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February 08, 2005

Understanding Social Security

Anderson on Political Economy, Elizabeth Anderson: February 8, 2005

Go over to the Heritage Foundation's Social Security Calculator and you can indulge your outrage at how little retirement income you will get from Social Security compared to what you would get if you invested your Social Security tax contributions in private stocks and bonds.  Then you can sober up by reading Pandagon's debunking of the economic assumptions behind the calculator.  (Matthew Yglesias does a similar debunking of the Cato Institute's Calculator).

I've got a different criticism of the calculator.  It forgets that Social Security is a form of social insurance, not a simple retirement plan.  So it's comparing apples with oranges.

This might seem puzzling.  Insurance is supposed to shield us against risks, not against certainties.  Against certainties, individuals should be expected to save up and provide for themselves.  Retirement is a near certainty.  So how can Social Security count as a form of insurance?

The answer is that Social Security isn't a simple retirement program.  The purpose of Social Security is to insure against a whole battery of risks that are difficult or expensive for many people to insure on the private market, especially if they have modest means or lack financial sophistication.  Some of these risks are inherent in strategies that rely exclusively on private sources for retirement (IRA's, 401(k) plans, corporate pensions, etc.).  What are the risks Social Security shields us from?

Let's count them up:

1. The risk that you will outlive your retirement savings.
2. The risk that inflation will eat away at the real value of the income derived from your retirement savings.
3. The risk that your private investments will go sour.
4. The risk that your lifetime income will be too low to accumulate enough savings to avoid poverty in retirement.
5. The risk that you will lose your prospects for a decent retirement due to personal bankruptcy. (Some private retirement accounts, particularly those available to the self-employed, are not protected from bankruptcy proceedings).
6. The rapidly increasing risk that your post-retirement standard of living will plunge precipitously because your employer ran your pension plan into the ground. (Although there is an independent federal program that takes over bankrupt corporate pension funds, it offers a far lower payback than promised by these plans, making additional guaranteed sources of income more important for retirement security).
7. The risk that you will become permanently disabled during your working years, leaving you and your family without your income, and hence also without retirement income, given your inability to save up for old age.  (Workers' comp only covers disability due to work-related causes, and ends upon reaching retirement age.)
8. The risk that you will die, leaving your spouse and dependents without support from your income.

Social Security protects you against all of these risks, either directly or indirectly.  These protections are substantial.  Considering just the last 2 risks, it's worth noting that about 1/3 of the current beneficiaries of Social Security, and 1/3 of its expenditures, go to survivors of deceased working-age contributors and to disabled workers, not to retirees.

Social Security calculators like Heritage's compare a fairly pure retirement investment against a package that combines a modest retirement supplement with ample insurance against multiple risks.  They assume that nearly all of the dollars you contributed to Social Security are dedicated to retirement.  This means that they assume that you aren't going to die, leaving survivors in need of support.  They assume that your retirement accounts are protected from bankruptcy proceedings, and that you aren't going to go bankrupt.  In assuming steady, high rates of return on your private investments, they also assume that your private investments will not go sour, either through poor investment strategies or through a general fall in the market before retirement.  And they pretend that the life annuity you can buy on the market is inflation-indexed, as Social Security's is, even though their figures are unrealistic even for a non-indexed annuity.

(The Heritage Foundation claims that its calculator is for an inflation-indexed annuity.  However, when I asked for data on a generic 45 year old female, it popped back a current salary of $31,592 and claimed a lifetime SS contribution nestegg of $559,111 if privately invested, yielding a $4,554 inflation-indexed lifetime monthly annuity.  Go over to TotalReturnAnnuities.com, which actually has to make a living selling these things, and you get a different story.  Buy a non-inflation-indexed single life annuity for $559,111 for a 67 year old Michigan female, and they'll pay her $3,618 per month for life.  The more responsible and cautious Cato calculator claims to preserve insurance against most risks and presumes workers may invest only 1/2 of their SS taxes in private accounts.  But its annuity estimates are also optimistic.  It claims a 45 year old female earning $31,592 and investing 1/2 her SS taxes privately will retire at 67 with a nestegg of $262,142, which can buy an inflation-indexed annuity of $21,237/year or $1,770/month.  TotalReturnAnnuities will offer a lifetime annuity of only $1,696/month for that lump sum--not so bad, only their annuity is not inflation-indexed.)

It's a trivial exercise to show that, if nothing goes wrong, you'll be better off never having paid for insurance than having paid for it.  I could produce a calculator like Heritage's, showing how much better off you'd be if you never bought home or medical insurance, on the assumption that your home never gets destroyed and you never get sick.

A true comparison of Social Security with privatization would compare Social Security benefits with the package of retirement + multiple types of insurance that you could get on the market.  The comparison would not be easy, however, because some of the types of benefit provided as a matter of course by Social Security are very hard for many workers to match in the private sector.  Inflation-indexed life annuities, for example, are rare and expensive.  Most disability insurance companies aren't willing to insure blue-collar workers, perhaps because of the problem of adverse selection (they are more likely to become disabled). (Maybe this is why the Heritage Foundation shrinks from advocating the privatization of the disability portion of Social Security.) Most financial institutions don't want to bother with dozens of minute payments per year into millions of low-balance accounts.  Without tight regulation, they would either not offer retirement accounts to low-income workers, or charge draconian fees for administering them. (This is true for Bush's favored TSP model for partial privatization of Social Security.)  A few years ago, Dean Baker (now at the Center for Economic and Policy Research) calculated the insurance value of Social Security and found that it compared favorably to what low- and medium-income workers would be able to get in the private sector, even if the Social Security Trustees are right in their gloomy predictions for Social Security a few decades from now. (High-income workers will not do as well, because of the progressivity of Social Security benefits, which are skewed toward lower-income workers to keep them above the poverty line.)  Baker shows us the substantial value of Social Security as an insurance package.  Check it out.

