Sunday, January 30, 2005

On Social Security, Part 5

The day of reckoning has come. And I'm not talking about the Iraqi elections. (In case you haven't figured it out yet, the authors of this blog are comparatively ignorant of foreign policy and will, thus, take longer to digest what is happening today than your average blogger.)

I mean that now I must answer, if I can, our biggest fan (in terms of actually reading our blog) and critic (in terms of carefully assessing our ideas) with respect to social security. For those who are just tuning in, all of this relates to my suggestion that we means test social security and my agreement to answer any objections to my proposal in the hopes of spurring a social security conversation within the Christian community.

DLW writes:

[Social Security's] justification has purportedly been that many of us are naturally bad savers and can benefit from the economies of scale and security provided by the US gov't. I think these are valid justifications for its existence.

I'm not sure that I understand what it means for us to be "naturally bad savers, but I'm going to try to speculate at exactly what you mean.

First, maybe you mean that people tend to favor immediate consumption over savings because they have difficulty defering gratification. If so, I think that this is best solved - not by forced savings - but by massaging people's incentives in other ways. It's best solved this way because it is less coercive and people therefore resent it less. (I know younger workers resent payroll taxes being withheld for example.) And in fact, we already "massage" people's incentives to make their preference for immediate consumption over savings less severe. (1) The much lower "capital gains" tax rate (which is less than half of the normal tax rate and generally applies to money made when people save for any purpose), (2) retirement accounts like 401(k) which exempt from taxation money people save for retirement, and (3) the "stepped-up basis" tax rules which exempt from taxation forever the previously untaxed gain from property people acquire in a will, are just a few examples of the many, many rules which encourage people to save and tend to mitigate the problem of us being "naturally bad savers."

But perhaps more importantly, those that have a lot of money and who would fail my means test have proven that they are not "naturally bad savers."

This aspect of the naturally bad savers point, I take it, relates back to the "security" point that you made about what the government can do. Well, my means-tested program still provides that security. If people turn out after-the-fact to have been naturally bad savers or (more likely) simply unable to save because they lived paycheck-to-paycheck, then they are covered by the program.

Second, maybe naturally bad savers means that it is too expensive and too much of a hassle for individual people to find out how to invest, where to invest, and what specifically to invest in. Understanding the stock market and hiring a broker are both annoying and costly. (As an economist might put it, individuals have too high "transaction costs"). I take this to be related to the "economies of scale" point about the government programs. My response here is that there are private entities that risen into prominence since the 1930s, such as pension funds and mutual funds, which serve to lower the expense and hassle associated with savings and make individuals better savers.

Thus, for me the individuals-are-bad-savers argument is not a sufficient justification for social security especially in the face of a budget crisis.

DLW writes:

for the purpose of income redistribution and poverty-reduction, we can just implement the Basic Income Guarantee program I mentioned before. That would maintain the incomes of the elderly and permit them to work part-time if they so desire. And, notably, it would effect inter-class transfers in, perhaps, a more even-handed manner.

First, this is absolutely politically infeasible. I believe that, within the next few years, my proposal will become feasible.

Second, insofar as we add an income guarantee on top of social security as it presently exists, we dramatically exacerbate the budget problems which I have pointed out are very serious and, indeed, very serious for "the least of these." In my opinion, "there ain't room enough in this town" for both social security as it presently exists and a basic income guarantee. If we can save money on social security by means testing it, then we might have the financial ability to implement an income guarantee.

DLW writes:

I have problems with turning a forced-savings program into a redistributive program in an ex post manner. Those that paid into social security, expecting to get the money back eventually, should get it back, regardless of their income and savings.

Insofar as people's "expecting" to get their money back represents simple feelings of entitlement, I've already indicated below that I think feelings of entitlement should not be accorded much respect and are not a sound basis for public policy.

Your idea of people's "expecting" to get their money back may mean that they, in the words of Contracts Law, "reasonably relied to their detriment" on the fact that social security payments would be available. This objection also may be countered. First, people rely on government programs that get changed all the time. People make long-term financial plans based on the tax code, and we change it every year. If your sense that we should defer to people's expectations about government programs was applied more broadly, complete stagnation in government policy would result.

Second, even if you don't accept the point I made above, there is another issue. A very wealthy individual who has "relied" on social security payments being there and who would be denied those payments under means testing hasn't suffered any real damage. She saved anyway despite the expectation that social security would be there. If someone did rely on the payments being there and not save, then they would "pass" the means test and have the payments available. Maybe the wealthy person would feel psychologically cheated in some way. But in the face of true, physical human suffering and limited resources, is this a good justification for an expenditure?


At 2:37 PM, Blogger DLW said...

no time to respond extensively right now. I need to go visit my grandfather who's had a serious accident.

I agree that SS has been a forced savings program targeted to make those with lower incomes save more.

My main objection with your plan was that it seemed to be a breach of trust not to pay back the money that people above a certain level paid into the plan.

Sure, they may not need it that much, but I don't see why we can't eventually find other ways to shore up SS in a progressive manner.

And, while the BIG is not feasible right now, politically, it is in need of more publicity and means could easily be made to pay for it. Check out the website to see how it could be done.


At 7:33 PM, Anonymous Anonymous said...

I don't think it's just a matter of poverty as to why people are bad-savers. Many people just have difficulty with the will-power not to spend in our hyper-consumeristic culture. That's why there are christmas clubs where people willingly put money in accounts that they don't receive any interest on and cannot withdraw from until right before Christmas. It also is likely why people often speak of real-estate as a wise investment (I'm going some from recall here, but I believe that it doesn't tend to give that good of a return. It is, however, yet another way to force yourself to save money).

And, even if mutual funds and other financial instruments are available, they don't perform that well(relative to the market as a whole) and they still entail risk. SS takes away that risk.

I agree that we can consider a more progressive way of raising the SS money, tax-wise.

As for dealing with the existing gap, there are many tax instruments we could use to pay for this. Why take the money paid by more wealthy soon-to-be-retirees? As I said before, this breaks with the good faith of the US gov't. If we were in a crunch and there was a need to ration benefits, I can see that a means-based approach would be more fair, but we aren't that close to the critical point yet and still have other options.

Also, regarding BIG, it is the most effective way to reduce poverty, while improving incentives for higher-earners to work more. It will also allow us to redirect many accountants and tax-lawyers into more productive lines of work as it would massively simplify the US's tax-code. But I'm sure that's not why you'd all be against it, would it now? ;-)

Yes, gov'tal plans get changed all the time, but radical changes are not per se a good thing(with the exception of course of the radical changes I myself advocate) and should preferably be avoided. Introducing more uncertainty into future incomes is not a wise thing. In fact, its a fair reason to make changes more gradually and with checks and balances agains the alteration of existing laws.

There just doesn't seem to be any real strong reason why we must only give out social security savings to those with lower incomes. If we need to stop-the-gap, there is no reason to only implicitly tax the elderly rich.



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