Following is a guest post from Dr. Robert Wright, Nef Family Chair of Political Economy at Augustana College SD, and author of numerous books.
Thanks for yet another opportunity to reach out to your large and informed audience. The last time I posted on your blog, Fubarnomics: A Lighthearted, Serious Look at America’s Economic Ills* was just out. Iâ€™m happy to report that sales are better than expected in part due to my appearance on the Dylan Ratigan Show a few weeks ago. One of the leading highlights of the book is â€œSacred Hoax,â€ the chapter on Social Security. My original chapter title was the title of this blog. I changed it after the editor convinced me to remove the repeated images of sodomy liberally and licentiously sprinkled throughout the original text. But donâ€™t worry, Iâ€™m not going â€œback thereâ€ here. Social Security is just too important a matter. Itâ€™s a prime example of what I term hybrid failures, or combinations of market and government failures that fester for years or decades, eventually turning quite monstrous. It is also a prime example of how our public discourse revolves around political ideologies rather than causes and effects.
Iâ€™m often asked, in effect, if I want old people to starve. Of course not. But I also donâ€™t want children, or anyone for that matter, to go without. So the real question is: How do we ensure that everyone gets enough of what they need? Part of the answer, of course, is to do things as efficiently as possible, to waste as little time, energy, brain matter, or human talents as we can. The other major part of the answer is to be fair to everyone. Society shouldnâ€™t take from A to give to B until it has extinguished all other available options. Social Security is a bad policy because itâ€™s inefficient and, as I recently reminded Paul Krugman, unfair.
Social Security is unfair because it is not actuarially-based much less actuarially-sound. It is not, as sometimes portrayed, a type of insurance. Workers pay the same percentage of their wages whether they have terminal cancer or are likely to live to 90. People likely to die relatively young, minority males for example, pay into a system that they get little or nothing from. Those who start families at young ages also lose out because by the time their mortality rates start getting high, when they are in their fifties, their children are already too old to collect any survivorship benefits. Because lower wage workers pay so much of their income into the system (the payroll deduction plus, in almost all instances, the employerâ€™s alleged contribution) they rarely have estates of any size to pass on to their children (be they minors or adults). And that is a recipe for perpetuating poverty. So, at best, Social Security merely privileges the aged poor over other equally poor groups.
Social Security isnâ€™t efficient either. In other words, individuals could receive more or better benefits if they could spend their S.S. taxes on private security products instead. No, Iâ€™m not talking about private accounts. Iâ€™m talking about a rationale plan of investing and insuring over the life cycle.
First and foremost, everyone needs disability insurance. (Iâ€™m setting the sticky issue of health insurance aside as it is a different chapter, â€œHouse Scrubs,â€ and a different set of issues.) Social Security offers the cheapest sort possible, known as â€œany occ,â€ which means if you can do any sort of work, you wonâ€™t get any benefits. (Except you might because the entire claims apparatus is highly politicized. You might also be denied benefits even if you canâ€™t legitimately work at any occupation.) That might be fine for unskilled workers but most of us these days really need â€œown occâ€ coverage, which means we can get benefits if we can no longer do our â€œownâ€ occupation, not push a broom or clean a toilet. Private disability insurance, especially â€œown occâ€ policies written by quality insurers, is pretty expensive and not as good as it could be. But its development has been stymied by the existence of Social Security and by state level insurance regulators. Policies and prices would rapidly improve in a less restrictive environment. Unfortunately, only a small percentage of the American population knows the difference between â€œany occâ€ and â€œown occâ€ policies, let alone the many other varieties of disability insurance available. (I blame the Aflac duck. No, not really.)
Next, many but not all people need life insurance. If you have a spouse or children or anyone else dependent on your income, you should buy as much as you can afford. And that, thankfully, is often a lot. Million dollar term policies are not uncommon these days. They are more affordable than disability insurance because Social Security has not crowded out the life insurance market as much as it has the market for disability insurance. Also, life insurance matured well before the Great Depression and hence was well established in its major outlines before it became more absurdly regulated. It isnâ€™t perfect, but it is far better than what Social Security offers especially given that turning age 18 is now more likely to mean big college tuition bills than economic independence.
Saving for retirement is also more difficult than it has to be due to government regulations and the effects of Social Security. The dirty secret of advocates of Social Security is that before the Great Depression the percentage of the aged population that was indigent had remained low and constant for decades. The government could simply have provided old age relief during the downturn and after the upturn allowed people to return to their pre-Depression savings strategies and all would have been well. But it didnâ€™t, so now we have generations of people who think that saving means speculating in the stock market. It doesnâ€™t. It means after covering disability and death contingencies with insurance people should acquire a diversified portfolio consisting of real estate (e.g. a home that you actually own and are not renting from a bank via a mortgage kept as close to 100% LTV as possible), life annuities (insurance contracts that make monthly payments during an annuitant[s]â€™ life [lives]), and financial securities (that shift towards cash as retirement age approaches). But Social Security has infantilized us to the point that most people donâ€™t know how to implement such strategies, much less how to make adjustments to changing economic circumstances.
In short, we are caught in a sort of catch-22. Private security is prima facie better than Social Security except in a world where Social Security (and some seriously FUBAR regulations) already exists. That is why it is so difficult to move beyond Social Security. Iâ€™ve sketched a plan in Fubarnomics that would pay promised benefits for older Americans out of general revenues and cast younger Americans (people precisely my age and younger) adrift with a stern warning to prepare for the future, starting now. If the economy ever roars again I think it would work economically, but I doubt it will work politically. Not yet anyway.–
Robert E. Wright
Nef Family Chair of Political Economy
Division of Social Sciences
Should We Means Test Social Security?
How Much Could You Have If Social Security Was Your Money?