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February 4, 2005

Why Is Social Security The Right Vehicle For The Social Safety Net?

Yesterday brought an informative exchange between Don Boudreaux at Cafe Hayek and the host of Calculated Risk

The essence of the argument at Cafe Hayek:

So even if you are unalterably in favor of Social Security, if you're honest and frank you, too, should reject descriptions of it as a safety net. Such a description is used for the added, unthinking emotional umphh it adds to the arguments of those who press to keep Social Security in its current form. That may be good, or, as I believe, it may be bad – either way, it’s no safety net.

And at CR:

I’ve argued before that Social Security should be considered retirement insurance. It should be intended to insure against the vagaries of life...

So when we reform Social Security, we should design it to catch those people that do “fall from life’s ordinary and expected institutional supports”. If we consider Social Security as "retirement insurance", then obviously Bush's plan of forced savings accounts is moving in the wrong direction.

And finally, Boudreaux’ final paragraph is inappropriate to the debate. Social Security should be a safety net, so lets work together to make it one.

My take is somewhere between the two.  Let me motivate my comments by way of the following scenario.  Suppose the Great Planner in the Sky has every American who will ever live congregate together at the beginning of time.  We are told the following: After the meeting breaks up, we will all be randomly assigned a birth year, indicating our arrival time on earth.  But there is a catch.  Some of us are going to be surprised by a really bad event -- let's call it the Great Depression -- that will wipe out a great deal of the financial planning of those alive at the time. And one more thing.  After that Great Depression thing, the number of us arriving on earth will, for awhile, explode.

Behind the veil of ignorance, I bet most of us would choose an intergenerational transfer system -- a safety net, if you will --  with "rates of return" that look something like this:

Internal_rates_of_return

One thing this picture does not look like is a sensible mandatory savings plan.  It looks like what it actually was (and still is): An intergenerational transfer program.

I suppose that there were other ways to implement the intergenerational insurance scheme represented by this picture -- a plain-vanilla deficit plan would seem to have worked, for instance -- but I have no real quibbles with the plan that was implemented.  An implicit social contract that shares the burden of cohort-specific systemic disaster seems like the right thing to me.

My question is this: What is the rationale going forward?  The demographics, the present-value imbalance in the current system, and, as Andrew Samwick has made completely clear, the cost of delay in making adjustments to rectify those imbalances, mean that the burdens will be increasingly pushed to future generations.  I don't get how those of us who drew the good number in life's temporal lottery can think that's a good idea.

If we were to start a mandatory saving scheme from scratch, I don't think we would ever pick the one represented by a pay-as-you-go social security system.  We would choose a defined contribution program, coupled with a progressive income tax system to implement the socially agreed upon intracohort transfer program.  If a forced retirement-planning scheme is what we need, why not begin the process of cashing out those payments made to generations past, and reconstruct the system into something sensible?

I completely agree that phrases like "bankrupt" and "insolvent" are not very useful descriptions of transfer programs run by the U.S. government.  I also agree there are lots of relatively simple ways to bring the current system back into long-term balance.  But I ask: What's the point?