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Comments

Posted by: Perseus

Elizabeth Anderson writes:

"A true comparison of Social Security with privatization would compare Social Security benefits with the package of retirement + multiple types of insurance that you could get on the market."

So she actually does read the posts on here. I had my doubts. Now please tell us something we don't already know. Specifically, what is the problem with having a private package of retirement plus a government package of insurance to deal with the problems in the private insurance market?

Posted by: Perseus | Feb 8, 2005 5:09:19 AM


Posted by: David Velleman

Think about it for a minute, Perseus (30 seconds should do). The risks listed in the post are risks that affect the "private package of retirement", as you call it. What Bush wants to sell you is just a savings and investment account, whose value can be destroyed by the vicissitudes of the market and inflation. And he's not offering you a "government package of insurance" against those risks. Nor will any private insurer sell you one.

Posted by: David Velleman | Feb 8, 2005 6:52:49 AM


Posted by: noahpraetorius@hotmail.com

My take on SS is that it is perhaps the clearest example of efficient redistribution of income but that it is foundering on flawed fundamentals.

Its defenders refuse for political reasons to acknowledge that it has changed in its character over the years and that due to falling birthrates and lengthening life expectancy that it doesn't make sense anymore. But we have made promises that we must keep.

Posted by: noahpraetorius@hotmail.com | Feb 8, 2005 7:10:03 AM


Posted by: Jay Cline

ok, so SS has lofty goals. It still keeps going into insolvency.

why do we need a single annuity for the entire population? what is wrong with funding your own annuity, your own death and survivor insurance, your own retirement plan?

Why do we have a program that is so contrary to our basic beliefs? why do we need a socialist program (no, I am not a rabid dog here), training everyone to feed at the trough, when there are equally laissez faire ones available based on private ownership that celebrates the individual.

Ok, point for point

What are the risks Social Security shields us from?
Let's count them up:
1. The risk that you will outlive your retirement savings.

Allow for individual annuities.

Anderson says Inflation-indexed life annuities, for example, are rare and expensive. Most disability insurance companies aren't willing to insure blue-collar workers,.

Fine. Nobody said the current SS admin couldn’t provide that. Why can’t we just ‘purchase’ our own through the SS, who could act as a national clearinghouse, providing the economic muscle the same way AARP provides political muscle to millions of seniors?

2. The risk that inflation will eat away at the real value of the income derived from your retirement savings.
3. The risk that your private investments will go sour.

Right now that is ‘guaranteed’ through tax rolls. But very conservative investments, as proposed by Bush, in legitimate mutual funds do a far better job against inflation than dipping into the tax rolls. If the economy tanks so bad that even these investments go sour, well, we will have much, much bigger problems than protecting retirement plans. Even if SS had been in place before the Great Depression, you really think it would have survived? If there is no GDP, there is no tax rolls. The argument is moot.

4. The risk that your lifetime income will be too low to accumulate enough savings to avoid poverty in retirement.

um... define too low. Just how expensive do you think annuities cost?

5. The risk that you will lose your prospects for a decent retirement due to personal bankruptcy. (Some private retirement accounts, particularly those available to the self-employed, are not protected from bankruptcy proceedings).

C’mon. That’s too easy. Pass a law that says retirement plans and annuities are protected from bankruptcy proceedings.

6. The rapidly increasing risk that your post-retirement standard of living will plunge precipitously because your employer ran your pension plan into the ground. (Although there is an independent federal program that takes over bankrupt corporate pension funds, it offers a far lower payback than promised by these plans, making additional guaranteed sources of income more important for retirement security).

Another facetious argument. We’re not talking employer pension plans. Point is moot.

7. The risk that you will become permanently disabled during your working years, leaving you and your family without your income, and hence also without retirement income, given your inability to save up for old age. (Workers' comp only covers disability due to work-related causes, and ends upon reaching retirement age.)
8. The risk that you will die, leaving your spouse and dependents without support from your income.

I believe the financial tool you are talking about is Short- and long-term disability insurance.

Social Security protects you against all of these risks, either directly or indirectly.

Nothing Anderson says shows that individuals can't make their own decisions. The obstacles she raises to defend the status quo are no different than the obstacles I encounter at work by people who just don't want change. We have a phrase for people like that. Stop being part of the problem and start being part of the solution. Using Anderson’s arguments, I see no reason why we can’t privatize all of it. The risks she defines can be adequately provided privately and on an individual basis. Is there a place for government? Absolutely. The great malaise with the current system is it shuts out the very people, in the decision-making process, that it is supposed to benefit.

Posted by: Jay Cline | Feb 8, 2005 7:58:03 AM


Posted by: Will

DV states:
What Bush wants to sell you is just a savings and investment account, whose value can be destroyed by the vicissitudes of the market and inflation. And he's not offering you a "government package of insurance" against those risks.

Yes, he is. Bush is not proposing that all of SS be invested in private accounts. The majority of SS dollars would still go into the Government's "social insurance" "benefit".

Also, as noted above, the argument that a conservatively balanced portfolio of stocks and bonds is some kind of risky scheme is ludicrous (and flatly contradicted by historical returns). I'd bet my future SS benefit that Mr. Velleman, for example, has a tidy sum tied up in such securities via his 401K, mutual funds, et cetera.

