My Socks are Cold Feet Insurance!

Yglesias, guesting over at Talking Points Memo, contests Julian's claim that it doesn't make sense to think of Social Security as “insurance” (making some of the same points I made in this TCS column.)

First and most obviously, Social Security provides insurance against disability. Through the survivor's benefits it also provides a kind of life insurance. Third, through the fact that you keep drawing benefits until you die rather than until some lump sum has been exhausted, it provides a kind of longevity insurance. Living until over the age of 65 is a very common and quite predictable feature of contemporary life, but none of us know exactly how long we're going to live. Someone who dies at 78 and someone who dies at 100 would need nest eggs of very different sizes to live comfortably in retirement. One's ability to keep working during the earlier portions of old age is also not-exactly-predictable. In my line of work it's a reasonable bet that I'll be able to keep on writing away for the vast majority of my lifetime, but many careers aren't like that. The guarantee of benefits starting in your mid-sixties serves as a kind of second-tier of disability insurance against the possibility that the vicissitudes of life will leave you unable to ply your trade into your late sixties and seventies even though you might be healthy enough to live.

Matt does an extremely effective job of evading the issue. First, let me point out that the big debate we're all having is about retirement policy, not disability. So let's leave that aside. Second, Matt seems to implicitly accept that turning 65 years old does not constitute an insurable “loss” that might be thought to require reimbursement. Older people are on average wealthier. In terms of buffering people against risk, it makes a heck of a lot more sense to transfer money from chi chi retirees in Boca to people facing the “risk” of turning 20. I think we can all agree that birthdays aren't insurable events. It's both weird and dishonest to represent a birthday or the event of voluntarily leaving the labor market as an insurable “loss.” Social Security checks are event-conditioned welfare payments. That's just what they are.

Now, yes, it turns out that we don't know exactly how long we're going to live, and so there's some chance we might outlive our savings. Or we might face some kind of financial catastrophe that guts our retirement nest egg. You don't know how long you'll be able to be a productive contributor to the economy, etc. But the point that Matt fails to address is that insofar as Social Security “insures” against these contingencies, so does means-tested welfare, and to a very great extent, so do personal accounts. Means-tested benefits are much MORE like insurance in the sense they kick in only upon the occurrence of some kind of loss or hardship. An annuity from a personal retirement account is exactly like a stream of Social Security checks, except that you actually own something. If Social Security is insurance, then so is a personal account annuity. The reason why Feldstein, in his presidential address to the APA, “Rethinking Social Insurance” discusses the current system, personal accounts, and means-tested benefits as alternative forms of “insurance” is simply that if the current system counts as social insurance, then so do the alternatives.

Regular commercial insurance works by subsidies across the risk pool. (And is by its very nature “social.”) Premiums are actuarially determined on the basis of bunch of variables like the probability of the occurrence of loss and the likely cost of reimbursing it. It's a kind of bet. The premiums of people who get lucky, and don't experience the relevant kinds of losses, reimburse people who get unlucky and do experience them.

Social Security isn't like this at all. It “reimburses” everyone who turns 65 (or 62 or 67). Like I said, this event isn't a loss; it is in fact correlated with being rich. A system that pays everyone–Warren Buffet, Tom Cruise, etc.– is conspicuously un-insurance-like. It's sort of like a system of home-owners insurance where everybody's house burns down ten years after you move in. There's nobody who gets lucky, so no way to transfer risk across the pool. Rather than being structured at all like regular insurance, Social Security is a system of chained intergenerational transfers — a chain letter, a Ponzi scheme — which is not what insurance is.

If you insist on calling non-insurance insurance, then Social Security is like insurance in the way that any stream of income is like insurance. It makes it possible to pay for stuff that you wouldn't otherwise be able to pay for. But that's not what insurance is, except in the loosest possible sense. You don't think that you have insurance because you have a salary. You don't think you have disability insurance because you walk around with a helmet on. Most people who receive Social Security are perfectly able to “self-insure.” And Social Security improves their ability to self-insure largely because it's replacing income that the government took away in the first place.

The point is: A system that pays everyone benefits upon the occurrence of a near-universal, non-loss event by means of a system of intergenerational wealth transfer just isn't insurance in the paradigmatic sense. If “insurance” just means “making sure that people don't suffer when they don't have enough money,” then ANY system that makes sure that people have enough money is insurance. Inter-family transfers, churches, charities, clubs, etc. count as insurance in this sense. And so do means-tested old age benefits and personal retirement accounts.

Is there any liberal reason to prefer the current system over means-tested benefits or personal retirement accounts? None that I can think of. Most of the people who are freaking about progressive indexing provide a distinctly illiberal reason. Unless we trick the middle class by taking their money away and then giving it back to them later while deceptively framing the whole enterprise as a kind of contractual agreement between a consumer and an insurer, mean spirited voters will starve ol' Ethel and Wilbur.

The first thing wrong with the argument is that there is nothing other than sheer knee-jerk ideological prejudice behind the assumption that a non-deceptive system wouldn't provide big enough benefits. I think the reverse is more likely true. Under a mean-tested system, sentimental Americans prodded on by massive interest groups like the AARP and heavily voting seniors would end up supporting benefits that are way too big, thereby causing a serious moral hazard problem. That's why we need mandatory investment accounts instead!

Almost everyone now thinks welfare reform was very a good thing. The problem before wasn't that Americans are stingy. The problem was that means-tested benefits really were TOO GENEROUS. As far as I can tell, there is nothing whatsoever to the “hard-hearted Republicans will starve gramps” argument other than reactionary boogety boogety.

Second, from a liberal perspective, it's just wrong to use the power of the state to trick the voters. The voters are supposed to tell the government what to do, not the other way around. We get righteously ticked when the Bush administration distributes faux pro-Bush “news” segments, and pays off opinion writers in an attempt to manipulate public opinion, and we should. And any good liberal, who cares at all about public reason, transparency in government, and informed reflective deliberation among self-governing citizens should throw up a little bit every time they think about the Social Security status quo.

So, there's no reason to believe that you've got to trick the voters to make sure they're generous enough. And it's wrong to trick them in any case. Is this really the liberal argument? Seriously?

The closer you look at the current system from anything resembling an authentically liberal perspective the more its appeal recedes. There's just no there there. Institutional path dependency and historical inertia is all it's really got going for it. A free, self-governing people should hope that's not enough.