains, and there is no formal instrument to shield citizens against the risk that it won't. If my rich sister promises to pay my hospital bills if I fall ill, I am not therefore insured, even if she has a good record of keeping her promises.
  • Peter Caress
    I've got bad news for Will Wilkinson, but the phrase "social insurance" is generally understood to have a different meaning from the word "insurance". Merriam-Webster's definition of "social insurance" ( http://www.m-w.com/cgi-bin/dictionary?book=Dictionary&va;=social+insurance ): "protection of the individual against economic hazards (as unemployment, old age, or disability) in which the government participates or enforces the participation of employers and affected individuals"

    So "social insurance" is an apt description of the Social Security program.
  • Nicholas Weininger
    No, the question is not *just* whether I'd prefer to see a little bit of paternalism or indigent old people, although you are correct that I prefer the latter. Even if you believe that some level of paternalism is justified, it doesn't answer the question of whether the level we have now is way too high.

    I think it clearly is, since SS could be made a great deal less paternalistic (and more fiscally sustainable to boot!) without producing lots of indigent old people. For example, the current system pays more to people who need it less; Bill Gates not only will get SS benefits, he'll get *considerably higher* benefits than Joe Schmoe who worked menial service jobs his whole life. So if everybody's SS benefit were cut down to the level Joe Schmoe gets, you could cut taxes considerably without reducing the protections afforded to the Schmoes of the world. As far as I can see, the only social-minimum-ist excuse for not doing this is the "noble lie" argument.
  • Javier Hidalgo
    Javier: you do realize you're making a "noble lie" argument of precisely the type Will is lambasting, right? Your argument boils down to the contention that, since the middle class wouldn't be convinced to support a social minimum on its own, they ought to be bribed with massive amounts of their own money to trick them into supporting one.

    Maybe, but I'm not sure. This is a tricky issue. I happen to believe that social security actually does benefit broad segments of the middle class in addition to the poor and it is for that reason that the program has such powerful support. While it might be misleading to view social security as insurance, I believe social security nonethless benefits most of the people covered by it and also benefits society more generally. Thus most citizens have reason to support social security for reasons independent of the issue of a social minimum.

    However, I think we need to realize how important the idea of a social minimum is to the justification for social security. Social security has played a major role in reducing the poverty rate among the elderly from 65% to 10%. If doing away with social security would bring the poverty rate among the elderly to anywhere near its old level, then it is the case that social security functions as a social minimum for the majority of old people. So it seems to be in the interest of most elderly people to support social security on the grounds that it provides them with a social minimum on top of any other reasons they have for doing so.
  • Gareth
    BTW, yesterday's Financial Times noted that Cato shadow boxes with Krugman all the time, but hasn't proposed debating him. What about it? Will you debate him?
  • Gareth
    Will,

    I think you need to make a distinction between having a legal entitlement which could be altered by Congressional legislation, and not having a legal entitlement at all. As a matter of positive law, they are different. And, as a matter of practice, they are different too, especially if it would be politically impossible for Congress to enact the legislation abolishing the entitlement.

    Nicholas:

    I don't deny that SS forces people to pay a premium to eliminate a risk they might prefer to take. That is why it is social insurance, not voluntary insurance. The question is whether you would rather see a little bit of paternalism or indigent old people.

    I realize that you have firm philosophical commitments which mean you would rather see indigent old people. But the point here is really one of rhetorical hygiene. Your side has put forward these calculators as a fair comparison: our side is pointing out that you implicitly value the insurance aspects of a defined benefit at nothing, which is quite a bit less than the market would value them. I know you understand this, so who's engaging in the "noble lie" now?
  • Nicholas Weininger
    Javier: you do realize you're making a "noble lie" argument of precisely the type Will is lambasting, right? Your argument boils down to the contention that, since the middle class wouldn't be convinced to support a social minimum on its own, they ought to be bribed with massive amounts of their own money to trick them into supporting one.
  • Nicholas Weininger
    monkyboy: the fact that government programs ignore individual preference is an excellent reason to have as little government as feasible-- indeed, none at all if we can get away with it. You're certainly correct that defense ignores preferences as much as SS; so much the worse for defense! But at least national defense is (arguably) a true public good, nonrivalrous and nonexcludable, and thus provision on the private market would pose huge free-rider problems.