Posted by: Will | Feb 8, 2005 8:47:11 AM


Posted by: bakho

And the bottom line, for all the insurance risks, SS was and is affordable and will be affordable in the future with minor adjustments. SS is a well managed program with low fees (lower than many private investment accounts) and it works to keep millions out of poverty. What is there not to like other than it is an example of a government policy that works? This annoys people who hate government and want to believe that no government program can be successful. The SS debate is politics driven by impractical ideology.

Posted by: bakho | Feb 8, 2005 9:14:24 AM


Posted by: David Andersen

"And the bottom line, for all the insurance risks, SS was and is affordable and will be affordable in the future with minor adjustments."

No, it is not. The cost-benefit for me is terrible. Social security now costs me $11,160 a year. In return for that premium over the next 32 years (undoubtably more with 'minor adjustments') I'll receive $2,062 a month when I retire at 67. The total I will have put into SS is about 420k. At 2,062 a month, it will take me 17 years to recoup that premium amount. That's certainly possible, but not statistically likely although I am very healthy. Obviously if I live longer I start to come out on the positive side, but how much longer am I likely to live beyond 84? More importantly, this analysis also completely disregards what that 420k could have earned in interest over time (hint: substantially more). Finally, when I die the principal would still exist assuming I was living off the interest (a likely scenario) and I would have an asset to pass on to family or charity (like a university, for example). Of course the idea of passing on estate wealth is apparently anathema to the leftist mindset so I'm wasting my words. The bottom line is that SS is a rip off for me and millions more like me whether you call it insurance or retirement. Can you leftists now understand why there are many of us who don't like SS? Can you understand why the idea of 'minor adjustments' (raising the payroll tax, increasing the full payout age, lowering benefits) only make the cost benefit worse? Go ahead and argue that it's in tune with 'social justice' to redistribute wealth this way, but don't try to claim SS is affordable or cost effective or financially sound. If you really think so, try starting a private business with the same business model and see how many customers you get.


PS. These numbers come directly from my annual SS statement and are expressed in today's dollars.

Posted by: David Andersen | Feb 8, 2005 9:53:09 AM


Posted by: Jay Cline

There are moments in one's life that are epiphanic, intuitively grasping a slice of reality through something simple and striking. After my early morning rebuttal on Anderson's 7 points, admittedly lengthy and clumsy (both mine and hers), I contemplated my navel on my long bus commute. I had vomited up the polemic charge of socialism without really understanding what my point was, except to say it felt right.

And then, buried in the lint, I found it, that simple yet elegant explanation to my decades-long repulsion towards Social Security.

Social Security takes our money and doles back to us what they decide is appropriate, fair, and possible. Can anyone please explain to me how this is any different than moving back in with my parents, turning over my paycheck to them and living off an allowance and their largesse?

Our Founding Fathers must be churning in their graves. After 200 years, we have replaced one Master for another.

Posted by: Jay Cline | Feb 8, 2005 10:12:53 AM


Posted by: Terrier

Jay Cline, you must hate your car insurance company! Until recently I had paid for YEARS and never received a single penny from them while they had most likely made a bundle of cash off of me. A few weeks ago, after the hood bender that totaled ny 5 year old car, the check arrived and I absolutely love them now! The damn fascists!

Posted by: Terrier | Feb 8, 2005 10:34:31 AM


Posted by: David Andersen

Terrier, please read my comment above. SS is not insurance. Leftists could start gaining some respect in this debate by stopping the comparison of SS to medical, auto, life, or home insurance. It's not the same.

Posted by: David Andersen | Feb 8, 2005 10:37:23 AM


Posted by: Jim Hu

The "debunkings" rely on excluding the employer contribution. The justification for this is that your employers wouldn't give you extra money if there was no payroll tax...of course, if you're self employed this is contributed by you.

Posted by: Jim Hu | Feb 8, 2005 10:43:32 AM


Posted by: Terrier

David Andersen, it is insurance and you are wrong.

Posted by: Terrier | Feb 8, 2005 10:57:19 AM


Posted by: Scott Schaefer

Mr Velleman:

What Bush wants to sell you is just a savings and investment account, whose value can be destroyed by the vicissitudes of the market and inflation.

The current SS system also contains a component which is just a savings and investment "account", whose value has already by destroyed by the vicissitudes of the US Congress, and whose future value is utterly dependent on same.

Nor will any private insurer sell you one.

This is true for some of the risks Ms. Anderson has enumerated today. Please state your estimation of the likelihood that it would be be true in the absence of the current SS system. I believe that dozens (hundreds?) of private insurers would have developed and be willing to sell you any number of innovative and flexible plans, tailored to your specific resources/needs.

Posted by: Scott Schaefer | Feb 8, 2005 10:58:25 AM


Posted by: Jay Cline

Terrier,

I agree with David.

Oh, I have no problems with my auto insurance carrier. They and I have an agreement, as you did with yours. A private contract, if I may use the term. Glad your long-shot paid off.

But I still dislike living off a forced largesse.

Not sure where you are going with the flippant facist remark. Do you think anyone to the right of the Democratic Party is a fascist?

Posted by: Jay Cline | Feb 8, 2005 10:59:24 AM


Posted by: Terrier

Insurance = protection against future loss
NOT
Insurance = means whatever I want it to


Jay, my corporate masters require that I refer to them as fascists; of course, I know the government is socialist. :-) Is everything you don't like socialist? I think I had some socialist pancakes the other day. Look, if it offends your delicate sensibilities work against it. Vote for those who would dismantle it but don't call it a rat just because you think that will make me want to kill it. I know what it is and you apparently don't.

