New Cato Social Security Choice Paper
I have a new paper out today in Cato Social Security Choice series. It’s called “Noble Lies, Liberal Purposes, and Personal Retirement Accounts.” If you’ve been following the Social Security posts on the blog, lots of the paper will seem familiar to you, but there’s a lot of new stuff in the paper that I encourage you to check out.
Here’s the executive summary:
Opponents of President Bush’s proposal to make individually owned personal retirement accounts a part of the Social Security program routinely charge that it is motivated by ideological animosity toward the values Social Security is supposed to embody, such as equality and social cohesion. However, a frank look at the Social Security status quo reveals that the program is very poorly designed to realize liberal ideals. Social Security has a barely progressive overall structure, if it is progressive at all. The huge volume of transfers inherent in the system accomplishes very little income redistribution within generational cohorts. Furthermore, it works to the disadvantage of current workers, who will receive a smaller “return” on their payroll taxes than do current retirees. The terms of the imaginary “compact between the generations” are manifestly unfair.
What is worse is that the Social Security status quo embodies a government-perpetuated deception designed to generate its own political support by misleading voters into believing that their payroll taxes entitle them to later benefits. The architects of Social Security created a structure and accompanying rhetoric that were specifically intended to encourage the false belief that the system provides a kind of insurance, similar to private insurance based in contract and property, and therefore involves a binding entitlement to benefits.
However, there is no justification for this deception on contemporary liberal grounds. The persistent intentional misrepresentation— the “noble lie” — embedded in the structure and language of the Social Security system is in fact antithetical to the ideals of transparent government, open democratic deliberation, and equality among citizens — ideals at the core of contemporary liberal thought.
A system of personal retirement accounts plus a means-tested safety net would serve the “social insurance” function better than the Social Security status quo according to liberal standards. Contrary to critics of reform, personal retirement accounts would materially enhance equality and social cohesion by more fully integrating workers into the market, providing everyone with a stake in its growth, closing the gap between the investing and noninvesting classes, and making more salient the mutuality of interests in a market society.
The paper is here.
June 28th, 2005 13:53
Here are two major problems with a means-tested safety net, as opposed to something more like current social security:
1) History has shown that means-tested programs are extremely politically vulnerable. No doubt emphasizing this point is in line with your criticism of liberals as preferring a policy of deception, but I feel that there are limits to the extent to which one can ignore political reality when devising policies.
Perhaps more importantly,
2) Means-tested programs tend to generate perverse incentives. If people only get social security benefits when their savings are insufficient, then for people with a limited ability to save, means-testing gives them an incentive to save nothing at all (since what meager savings they could manage would be offset by reductions in their means-tested social security income). Being a liberal doesn’t require being totally blind to the need to make certain people have incentives to be economically productive.
June 28th, 2005 14:14
Means-tested programs tend to generate perverse incentives. If people only get social security benefits when their savings are insufficient, then for people with a limited ability to save, means-testing gives them an incentive to save nothing at all
Exactly how is this different from the current structure of Social Security? As it now functions, Social Security discourages saving as well.
June 28th, 2005 14:18
Protagoras,
I address both these points in the paper. Take a look at the paper for the citations, which are omitted here:
[From the paper]
But what about the argument that defenders
of the status quo consider their trump card—
namely, that a means-tested safety net would
not attract sufficient public support to keep it
properly maintained? Again, it bears repeating
that this argument is basically an expression of
contempt for the American electorate. It
assumes, by welfare-liberal standards at least,
that most Americans are less generous and caring
than whoever is making the argument.
However insulting, is the argument correct? Is
there any reason to believe that a decently funded
safety net for retired Americans would be unable
to maintain public support? Perhaps, 70 years
ago, New Dealers had cause for concern about
Americans’ rugged-individualist aversion to the
“dole.” But today? Is disability insurance—
which, unlike the old-age dimension of Social
Security, goes only to people who have suffered a
loss—unpopular? Unemployment insurance?
How about the earned income tax credit? Or disaster relief for hurricane victims?
Yes, it is true that the old Aid to Families with
Dependent Children program attracted plenty of
conservative ire, but AFDC lacked strong public
support because of well-founded concerns about
its perverse effects of encouraging dependence
and illegitimacy. The program was in many ways
too generous in terms of eligibility and benefits,
as is now acknowledged by those who agree that
the mid-1990s welfare reform has been a great
success. But total means-tested non-AFDC/
TANF welfare spending has increased significantly
since the advent of Clinton’s plan to “end
welfare as we know it.”