    Retirement insurance is both rivalrous and excludable and is provided all the time on the private market-- indeed it was provided to millions of people before SS was enacted. None of the excuses for having government provide defense apply to SS. (I agree with you, BTW, that we could be just as safe with 1/10 the defense spending).

    Sure, some insurance companies fail. On the other hand

    1. there are plenty that have stuck around longer than SS has existed, and some have lasted longer than most governments-- think of Lloyd's of London

    2. there are many huge, stable reinsurers in the world

    3. the risk of government default is low but not zero, and even without default Congress could legally abolish SS tomorrow.

    So the risk of insurance company failure thus cannot be a sufficient justification for SS.
  • Timothy Waligore
    Jon- I may have slighted the differences between a Universal Basic Income and Negative Income Tax. But no matter. My point is not about Friedman, but whether there is a proposal that would be called a social minimum but is not means-tested. Suppose we say the program we are talking about gives every American, say, $2000 a month. Perhaps we pay for the program by raising income taxes and cutting welfare. I suppose you can say that under the negative income tax, he does not get anything, but here Bill Gates gets this check. Is this not a social minimum? (I haven't claimed it or S.S. is social insurance)
  • monkyboy
    "Oh, 'meltdown'. It's one of those annoying buzzwords. We prefer to call it an unrequested fission surplus." - Mr. Burns

    Does it really matter how Social Security is defined? It doesn't look like any 'reforms' are gonna get passed this year. Maybe as a consolation prize, congress can hold a contest to rename Social Security...
  • Jonathan Dingel
    Timothy -

    Not that this is my area of specialty, but I'd say that Friedman's negative income tax would be means tested, as the negative tax rate applies to people below a certain threshold of income, while the tax rate is positive for persons above that level of income.

    Such an approach passes the "is Bill Gates receiving government money?" test. It's means tested, by Micha's definition of "only the poor collect."
  • Timothy Waligore
    My impression was that Milton Friedman's Negative Income Tax was called a social minimum. If unconditional basic income is a type of social minimum, then there is nothing in the definition of social minimum that say it need be means tested. If so, then the fact that social security is not means-tested does not mean it is not a social minimum. Whether or not it is social insurance is another story.
  • Javier Hidalgo
    This is not clear at all. It is false. If the purpose of social security were to create a social minimum, it would be means tested. Only poor old people would be able to collect. This is not the case. Instead, all of us are forced to save in order to pay for our own retirement, regardless of whether we are poor or not.

    Social security does create a social minimum, although as you say it does other things besides this. And means tested programs are notoriously unviable from a political perspective, at least in American but I suspect in Europe as well. The reason that social security and other universal welfare programs survive is because they are in the interest of the middle class (or at least broad segments of the middle class percieve them to be in their interest). If social security were mean tested, it would probable lose massive political support and face severe budget constraints as the middle class would not longer have an interest in maintaining it. Thus is it necessary to make social security a univeral program in order to ensure that it maintains broad political support.

    So my basic point is this: (1) social security has done a great deal to alleviate poverty among the elderly and has thus helped create a social minimum, (2) if social security were means tested, it would become much more politically insecure and probably a less effective program.
  • I mean, Bill Gates has Social Security benefits coming to him. Insurance? Really?
  • People don't participate in insurance schemes because they want to help other people, they buy in because it's in their best interest to do so. Insurance is valuable for beneficiaries and non-beneficiaries alike because it insulates against catastrophic risk.


    If Social Security is valuable and in our best interest in the same that insurance is valuable and in our best interest, then why make it mandatory? Why not let those who wish to insure themselves purchase insurance, and those who don't , don't?
  • Regardless of whether social security is a form of insurance, it is clear that the purpose of social security is to create a social minimum, a floor below which no one should be allowed to fall.


