In his by-request post on safety nets, Tyler writes:

Most of all, the welfare state liberates the productive and the creative from their sometimes burdensome family ties. The welfare state is the Randian’s secret dream, and that is what clinches the case for a government safety net.

I don’t think I understand. How many productive and creative people take advantage of government assistance programs for the poor, or are liberated by them? It would seem that genuinely productive, creative people would need them least.

Probably Tyler means that Social Security and Medicare allow the productive and creative to foist their poor parents off on the state. True. But increasing incomes also allow the productive and creative to foist their not-so-poor parents off on “assisted living” facilities. Wealthier parents don’t need their kids’ money, and wealthier kids can afford to have somebody else worry about their parents. How much has the deadweight loss of our actually existing, almost entirely middle class to middle class “social insurance” tranfer system decreased economic growth over the last half-century? It is not obvious that the history of our real system compares favorably to even a slightly higher-growth counterfactual in terms of the kind of liberation from burdensome family ties Tyler is talking about.

If you’re a Sen-type positive liberty advocate like Tyler, and don’t so much care about the coercion implicit in transfers, your problem with safety nets ought to be the potentially psychologically debilitating effects of transfers on the recipients with respect to a sense of control, self-efficacy, motivation, etc. I do not doubt for a second that many, many people have been genuinely helped by public assistance. I do, however, have some doubt that the overall effect has been positive relative to some of the potentially feasible alternatives.

In the Washington Post’s account of the resuscitation of Social Security reform in the president’s budget proposal, Allan Sloan writes, of progressive indexing:

This means that although progressive indexing is an attractive idea from a social-justice point of view, it would reduce Social Security’s political support by making it seem more like welfare than an earned benefit.

Matt Y. characterizes Social Security reform as a zombie that won’t (really truly) die. Sure. But how about Sloan’s undead item of liberal faith about political support, which keeps rearing its dessicated head despite the lack of any good argument.

As far as I can tell, there is little to no evidence that converting social security to a means-tested benefits program would reduce political support for it. It is true that former Social Security administrator Wilbur Cohen’s assertion that a program for the poor will be a poor program is repeated endlessly. But truth is not established by repetition. Unemployment and disability insurance, unlike Social Security retirement benefits, kick in only in conditions of necessity. Nevertheless, or perhaps due to that fact, they are very politically popular, well-funded, and face no apparent political threat of reduction.

Indeed, there is compelling evidence that means-tested retirement benefits would be too generous creating a perverse incentive for workers to save too little in order to qualify for a beefy means-tested benefit.

Xavier Sala-i-Martin and Casey Mulligan have written a fascinating account of the political economy of “gerontocracy” or rule by the old. Their key point is that during their working years, workers have fractured political interests. Teachers plump for teacher’s unions. Manufacturers lobby for price-supports. Investors fight for lower capital gains taxes. Etc. Many of these interests cancel each other out. In any case, there is no unified front. However, when people retire from their particular occupations, they leave behind a narrow sectional interest and move into a much broader interest group, retirees, who have highly unified interests, and, moreover, very low opportunity costs to political participation.

The demographic problem of social security is precisely that a very large portion of the population is soon to make the transition into this group. There is every reason to believe that retirees would lobby for big retirement benefits, and there would be no other political interest as large and unified to keep them from getting them. One of the chief economic reasons for mandatory retirement savings accounts is to guard against this much more likely contingency. (More likely than too little political support, that is.) If workers are required to save for retirement in protected accounts, they will not be able to prematurely consume their savings in order to qualify for predictably over-generous means-tested retirement benefits.

I agree that progressive indexing is attractive in terms of distribution. But since there is little reason to believe that a more means sensitive program will lack political support, why not just go all the way to a progressively designed means-tested program for the poor elderly complemented by mandatory personal retirement accounts to buffer against moral hazard?

This is, I agree, not a particularly libertarian proposal. But I think it is the best feasible option from almost every perspective with an interest in feasibility. For the life of me, I still can’t figure out how a liberal could possibly prefer the status quo over a cushy retirement safety net plus mandatory accounts.

My prediction is that nominal liberals actually won’t be able to hold out that long against the overwhelming liberal sensibleness of this, and so if Republicans can’t get the job done, Democrats will soon enough.

If you missed Nathan Smith’s TCS article on the ongoing saga of Social Security reform, do check it out.

Bush’s plan for carve-out private accounts would have amounted, institutionally, to a sort of Great Leap Forward. DeMint’s plan will set in motion incremental changes which may be compared to knocking down a row of dominoes. The first domino to fall is the payroll tax surplus in the Trust Fund. The second domino will be the excessive scheduled benefits that drive the program into long-term bankruptcy. The third domino will be the restriction of personal retirement accounts (initially created as lockboxes to stop the raid on the Trust Fund) to T-bonds. When that falls, all Bush’s Social Security reform goals will have been accomplished, and we’ll have a system of forced savings and private accounts.