Posted by: Terrier | Feb 8, 2005 11:14:56 AM


Posted by: David Andersen

Terrier,

I don't believe you understand insurance. I also don't believe you understand what a reasonable premium should be with respect to the risk. If you look at my example, I don't know how you can conclude that my SS 'premium' is a reasonable cost for the expected benefit. If what I pay into SS was substantially lower (90%?) and only paid out if I really, really needed it in old age, then it is insurance. As it stands it is a wealth redistribution system.

Posted by: David Andersen | Feb 8, 2005 11:34:10 AM


Posted by: Terrier

David Andersen, I know that if you were running an insurance company you'd need Social Security just to retire.

Posted by: Terrier | Feb 8, 2005 11:45:18 AM


Posted by: noah

I was listening to the Washington Journal on C-SPAN yesterday morning. The callers were whining that uninjured veterans were going to have to pay more in order to get VA health care benefits.

I'm sure the whining will turn into a cacophony when and if the social security reforms come up for a vote. For the life of me I can't figure out why anyone would want to be President. He is not a dictator but to hear people talk you would think he is.

Posted by: noah | Feb 8, 2005 12:05:09 PM


Posted by: David Andersen

"David Andersen, I know that if you were running an insurance company you'd need Social Security just to retire."

????

Posted by: David Andersen | Feb 8, 2005 12:16:10 PM


Posted by: Jay Cline

Terrier,

Sorry to hear you're not a free person. Liberty is a wonderful thing. There are a lot of things that I don't like that aren't socialist (homemade pancakes smothered with real maple syrup is not one of them), but I do dislike most things socialist. State control is a real bummer, man. Hope that doesn't strain your comprehension. Thanks for the electoral advice, but I already successfully exercised it.

Posted by: Jay Cline | Feb 8, 2005 12:52:15 PM


Posted by: Lisa SG

Hey, in most states you are compelled to be auto insurance in order to drive a car.

My father in law was a doctor who would often complain about people who did not have health insurance (but could afford it) and became injured. The problem is, hospitals have to treat people who come in with serious injuries regardless of whether they have the ability to pay, so those uninsured patients end up with service without having paid for it, though they could have afforded the insurance at the outset. Those who do buy insurance are the ones who subsidize these uninsured patients. My FIl did not have a solution to the health care crisis, but certainly favored everyone having health care in one way or the other.

Given the fact that we will not allow people to starve who have not adequately provided for their future, or those who become disabled, or children whose father has died, wouldn't eliminating social security simply mean that those who buy the insurance will simply end up contributing, through their taxes or somewhere else, to those who have not? Is that not a redistribution of income, as indeed it is in the above case? The problem with someone else's freedom is that it can IMPINGE upon mine. Government can rationally settle these disputes and maintain the maximum amount of freedom for all, which I think the SS system does reasonably adequately.

Or are we literally going to let people--the disabled, children, eighty-year-olds--starve in the streets?

Posted by: Lisa SG | Feb 8, 2005 1:15:34 PM


Posted by: David Andersen

"Or are we literally going to let people--the disabled, children, eighty-year-olds--starve in the streets?"

This silly strawman needs to be put to bed Lisa.

Where have you read anyone suggesting that SS reform should eliminate any safety net so that they truly needy are left to 'starve in the street?'

Furthermore, compulsory auto insurance doesn't justify anything. When I lived in such a state, my premiums were significantly more and it didn't even solve the problem it puported to solve! There are still people in these states who don't carry the insurance!

Posted by: David Andersen | Feb 8, 2005 1:27:48 PM


Posted by: Lisa SG

And what happens when an insured person is in an accident with an uninsured person (who is at fault)?

1) The insured person pays for it with their insurance, and the rates go up, requiring them to pay more for something that was not their fault, something which ultimately benefits the uninsured at the expense of the insured, which it seems to me is a form of theft;

2) The insurance company seeks money from the uninsured person through legal system, costing society as a whole lot more, or if it's not worth it, the insurance company does not even try, again benefitting the uninsured scofflaw at the expense of others.

3) There is a government vehicle (in some states) for reimbursing those in accidents with uninsured drivers. The taxpayers fund this, again benefitting the uninsured party, here at cost to society.

4) If the ininsured driver has no health insurance and is injured, he gets health care and we pay for it in our insurance premiums.

Of course, no law will insure 100% compliance. There are criminals out there. I didn't know that there existence (and immorality) made the law worthless.

(And by the way, given that people are not particularly good at saving for retirement, how do you know the cost of the social welfare net for the aged poor will not exceed the cost of SS as it is now? Who is going to pay for that, and how? What sort of program will it be--it won't be welfare, because that barely exists and exists only to get people into jobs--it doesn't exist for those who cannot work. The only program that really exists currently for those who cannot work is--surprise--SS! Which you want to eliminate or severely restructure! So I wonder about your claim that there will be no poverty at the end of life if SS is changed).

Posted by: Lisa SG | Feb 8, 2005 2:11:44 PM


Posted by: miab

David Anderson writes: "This silly strawman needs to be put to bed Lisa. Where have you read anyone suggesting that SS reform should eliminate any safety net so that they truly needy are left to 'starve in the street?' "

She didn't say that.

In fact, her entire point was premised on ". . .the fact that we will not allow people to starve who have not adequately provided for their future, or those who become disabled, or children whose father has died . . ."

Given that you agree with her on that, don't you also agree with her conclusion: ". . . wouldn't eliminating social security simply mean that those who buy the insurance will simply end up contributing, through their taxes or somewhere else, to those who have not? "

I think she's right.

Posted by: miab | Feb 8, 2005 2:12:49 PM


Posted by: Will Curtis

miab:

David's point is that Bush is not advocating "eliminating" social security. Thus, Lisa's use of a straw man.