    This is not clear at all. It is false. If the purpose of social security were to create a social minimum, it would be means tested. Only poor old people would be able to collect. This is not the case. Instead, all of us are forced to save in order to pay for our own retirement, regardless of whether we are poor or not.
  • And no. It is not closer to insurance. (1) I have no legal entitlement to any sort of payment whatsoever, no mater how bad I need it. Geico, on the other hand is legally bound to pay out if I get into an accident. We have a binding contract. (2) If the SS system stays constant, I will get the money whether or not I need it. Geico, however, will not pay me anything if I never file a claim, no matter how much I pay in premiums.

    My mutual fund is a lot more like insurance than SS in that there there is a legally binding contract. And AS insurance, dollar for dollar, my well diversified 401k mutual fund would more reliably shield me against various kinds of risk than SS.

    SS isn't remotely like insurance. And predicate nominalism is false. Calling a cat a lamp doesn't make it a lamp.
  • Wittgenstein would wack you with a stick and glower at the grievous misuse of ordinary language by politicians.
  • Timothy Waligore
    Will- even if you think social security does not precisely fall under the definition of insurance, do you think it is closer to insurance than your 401k?

    Considering the name of your blog, what do you think Wittgenstein would say about these debates over rhetoric?
  • Benson Bear
    WillWilkinson: if you invest in a diversified portforlio, you are only insuring *yourself*, not others, so society's resources are not being transferred as much as they can be from "the statistically typical to the statistically atypical" . *Social* security is *social* insurance (inter alia), not an individual insurance policy. And, what it insures against is being in the losing mass of a lottery in life that makes it difficult to afford purchasing regular individual insurance. This is all a condition of a well-thought out Rawlsian style contract.
  • monkyboy
    Why does individual preference matter for a government program, Nicholas? With the current proposed budget, the US will be spending more on our military than the rest of the world does on theirs combined. I would feel perfectly safe with a defense budget at one tenth its current level.

    Insurance companies frequently go bankrupt. Last year's four hurricanes was no picnic for them. As usual, it is the US government that steps in and covers the policies of these insurance companies that go out of business.

    On a side note, only insurance companies are allowed to issue annuities. And the US govenment backs them, too...
  • Nicholas Weininger
    Gareth: although rational people do discount for risk, not everyone discounts for risk at the same rate because not everyone has the same degree of risk-aversion. Social Security, even if it operates as a sort of forced insurance program, therefore still harms people who would rationally choose more-risky options on a private market because of their greater degree of risk tolerance. People with lower risk-tolerance are still quite free to buy perpetual annuities and other defined-benefit type insurance plans; such things do exist on the private market.

    So the calculators are pointing out to people the sorts of expected returns they could get if they were willing to take a moderate degree of stock market risk. Not a very high degree, really, given the historical consistency of average stock market returns over 30-40 year periods. But perhaps a somewhat higher risk than SS, yes. So what? It's still pointing out the legitimate possibility of a benefit to people who might rationally prefer that benefit to what they can get now.

    Besides which, you (and Lindsay) are missing a key point of Will's: Congress could abolish SS tomorrow without violating any enforceable contractual obligations to anyone. When you buy private insurance, you create a carefully specified contractual obligation on the part of the insurance provider in return for your premium payments. This obligation persists unchanged as long as you pay that premium; no majority vote can abrogate it. SS does not and cannot give you that.
  • Gareth
    Will,

    Forget social security. Forget government. Imagine an anarcho-capitalist utopia.

    You have two options. One is to pay $X per month into a diversified mutual fund with an expected return at 65 of $5 million.

    The other is to pay the same per month to a pension company with a guaranteed benefit equal to an annuity equal to what we expect $5 million will buy the year you turn 65. You can be confident about the solvency of the pension company during your lifetime.

    A rational person would pick the second option. That is because the pension company takes on the risks Elizabeth Anderson mentions. These risks are ones normal people are averse to.

    For that reason, it is rational to pay somewhat more than $X per month to get the second option. That increment is, in effect, an insurance premium. Social Security adds disability insurance and a death benefit.

    So Anderson is right. The calculators, to make a fair comparison, would have to provide a market price for "defined benefit" insurance, disability and death insurance premiums from an entity with long-term financial stability comparable to the US Government.

