A Rare Triumph for Liberals

Here's E.J. Dionne:

Indeed, the Social Security debate so far has been a rare triumph for liberals: For the first time in a long while, core liberal principles are actually winning in a public debate. The idea that Social Security is an insurance program and not an investment plan is gaining traction.

Why E.J. Dionne thinks deception is a “core liberal principle” totally eludes me. Here are two options about Social Security as insurance.

(1) It is not insurance.
(2) It is “insurance,” in some loose sense. But then so is (a) means-tested welfare or (b) mandatory personal retirement accounts plus a safety net.

If (1) is true, then Dionne's claim is a lie. If (2) is true, then saying that Social Security is insurance does nothing to tell us why we ought to prefer the status quo over (a) or (b). As it happens, there is NO “core liberal principle” that I can think of that supports the fevered defense of America's badly structured historic welfare programs.

Check this:

* The Social Security tax is regressive.
* The overall benefit structure accomplishes, on net, either no downward income redistribution, or a small amount of upward redistribution. (I.e., it is either close to a wash, or regressive, redistribution-wise.)
*The system is structured to disadvantage current workers over current retirees, and is thus invalid as a “compact” between generations, if we take the contract metaphor seriously.
* Because the Social Security tax hits least wealthy workers hardest, Social Security prevents many from accumulating wealth, and reinforces the divide between investing an non-investing classes.
*Social Security makes it impossible for many of the least wealthy to accumulate wealth that they can pass on to their children or grandchildren, thereby helping to perpetuate generational inequality.

It is crucial to note that whatever else it might be, Social Security is not PRIMARILY insurance, if it is insurance at all. The redistribution to the elderly poor it does manage to effect is incidental to the huge volume of transfers back and forth from within the same income bracket. (Net income-related redistribution come to less than 10% of total transfers) There's a huge amount of deadweight loss in all this pointless churn.

A system of personal accounts plus a means-tested safety net would:

* Be more progressive in every way.
* Eliminate most of the unjust intergenerational transfers that are at the heart of the current system.
* Almost entirely close the gap between the investing and non-investing classes.
* Help the least wealthy workers accumulate inheritable wealth.
* Protect the elderly against poverty AT LEAST as well.

All this is independent of the fact that the “insurance” language amounts to a “noble lie” that ought to be anathema to liberals.

Consider James Buchanan's analysis of Social Security as a “fiscal illusion,” which is an idea he credits to the obscure Italian public finance theorist Amilcare Puviani. According to Buchanan, following Puviani, those with political power will often erect a structure of public finance that is meant to cause “tax payers to think that the taxes to which they are subjected are less burdensome than they actually are” and “make beneficiaries consider the values of public goods and services to them to be larger than may actually be the case.”

Here is what Buchanan says about Social Security in particular:

Social Security Taxes. The modern American system of old-age and survivors “insurance” seems ready made for the Puviani criticism. It is apparent to almost everyone, without detailed analysis or knowledge of the system, that the effects of promoting the institutions under the “insurance” rubric, which implies actuarial independence and integrity, tends to conceal from participants the real flows of costs and benefits. Whether or not such was the deliberate intent of the founders of the system need not concern us here. The facts are that the system, as an independent trust-fund account outside of the regular budgetary procedures of the federal government, is not actuarially sound by private financial standards, and that the plan will depend for its continued existence on the Treasury's willingness to finance currently claims made against the system. Contributors to the system finance only a relatively small share of the benefits that they receive, especially to this date (1966), and the remaining funds must be secured from current taxes collected from prospective beneficiaries. To the extent that the current contributor accepts the regular increases in his own taxes, as well as those nominally levied on his employer, under the assumption that, on balance, these are to be accumulated for support of his own retirement benefits, he will be less resistant to such increases than if he knew that such tax increases were simply required to meet current outpayments to beneficiaries. He operates under an illusion of the Puviani sort. If future claims against the system should be properly discounted, along with future taxes that are required to meet these claims, the entrant into the system would recognize that, in the net, the costs significantly exceed the benefits, both computed in present-value terms. The fact that there is no widespread resentment or resistance against entering the system supports the hypothesis that illusion is present, and is effective. Even for the employee who may recognize the actuarial bankruptcy of the present system, who is able to dispel the fiscal illusion, it may not, however, be rational to reject the scheme when he predicts that, during his own period of retirement, other prospective entrants can still be attracted by illusory claims of “insurance.” The system in this manner provides a continuing means through which income transfers can be made to the aged from the currently productive elements of the population, which can be “explained” or “rationalized” to many taxpayers on the basis of contributory schemes of retirement protection. There seems little question but that, if the same fiscal transfers were proposed openly and without attempts at illusion, there would be significantly greater political resistance. This conclusion can be attained, regardless of one's own value position on the quite separate question as to whether such transfers should be decreased, kept the same, or increased.

Compare Buchanan's analysis with a key idea from another of the 20th Century's great contractarian political theorists, John Rawls:

if the basic structure relies on coercive sanctions, however rarely and scrupulously applied, the grounds of its institutions should stand up to public scrutiny. When . . . basic social arrangements and individual actions are fully justifiable, citizens can give reasons for their beliefs and conduct before one another confident that this avowed reckoning itself will strengthen and not weaken public understanding. The political order does not, it seems, depend on historically accidental or established delusions, or other mistaken beliefs resting on the deceptive appearances of institutions that mislead us as to how they work.

That's Rawls in Political Liberalism talking about the publicity requirement for just institutions. Just rules for a free people in a liberal society must be open to them and MUST NOT be sustained by illusions that cause people to misunderstand the terms of our association, cripple our ability to govern ourselves through effective public deliberation, and ensure that we remain ignorant of the institutions that shape our expectations for our lives, and condition our preferences and characters.

By pushing the “Social Security status-quo is insurance line” Dionne is directly contributing to the violation of “core liberal principles” that ought to be even more important to welfare-liberals than the fiscally anti-egalitarian aspects of the status quo that Dionne, for some inexplicable reason, thinks are just great.

This is a “triumph for liberals”?!

Welfare iberals keep wondering aloud about what's the matter with welfare liberalism. Dionne unwittingly points us toward a plausible hypothesis. Welfare liberals have become fetishists of the crumbling institutions of the New Deal/Great Society welfare state, which they mistake for actually existing expressions of liberal ideals. But welfare liberals don't even understand what liberalism, as an idea, is, and so can't recognize that their beloved programs fail according to what ought to be their own standards. All they can do to answer the what is liberalism question is to point at an amber-edged policy and say “that!”