Posted by: Will Curtis | Feb 8, 2005 2:27:49 PM


Posted by: oliver

miab writes: "David's point is that Bush is not advocating "eliminating" social security. Thus, Lisa's use of a straw man."

I disagree. If David has a valid point then it's that Bush didn't state explicitly that he wouldn't fortify welfare or else invent some new program to rescue the people who have bad luck in their personal security savings investments and hit retirement age broke or inadequately prepared. But if Bush has that in mind, he should say so, as well as how he plans to guarantee it will have adequate funds to rescue everybody who'd suffer from a stock market crash.

Posted by: oliver | Feb 8, 2005 2:39:21 PM


Posted by: Terrier

Lisa SG IS right and that is why SS is insurance (protection against future loss.) The problem a lot of rightwingers have is they don't realize that SS also insures them against the loss of others (which is actually what all insurance does because it is a pooled risk.)

Posted by: Terrier | Feb 8, 2005 2:40:31 PM


Posted by: David Andersen

A brief analysis of the risks SS supposedly covers cost-effectively:

1. The risk that you will outlive your retirement savings.

This risk is almost entirely mitigated by adequate savings over one's lifetime. Live beneath your means and save. It is entirely possible to save enough money that you can live off the interest and never deplete the principal. This is primarily an issue of personal responsibility.

2. The risk that inflation will eat away at the real value of the income derived from your retirement savings.

This risk is harder to mitigate personally, but building in a margin of safety in your savings will help. Again, live below your means. Someone else can address this risk better than I.

3. The risk that your private investments will go sour.

This is again an issue of personal responsibility. Diversify your investments. Don't put all your savings in one basket. Live beneath your means.

4. The risk that your lifetime income will be too low to accumulate enough savings to avoid poverty in retirement.

I'd say this is an argument for a new career. If your income is this low, how can it provide well for you now? Should you take a job that does not allow you to save enough money to live at the same income level in retirement? You can also work longer.

5. The risk that you will lose your prospects for a decent retirement due to personal bankruptcy. (Some private retirement accounts, particularly those available to the self-employed, are not protected from bankruptcy proceedings).

In almost all cases, personal bankruptcy is a result of behavior that is risky: overspending, failure to live beneath your means, failure to buy low-cost, high deductible health insurance, failure to insure against liability exposure at home and business.

6. The rapidly increasing risk that your post-retirement standard of living will plunge precipitously because your employer ran your pension plan into the ground. (Although there is an independent federal program that takes over bankrupt corporate pension funds, it offers a far lower payback than promised by these plans, making additional guaranteed sources of income more important for retirement security).

Don't trust your employer with your retirement future. Diversify. If you are forced to contribute funds to a pension - especially one that buys employer stock - work somewhere else. It's not worth the risk.

7. The risk that you will become permanently disabled during your working years, leaving you and your family without your income, and hence also without retirement income, given your inability to save up for old age. (Workers' comp only covers disability due to work-related causes, and ends upon reaching retirement age.)

This is what disability insurance is for. And only a very small percentage of people become permanently disabled.

8. The risk that you will die, leaving your spouse and dependents without support from your income.

This is what life insurance is for. Term coverage is quite cheap when you buy it when young and healthy as you should. As you accumulate assets over your life, you don't need it anymore, especially as your responsibility for dependents decreases.

*****

I'm not claiming I've adequately addressed these risks completely, especially for all cases. But I will claim that only a very small segment of society is really burdened by these problems through no personal fault of their own. For them, something like SS (but better and cheaper for all of us) is a good and decent idea. For the rest of us, we need to be responsible.

The argument that "but people won't" is weak. It's true that some will not, for whatever reason, but they are even less likely to be responsible if SS is there to bail out their irresponsible behavior. Incentives matter. People will be more likely to prepare for their future if they have no choice. I think this is one of the issues at the root of the SS debate. People who want to keep the SS status quo seem fine with providing for anyone via the state no matter what their circumstances and personal responsibility (and seem to be especially fine with it when they do not shoulder most of the burden for it). Those of us who want it changed don't think irresponsible behavior is a worthy excuse and furthermore believe that SS only enables it more.

Posted by: David Andersen | Feb 8, 2005 2:59:00 PM


Posted by: David Andersen

Oliver, Bush has explicity stated that SS is not going away (much to my dismay). There is no plan from anyone with the power to do anything about SS to eliminate it. Shifting 1-2% into 'private accounts' will not leave anyone starving in the street. No one has proposed anything like it. Give me a break. Do you guys read!?

Posted by: David Andersen | Feb 8, 2005 3:01:27 PM


Posted by: David Andersen

SS is not protection against future loss. It provides a guaranteed benefit no matter what happens. That is NOT what insurance does. Furthermore, I'm not paying 11k a year to avoid a future loss. I'm paying 11k a year for 32 years, against my will, to get 24k a year from age 67 to ?. If you feel like looking at this as insurance, then defend the premium I pay against the benefit I will receive. No fiscally prudent person would voluntarily pay that much for so little in return.

Posted by: David Andersen | Feb 8, 2005 3:06:08 PM


Posted by: David Andersen

"...rescue the people who have bad luck in their personal security savings investments and hit retirement age broke or inadequately prepared. But if Bush has that in mind, he should say so, as well as how he plans to guarantee it will have adequate funds to rescue everybody who'd suffer from a stock market crash."

When I read statements such as these, I assume that the writer is not informed on safe, prudent investment and retirement strategies: Diversify. Decrease your risk exposure as you near retirement. Spend less than you earn and save it. Buy low cost insurance to cover real risks.

And if the writer does understand these things, why would he write this? Because of a belief that people should not be responsible for their future? Because he is not sure of his ability to provide for his future and feels comforted that the state will? Because of an unspoken agenda for redistribution of wealth?