    And monkyboy is correct that the great American people understand this. There are lots of options if you want to invest for your retirement and are prepared to live with these risks. There is no other purveyor of equivalent insurance.

    SS may have further redistributory effects, but this is not why it is broadly popular, although as a social democrat, I don't have a problem with them.
  • keelay
    Fine, fine. The calulators do miss the social insurance aspect. This doesn't change the fact that my social security "contributions" are a lousy long-term investment.

    Will someone explain to me why we can't just provide a social safety net for the elderly without all the retirement account pretense?

    I understand that there is some moral hazard involved in discriminatory benefit allocation, but surely not enough that it worth forcing everyone to participate in this farce.

    I must be missing something.
  • monkyboy
    Will, Social Security will pay you $1380/month for life if you become blind.

    Using the same annuity calculators that have been used to trash SS lately, at your age, you would have to make an investment of over $300,000 to get such an annuity from the private sector...how is this part of SS not insurance?

    It seems to be only the pointy-headed academic types who can't see that SS is part insurance, part retirement account. Average Americans have no problems recognizing this fact.
  • Trent McBride
    I think you can battle with the "social insurance" people on their own ground. If it is "insurance," why does everyone get benefits? My car insurance only pays out to the small number of people have wrecks. My homeowners insurance only pays out to the small number of people whose homes are damaged. SS should only pay out to those small number of seniors truly in poverty. That way, you could have a much smaller payroll tax, and voila, the rest of SS is privatized!
  • Will Wilkinson
    Lindsay, A diversified portfolio also shields against risk. Should my my 401k be considered insurance?
  • Will Wilkinson
    Javier, I don't oppose a Friedman/Hayek safety net. I do oppose nonsensically designed transfer progams, like SS, and I strenuously oppose official rhetorical deception.
  • Will, I think you're being a little uncharitable to Elizabeth. Comparing the average worker's Social Security benefits to expected market returns is misleading because Social Security also shields against risk. A rational person discounts for risk.

    An insurance scheme is a form of wealth transfer from the statistically typical to the statistically atypical. Social Security works the same way for disability, survivor benefits, and extreme longevity. Typically, what you get out of the program depends on what you put into it-- i.e., how long you worked and how much you earned. However, some statistical outliers get back far more than they put in. This isn't charity, this is insurance. People don't participate in insurance schemes because they want to help other people, they buy in because it's in their best interest to do so.

    Private insurance operates on exactly the same principle. Most people with fire insurance never collect any benefits. They just keep paying premiums year after year to subsidize the handful of others whose houses burn down. But it's rational to buy a fire insurance policy, even if you know that you'll probably lose money for want of a fire. Insurance is valuable for beneficiaries and non-beneficiaries alike because it insulates against catastrophic risk.
  • Javier Hidalgo
    Regardless of whether social security is a form of insurance, it is clear that the purpose of social security is to create a social minimum, a floor below which no one should be allowed to fall. Social security has significantly reduced poverty among the elderly and thus partially succeeded in this purpose.

    All types of liberals can support a social minimum. As Samuel Freeman makes clear in his article "Illiberal Libertarianism" (which you've referenced on this blog), classical liberals (Hayek, Friedman, etc) and high liberals (Rawls, Dworkin, etc) support a social minimum.

    So what's the problem? Does it really matter if social security is or isn't an insurance program? As long as social security accomplishes the goal of creating a social minimum for the elderly, I see nothing fundamentally wrong with it.

    The classical liberal counter is, of course, that family and civic associations should provide for the social minimum rather than the state. I can only say that I think this counter is rather implausible on empirical grounds, although this point is to complex for me to substantiate here.
  • btr@yahoo.com
    If SS is just a tax and a transfer, why not reduce the (future) transfer in exchange for lower cap gains taxes? Why continue to perpetuate the fraud of "social insurance" with bastard private social insurance accounts?

    In other words, why support private accounts and not, say, increased Roth IRA limits? I'd rather be able to put more money in a Roth than have a so-called private account that I don't really control. And I'd certainly accept lower SS payments for the opportunity to control more of my own money tax free.
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