Suppose that the DeMint plan passes and personal accounts are created from the surplus, then fast-forward two years. Now every working person under 55 — well over 100 million Americans — will own a personal retirement account consisting of US Treasury bonds. Since everyone and his brother knows that Social Security can’t pay promised benefits in the long run, most young people will see these accounts as their sole source of real retirement security. But they’ll also realize that the personal accounts are too small to underwrite a comfortable retirement. Moreover, they will learn that new money will cease being deposited in their accounts after about 2018, when the Baby Boomers’ retirement puts an end to the surpluses.

At this point, there will be pressure from younger voters to increase the size of their personal retirement accounts. If, up until now, the Social Security program has consisted of one-sided class warfare, with the old fighting against the young and the young not defending themselves, personal accounts will clarify younger generations’ stake in the fight.

Nice account of what perhaps should have been the strategy all along. I don’t have a good independent sense of what DeMint’s odds are. Probably not great, but better than than is being reported.

My brilliant colleague Jagadeesh Gokhale explains why the notion that personal accounts and Social Security solvency are unrelated is a canard.

Here’s the core of the argument:

The difference between the two projections of future benefit levels funded out of present law payroll taxes — higher ones under “add-on” personal accounts versus lower ones under a “status-quo” hike in payroll taxes — constitutes the basic case for “carve-out” personal accounts. How come? If “add-on” accounts to pay for benefits that are promised but unpayable under present law effectively increases saving and investment and preserves work incentives, the (lower) level of payable benefits under a “status quo” payroll tax hike could be financed with a less than 12.4 percent payroll tax rate under the “add-on” policy. That implies room for a “carve out” — that is, for diverting a part of present law payroll taxes into personal accounts.

How large would be the size of a feasible carve out? Would it ultimately completely do away with the need for “add-on” contributions? These are difficult questions to answer. Two considerations suggest, however, that the scope for carve-outs could be large. First, several studies report that payroll taxes add significantly to marginal tax rates — especially for households’ secondary earners — and that labor supply is quite sensitive to higher taxes. Noteworthy here is a recent study by economics Nobel laureate Edward Prescott that attributes the significant decline in European labor supply relative to the United States since the 1970s to higher European social insurance taxes.

Second, loss in annual output because of the savings-reducing impact of the current Social Security system’s pay-as-you-go financing structure is estimated to be of the same size as total current outlays on Social Security. That is, were the existing system based entirely on “add-on” personal accounts, the gain in annual output due to higher saving and capital formation would have been about as large as total current outlays on Social Security.

It’s a complicated argument, but nobody ever said getting it right is easy.

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.

This is from a now very old Barry Schwartz column about why people are too stupid to manage their own finances, especially if their finances involve a Social Security personal retirement account, in the NYT. Old, but so bad I can’t help talking about it.

This brings me to the final defense of privatization: the payroll taxes you pay are your money, and you ought to be able to do what you like with your money. This, I suspect, is the real justification behind the move to privatize, and it is the worst reason of all. The payroll tax is not “your” money; it’s our money. Social Security was created as an insurance scheme, not a pension scheme. It was meant to provide a safety net, to protect the unlucky from immiseration in old age. The benefits we get are not payouts from accounts in which we have accumulated our own private stash. What we get is largely determined by what we earned, but we keep getting it even after we’ve taken out every penny we put in. And if we happen to die early, someone else reaps the benefits of our contributions.

That’s refreshingly frank: it’s not your money! OK. So, it’s “ours.” Let’s just skip over the fact that the entire Social Security system and the disinformation one regularly gets from the SSA is specifically designed to encourage the sense that there is some kind of property-like nexus of entitlement between the payroll tax and retirement benefits. (And that social insurance systems like ours are commonly called pensions systems around the world.) Perhaps Schwartz will forgive American voters for having the wrong idea here, and not realizing that they do not in fact have any right to their benefits.

Anyway, what is it that we’re doing with “our” money? Well, we’re sending over 90% of it back to the same income bracket from whence it came, that’s what! Now why would we be doing that if what we wanted to be doing was “protecting the unlucky against immiseration in old age”? (Not to sustain the illusion that our payroll taxes do in fact belong to us as individuals, for sure!) I mean, wouldn’t it be silly to pretend to “insure” people by taking money away from them (thereby increasing their exposure to risk!), and then simply replacing it later? That sure would be silly! Schwartz gestures toward the redistributive function of the program, but . . . there is almost no redistribution! And . . . it isn’t progressive!

An authentic government old-age insurance program might look like government disability insurance. You pay taxes into the program and then you get money back if and when you need it–sort of like the way actual insurance works!

Hey liberals! Since you insist on talking about social insurance, why not stop dissembling and plump for a system that is actually sort of like insurance? Why not not defend a disability insurance model of old-age insurance, where you get it only there is some actual threat of immiseration? We can fund it with a dedicated payroll tax and everything. It really will not function like a pension at all. It will be a safety net for people who need it funded by people who don’t. Isn’t this exactly what liberals should want? TPM Cafe? Left2Right? Somebody? Why don’t you love this idea? Really, I want to know.

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!”