Posted by: David Andersen | Feb 8, 2005 3:21:51 PM


Posted by: bakho

David, you have a point that SS takes a huge bite out of the self-employed. A better argument would be an adjustment in the premiums for the self-employed. SS taxes were a lot lower percentage of income until Reagan got hold of it and raised SS taxes by about 50%.

I should point out that you do get an income tax break on the part of those SS payments. So the net bill is somewhat less than $11,000 per year, depending on your income bracket.
Also, it is not like you would otherwise have the entire $420 K up front and doubling the entire 32 years. I understand how the self employed could benefit from private accounts. However, the SS debate is not over private accounts, it is about drastic cuts in SS benefits. If Bush gets his way, you will still pay the $420 in SS taxes but only get about $15K per year in SS benefits + however much better than 3% your private account could get you after fees and annuity fees.

Posted by: bakho | Feb 8, 2005 3:33:06 PM


Posted by: Jay Cline

God save me from those who would save me.

Posted by: Jay Cline | Feb 8, 2005 3:35:29 PM


Posted by: John F. Opie

Hi -

I think part of the problem here is that the Social Security Administration **calls** big parts of social security that we all know and love "insurance". You can look at this here:

http://www.ssa.gov/OACT/COLA/piaformula.html

where the government states:
/*begin quote
The "primary insurance amount" (PIA) is the benefit (before rounding down to next lower whole dollar) a person would receive if he/she elects to begin receiving benefits at his/her normal retirement age. At this age, the benefit is neither reduced for early retirement nor increased for delayed retirement.
/*end quote

Now, let's go to the historical record:

http://www.ssa.gov/policy/docs/statcomps/di_asr/2002/background.html

/*begin quote

When President Franklin D. Roosevelt signed the Social Security Act into law on August 14, 1935, the original program was designed to pay benefits only to retired workers aged 65 or older. The 1939 amendments added two new categories of benefits: payments to the spouse and minor children of a retired worker (known as dependents benefits) and survivors benefits paid to the family of a deceased worker. That change transformed Social Security from a retirement program for individuals into a family-based economic security program.

The Social Security Amendments of 1954 initiated the Disability Insurance (DI) program that provided the public with additional coverage against economic insecurity. Effective as of 1955, there was a disability "freeze" of workers' Social Security records during years when they were unable to work. While that measure offered no cash benefits, it did prevent such periods of disability from reducing or wiping out retirement and survivors benefits. This legislation outlined the work requirements, the definition of disability, the nature of the disability determinations, and the emphasis on rehabilitation that are still fundamental to the disability program.

...

In addition to meeting the strict medical definition of disability, an individual must also meet an insured-status requirement. To be eligible for disabled-worker benefits, a person must have worked long enough and recently enough under Social Security. A person can earn up to four work credits per year. The amount of earnings required for a credit increases each year as general wage levels rise.

The number of work credits a person needs for disability benefits depends on the individual's age when he or she becomes disabled. To be fully insured, the maximum number of credits needed is 40. To be currently insured, a person generally needs 20 credits earned in the last 10 years ending with the year he or she becomes disabled. However, younger workers may qualify with fewer credits.

Dependents of a disabled worker are eligible for benefits if the worker meets both the medical and insured-status requirements. Disabled widow(er)s and disabled adult children do not need to meet a work requirement themselves, but the worker on whose record they are filing must be insured.

/*end quote

And from the glossary:

http://www.ssa.gov/policy/docs/statcomps/di_asr/2002/glossary.html#trustfunds

/* begin quote
trust funds
Separate accounts in the U.S. Treasury in which are deposited the taxes received under the Federal Insurance Contributions Act and the Self-Employment Contributions Act, contributions resulting from coverage of state and local government employees, any sums received under the financial interchange with the railroad retirement account, voluntary hospital and medical insurance premiums, and transfers of federal general revenues. Funds not withdrawn for current monthly or service benefits, the financial interchange, and administrative expenses are invested in interest-bearing federal securities, as required by law; the interest earned is also deposited in the trust funds.

* Old-Age and Survivors Insurance (OASI). The trust fund used for paying monthly benefits to retired-worker (old-age) beneficiaries and their spouses and children and to survivors of deceased insured workers, including most disabled adult children and disabled widow(er)s.
* Disability Insurance (DI). The trust fund used for paying monthly benefits to disabled-worker beneficiaries and their spouses and children and for providing rehabilitation services to the disabled.
* Hospital Insurance (HI). The trust fund used for paying part of the costs of inpatient hospital services and related care for aged and disabled individuals who meet the eligibility requirements.
* Supplementary Medical Insurance (SMI). The trust fund used for paying part of the costs of physician's services, outpatient hospital services, and other related medical and health services for voluntarily enrolled aged and disabled individuals.
/*end quote

So, there's the **terminology** used. It clearly identifies various aspects of social security as insurance.

However, there is, I think, a fair amount of intellectual dishonesty in calling it that.

Why? Because we've all pretty much grown up thinking that whatever we pay in, we get back. The government takes our money and holds on to it for us so that when we're old we'll not be living in cardboard boxes and eating cat food. It's our retirement fund.

Now, looking at ut supra, it is clear that social security isn't a retirement fund, but rather insurance for something that no private insurer will touch, since it involves, for insurers, really bad math. Put simply, up until now most people who are getting social security are getting a lot more out of it than they put into it, and no insurance fund can go on forever when that happens. This is why some - and I do it as well - call social security a ponzi scheme: it'll go on forever as long as there is an endless supply of new people entering the scheme.

My critique of the system is that it is intellectually dishonest to present it as an insurance scheme against **my** old-age poverty: it is, rather, an insurance scheme against **current** old age poverty.