Despite worries that means-tested assistance
for the elderly poor would be underfunded,
there is at least as much reason to believe that
such programs would be overfunded. The political
power of groups like the AARP, high voter
turnout among the elderly, the desire of middle-aged workers not to be burdened by their parents’financial woes in retirement, and general
sentimentality about the elderly poor could
result in high benefit levels that would create
perverse incentives for savings and retirement
planning.
A system of personal retirement accounts
would minimize problems of perverse incentives
by virtue of the fact that a means-tested safety
net would serve only as an adjunct to the main
retirement system based on mandatory private
savings. Absent a requirement to set aside money
in personal accounts, a means-tested benefits
program for retirees would create a “moral hazard”
problem: workers would have an incentive
to “game” the system and consume their
incomes earlier rather than save sufficiently for
retirement. Well-designed personal retirement
accounts funded over workers’ careers, however,
would simultaneously reduce the moral hazard
problem and, by ensuring that workers have
accumulated assets, diminish the likelihood that
retirees would require assistance in old age.
June 28th, 2005 14:19
Sorry about the screwy formatting…
June 28th, 2005 19:11
I see the usual “noble lies” in this paper, among them:
Even though Social Security is structured almost identically to whole life insurance, it really isn’t insurance.
Workers in 1935 had a small chance of reaching retirement age, even though 60% of them did, and lived 12 years after retiring on average.
The noble lie Cato and its Wall Street masters are selling is putting away a few percent of your income will take care of you in retirement.
Putting away 4% of your income for 25 years get you…one year of salary in the bank. Even with 3% above inflation interest applied to these savings…you won’t even have 2 years of income saved after 25 years.
The real road to wealth in America is a high income…but the poorest 80% of Americans haven’t seen a gain in income in 25 years.
The only people who will get rich under the CATO plan are the Wall Street brokers who will get fees for handling the accounts and the wealthiest 20% of Americans who currently hold 96% of all corporate shares…
Even if Wall Street gets their lackeys to pass a bill that provides for private accounts, there is no guarantee these accounts won’t be taxed or opened up to people in times of need…
Public opinion is running overwhelmingly against the privitization of SS…give it up Will.
June 28th, 2005 22:54
Thank you for your support.
June 29th, 2005 17:57
Putting away 4% of your income for 25 years get you…one year of salary in the bank. Even with 3% above inflation interest applied to these savings…you won’t even have 2 years of income saved after 25 years.
Um, ok, so maybe you shouldn’t retire at 45 then. But save 12% (as in the same percentage forcibly taken via the regressive SS tax) for 40 years and you end up with over 9 times your salary. Increase the savings to 15% and bump the return to a still conservative 4% and you end up nearly 15 times your salary, almost enough to live off the interest indefinitely.
But forget all that math stuff, let’s say you’re right and only the wealthy can afford to save for their own retirement. In that case, we need a progressive system that transfers wealth from the rich to the poor and middle class, and as Will has noted, Social Security doesn’t do that. Its net effect is to transfer wealth between generations, but not between classes. And yet you and the left fervently oppose changes that would actually make the system progressive.
Public opinion is running overwhelmingly against the privitization of SS
Public opinion is also running against the theory of evolution. I guess Kansas has the right idea.
June 29th, 2005 20:41
Thank you for pointing out how pointless the Cato and Republican private account scam is, pi.
For your next lesson, calculate the fees Wall Street will make by managing 127,000,000 new, government-mandated retirement plans…with minimal oversight, of course.
June 20th, 2006 12:06
monkyboy,
You are basically saying that people with average income cannot afford to save for retirement.
If that is the case, then what are our options for allowing them to retire? Transfers from rich people in each age cohort will not work. It is mathematically impossible to raise people above the average level through redistribution. Thus, you are left with taxation of the other age cohorts.
However, that assumes that the other age cohorts are large enough and wealth enough to support the retirees.
March 1st, 2007 03:34
Great article, Will. So there’s no real redistribution taking place, for example from rich to poor. And I agree that helping non-savvy investors to become good investors does in effect integrate them better into the financial systems of today.