I don’t often have occasion to say that Charles Krauthammer’s latest column is excellent. It’s about Social Security.

As I have been writing for years with stupefying redundancy — and obvious lack of success — this idea is a hoax. There is no trust fund. The past Social Security surpluses were spent the year they were created. The idea that in 2017, when the surpluses disappear, we will be able to go to a box in West Virginia to retrieve the money we need to make up the shortfall (between what Social Security takes in and what it pays out that year) is a deception. There is no money there. It will have to be borrowed or garnered from new taxes.

But things are worse than that. The fiscal problem starts to kick in not in 2017 but in 2009. The Social Security surplus, which Congress happily spends every year, peaks in 2008. Which means that starting in four years (and for every year thereafter) a budgetary squeeze begins, requiring new taxation or new borrowing.

If in 2010 tax revenue and spending remain exactly the same as in 2009, the Treasury will not end up with the same size deficit. It will end up with a larger deficit, because the amount of money it was receiving free and “borrowed” from the Social Security surplus will have shrunk.

That surplus shrinks from its peak in 2008 to zero in 2017 and goes negative after that. That is a very serious fiscal problem that starts not in 50 years, not even in 12 years, but in four.

Does anyone have numbers on what United employees’ retirement benefits would be worth if they had been in a defined contribution plan like a 401(k) all along rather than a broken defined benefit pension? That is what I’d like to know.

Alex Tabarrok has nailed the lesson of the failed United pension plan. Yglesias, on the other hand, is piling confusion atop confusion.

Alex Tabbarok takes the opposite view and holds that the moral of the increasing unviability of defined-benefit pensions is that we should eliminate our defined-benefit public sector pensions as well. Frankly, I think this is a bit silly. If one aspect of your finances is becoming riskier, that’s a terrible moment to transform a different aspect of your finances into a riskier system as well. It’s particularly foolish if the risks entailed are essentially the same. Under privatization, your Social Security benefits will be down at the exact same time your 401 (k) account is down, i.e., just when you need it most.

Frankly, I think Matt is being more than a little silly. Most personal account plans encourage annuitization of at least some of the assets in the plan upon retirement. (The Cato plan would require purchase of an annuity that provides a stream of checks at at least 120% of poverty. You can cash out the extra, buy a boat, send your granddaughter to college, or leave it in the market.) If the market goes down, your annuity pays the same as ever. It would be a good idea not to buy an annuity right after the market takes a dip. And, hey!, you don’t have to. Matt pretends as if the market is a giant unpredictable roulette wheel that has not developed sophisticated financial instruments for managing the modest risks of investment. He also pretends that the personal account plans do not include some means-tested assistance to people whose personal retirement savings and investments leave them below a critical threshold. But they do. There is simply nothing left in his point once the actual features of the actual world relevant to the argument are fairly acknowledged.

Now what needs to be brought into the picture here is that the federal government is not like a big corporation. Governments don’t go out of business. Governments don’t experience unexpected new competition for their customers. Corporations can’t just generate new revenues by taking a vote. And of course corporate managers are supposed to have a different attitude vis-à-vis their employees than elected representatives have vis-à-vis their constituents.

This makes no sense. Governments CONSTANTLY go out of business (while the state abides), and new governments bring new policy. See, sometimes there are differently constituted congresses with different policy preference profiles. And there are different Presidents with different policy preferences. Etc. Which is why people get so very excited about elections. And which is why there is a lot of policy volatility. I assume Matt voted for Kerry because he wanted him to implement different policies from Bush’s. No?

And Matt would not be up in arms about the prospect that Social Security might fundamentally change in nature and structure if it was not the case that it could change fundamentally in nature and structure. If government, like Everest, is unmovable, then why all the high-toned rhetoric about saving the jewel in the crown of the New Deal, yadda yadda?

Matt also seems to entertain the fantasy that government can raise revenues simply by turning up the tax spigot. But government does not exist in a blissful parallel plane where economic logic does not apply. Even fairy folk respond to incentives. Surely he has heard of optimal tax policy.

Now, it is true that the government is not like a big corporation. It is less efficient, suffers from far more severe principal/agent problems, is more inclined to corruption, and is rather more like an extortion racket.

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.

I wish everyone would read Paul Romer’s “Preferences, Promise, and the Politics of Entitlement,” in Individual and Social Responsibility, edited by Victor Fuchs.

Romer tells the story of exactly how concerted and intentional is the deceptive rhetoric of Social Security. The ideas of SS as “insurance,” the payroll tax as “contributions,” and the “trust fund” were purposeful rhetorical ruses deployed to lock in political support for the program. The point was to create the illusion that a tax plus a regressive transfer from the young to the old (which could not have maintained political support) is instead a form of social insurance, which it manifestly is not. The illusion — the lie — has succeeded brilliant. Indeed, Romer’s paper suggests that Social Security may be the best example of purposefully deceptive framing for political gain in the history of the United States. (That’s the lesson I take from it, in any case.)

Unfortunately the paper is not exactly online, but you can probably make your way through it using the Amazon “Search Inside” function (link above).