And looking at the demographics, the system **will** go broke. It's just a question of **when** it does this. For the democrats and liberals, this will never happen, or at least not in their lifetimes, and as long as a republican wants to change the system, they will be against it.

Reformers like Bush want to reduce the current payout system and slowly transform it into what a proper retirement system should be: long-term funds earning risk-neutral returns to build up enough funds to ensure an annuity.

My question then: WHY NOT???? What is the problem with doing this?? It's not going to replace social security, it's not going to throw old folks out of their houses, it's only going to ensure that our children won't be facing the demographic problems that the Germans face right now, where their social security system, RIGHT NOW, TODAY, is broke and kept propped up by misusing income from gasoline taxes to avoid outright bankruptcy.

It is fiscally responsible to change the nature of the beast when conditions change.

John

Posted by: John F. Opie | Feb 8, 2005 3:49:13 PM


Posted by: Jay Cline

Insurance requires premiums. No premium; no insurance. My FICA is not my premium for my insurance; my FICA pays current retiree benefits. All I get is a vague promise that the next generation will pay my benefits and a stupid T-shirt that says I am a sap.

Posted by: Jay Cline | Feb 8, 2005 3:51:21 PM


Posted by: John F. Opie

Jay -

Exactly my point! I'm not paying a premium for MY retirement, but rather for all those old folks. It's been a con game, and those getting conned want to know who is going to ensure - not insure - that the game isn't going to be up when WE, the current generation, is gonna need it the most...

John

Posted by: John F. Opie | Feb 8, 2005 3:54:11 PM


Posted by: David Andersen

bahko -

Naturally you would not have the entire 420k up front. But spread that out over 32-40 years at a low 5% rate of return and tell me that the difference is not substantial. It's on the order of 3X AND it is a person asset. Those are two excellent reasons to question SS as is.

I'm not aware of a tax break on SS taxes. From what I can tell, it only applied through 1989, but I'm not clear on this.

I note that Reagan was hardly the only President to preside over SS tax increases, as the total tax (all components) has risen from 1% to 7.65% (for employees) since 1937. That's a 665% increase. Hardly indicative of a program that is well structured financially.

Posted by: David Andersen | Feb 8, 2005 4:00:25 PM


Posted by: oliver

David Andersen writes: "Oliver, Bush has explicity stated that SS is not going away (much to my dismay). There is no plan from anyone with the power to do anything about SS to eliminate it. Shifting 1-2% into 'private accounts' will not leave anyone starving in the street."

My impression is Bush has a rationale for privatizing the whole thing and would do so if congress would let him, but since it won't, he is either a)_assuming_ that some of a good thing is itself a good thing or b)arguing that some privatization is good for the same reason he would offer for all being good. In case, I believe Lisa is getting to the gist by addressing what happens to the unlucky when you privatize. Yes, if you don't privatize it all then you leave part of a safety net, but having only part of a net is less safe than having all of a net and indeed may be like no net at all for the people who fall hard.

Posted by: oliver | Feb 8, 2005 4:00:36 PM


Posted by: Jay Cline

Oliver,

What about the unlucky when you fail to do anything and SS goes bankrupt, er, insolvent, er, needs a new infusion of funds, er, ...

Well, at least I got this stupid T-shirt.

Posted by: Jay Cline | Feb 8, 2005 4:39:24 PM


Posted by: Jay Cline

from the Wizard of Oz

How can you talk if you haven't got a brain?

I don't know. But some people without brains do an awful lot of talking, don't they?

(singing)
Why, if I had a brain, I could—
I could while away the hours,
Conferrin' with the flowers,
Consultin' with the rain.
And my head I'd be scratchin'
While my thoughts were busy hatchin'
If I only had a brain.


The Scarecrow AKA Strawman

Posted by: Jay Cline | Feb 8, 2005 4:46:26 PM


Posted by: Jay Cline

My apologies up front.

My reference to a lack of brains is directed at the Strawman argument personified, not to any of the participants in this debate.

I realized only after rereading this in the blog that even I would quickly take offense to this apparent offense.

No offense intended.

Posted by: Jay Cline | Feb 8, 2005 4:58:16 PM


Posted by: David Andersen

bahko - I'm educating myself on the self-employment deduction for SS. I will modify my example appropriately once I figure it out. It has been a couple of years since I used it and forgot all about it.

Posted by: David Andersen | Feb 8, 2005 5:00:33 PM


Posted by: CDC

From the argument presented at EA's link: "Now, I'm also assuming that this is the portion I pay, not the total including my employer's contributions. Under the first assumption, with SS taxes constituting 6.2% of my total income, I'd have to earn, on average, $152,333.11 a year in 2004 dollars to pay this much in Social Security taxes."

Let's take the example of my interest in hiring Mr. Jones. In his desired job, he is worth $100/hr including all the attendant expenses of hiring him. If there were no attendant expenses, I would pay him the whole $100 bucks. If he has to pay 6.25%, and I have to match that, he gets $100 - $12.5 = $87.50, not $100 - $6.25= $93.75. The employee pays the whole tab. This isn't some ivory tower theory. It is what the numbers force employers to do.

Jim Hu is right; the "debunking" is, umm..., bunk.

Posted by: CDC | Feb 8, 2005 6:01:13 PM


Posted by: Jay Cline

CDC,

Unfortunately, in terms of economic theory, you are only looking at one side of the coin. Your Mr. Jones may be worth $100 to you, but if Mrs. Smith, with the same value comes to you and says, "I'll do the job for $90". Who do you hire? And when SS taxes increase by $2 an hour, who's gonna pay?

Your argument may be righteous, but fair is fair. You are still talking ivory tower here.

Posted by: Jay Cline | Feb 8, 2005 6:16:12 PM


Posted by: Achillea

I thought this SS = life/car/etc. insurance canard had been dispensed with a few posts ago, but here it is again like a bad penny.

A) Life/car/etc. insurance is designed to provide financial assistance to you (and/or your loved ones) in the event of misfortune. 65 is not misfortune. It's not an anvil that's going to fall on one's head or a bus that'll run you over tomorrow. SS is, at best, a retirement account with a low interest rate, which you can't touch but the government can raid at will ... and which may well implode entirely.

B) Life/car/etc. insurance is voluntary. You can make use of it or not, as you choose. Contrary to popular belief, it is quite possible to drive without car insurance, even here in California. The guy who ran into my car a few years ago didn't have any, nor did the woman whose vehicle mine was spun into. He paid through the nose, but that was the gamble he chose to take (along with opting to burn a red light at 60+ in a 40 zone, but I digress). My insurance assisted me, just as it was designed to do. I didn't have to wait till my 65th birthday.

PS: Where's my t-shirt?

Posted by: Achillea | Feb 8, 2005 6:20:52 PM


Posted by: Jay Cline

Achillea,

I am now taking orders. Visit my blog, leave your name, phone number, credit card number and quantity desired, and I'll guarantee you should get something in 30 or 40 years.

Disclaimer: the real quantity and value of your T-shirts may be discounted to maintain the solvency of my slush fund.

Posted by: Jay Cline | Feb 8, 2005 6:25:45 PM


Posted by: Boiler80

Bakho, Oliver, and Terrier,

Currently, about 4% of employees in the US pay no Social Security taxes. According to the GAO,

Social Security covers about 96 percent of all U.S. workers; the vast majority of the rest are state, local, and federal government employees. While these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits. This poses difficult issues of fairness ..

http://www.gao.gov/new.items/d03710t.pdf

Also according to the GAO, this resulted in approximately $171B in 2002 wages not being subject to Social Security taxes. How about this as a first step to fixing what you guys consider a small problem? Let's start collecting SS taxes from the mostly government employees who currently don't pay but are eligible for benefits. In 2002, this would have resulted in $10,602,000,000 additional dollars into the "Trust Fund". No sense making the Federal Government pay their 6.2% share, but if we can get the state and local governments to pony up for their "fair" share, maybe we can start to solve the problem - that doesn't exist of course.

Now some may call this suggestion pandering to the non-governmental employees who would love to see some fairness exercised in Social Security tax policy - and they would be right. Let's stick it to the government class!!

This seems far more fair than raising my (and my employers) payroll contributions for every dollar I make over $90K.

Posted by: Boiler80 | Feb 8, 2005 7:13:14 PM


Posted by: CDC

Jay Cline: "Your Mr. Jones may be worth $100 to you, but if Mrs. Smith, with the same value comes to you and says, "I'll do the job for $90". Who do you hire?"

That's irrelavent to my argument.

"And when SS taxes increase by $2 an hour, who's gonna pay?"

The employee.

Posted by: CDC | Feb 8, 2005 7:29:41 PM


Posted by: Jay Cline

CDC,

Nope. The employer pays, if Mrs. Smith is smart. And since she got the job and not Mr. Jones, that's a fair assumption. Mrs. Smith said she'd work for $90. If the government takes away $2 more dollars next year, and her boss don't pony up, she walks and the boss has to pay Mr. Jones $102.

You confused fair market value with the value to only one side of the equation, the buyer.

If you have $20,000 for a car, and the dealer says ok, and then when you start signing papers, he charges $500 for license fees, claiming it's the government, not the dealer, what do you do?

Well, I say see ya later bubba. Either you cover the extra costs, or I find another dealer.

Posted by: Jay Cline | Feb 8, 2005 8:05:29 PM


Posted by: CDC

Jay,
This is a fundamental point and it is too often overlooked. It is possible that I misunderstand this, but it would surprise me. The "debunk" link posted by EA and quoted by me appears to demonstrate a lack of understanding. Please don't take this as an attack, but you also seem to misunderstand this.

I will try to prove that the employee and not the employer pays the employer's share of the Social Security tax. As an aside, the reason why this is important is that, if SS is considered an investment by the employee, the amount that employee pays is critical to the calculation of the return on the investment.

I will try to develop this argument from distinct premisses and try to make my method of proof understandable. The proof is going to use an example, which is TERRIBLE technique. Elegance of exposition will be sacrificed to the need for clarity.

1. An employer hires an employee with the intention of making a profit from the efforts of that employee.

2. An employer will try to pay only what the employer needs to pay to secure the good efforts of that employee.

3. The employee in our example is worth a TOTAL of $21.25/hr because the employer can only make an adequate profit by paying a total of that or less.

4. Since the employer has to 'match' the employee's FICA 'contribution' (with a nod to Orwell), the employer deducts $1.25 from the $21.25 that he can afford to pay for an hour of the employee's services, and offers the potential employee $20/hr.

5. NO qualified applicants could be found for less than $20/hr. Please note that, if the employer could get a comparable employee for less total cost, he would. He tried but nobody answered the ad.

6. The employer deducted the cost of his 'matching' portion of FICA before he offered the applicant $20. Without the FICA the employer could have afforded to pay the employee $21.25. That last 6.25% came right off the top of the money allocated to paying for the employee's services.

Conclusion: The employee pays all of the FICA tax.

There is nothing ivory tower about the above. I have been involved in hiring and firing hundreds of employees. This is the real world.

Posted by: CDC | Feb 8, 2005 9:21:09 PM


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