Thoughts on Social Security and Private Accounts
I often find myself wondering how in the world they originally justified Social Security to the voters. Did Roosevelt really stand up and say, “this act is designed to protect you from yourself because you are too stupid and irresponsible to save for your own retirement!”? Somehow, I doubt it. More likely, as with most government programs, they led the majority of the people to believe that they could parasite more from the system than they would have to put in. Why else would they go along with it?
Well, maybe I am being a little unfair. The idea of old-age insurance might not be all bad. Nobody knows exactly how long they are going to live, so planning for retirement can be a little tough. An insurance type scheme could be utilized so that people only have to save up enough to live out their expected life span; the savings could be pooled so the people who die off early basically hand over their excess savings to those who live to a ripe old age. I have my doubts about this kind of scheme though. I doubt that most people would seriously plan to spend their last dollar on the day they died, even if they could somehow know exactly when that would be (well, there is at least one way to know for sure, but most people don’t consider it a viable option!) Rather, I think most sensible people plan to retire when they have enough savings to live comfortably off the returns more or less indefinitely.
Ignoring for the moment my doubts about the desirability of old-age insurance, we could note that there are a number of things that make Social Security different from actual insurance (aside from the fact that it’s involuntary). Real insurance would charge you higher or lower premiums based on your life expectancy. People who smoke, for example, would pay less – odds are they will die before they can take much back from the system. Then again, I guess an insurance company is at liberty to include as many classes of people as it wants in one big pool; it’s just that in a competitive market for insurance some insurance company will cater to low risk people if they can be identified. Once the low risk option becomes available, all the low risk people will switch over and the premiums for the policies that cover all comers must go up (they are now the de facto high risk policies). In my opinion, then, it’s a stretch to call something insurance when it ignores available information about risk.
In any case, even if Social Security could be described as a kind of old-age insurance, the question would be: why have the government do it when old-age insurance could be provided on the open market (and probably with much less waste)? I can think of at least two answers. One is that the social engineers want to muck with the payouts to make them come out differently than they would on the market. For example, they may want to make retirees all get very similar benefits even though some people pay far more into the system. I tried playing with a benefits calculator for a little while, but I really could find no rhyme or reason to it. But if people only ever get an amount out that is on par with what they put in, then why bother? Seriously.
Well, that brings up another thought. I know that I’m a crazy cynic, so bear with me, but it’s possible that the government does give everyone relatively the correct amount of benefit based on how much they put in, but gives a very lousy rate of return and pockets the difference (or rather, spends it on other government nonsense). Using an on-line calculator at Howstuffworks.com, I can see that if I make $50,000 a year for 54 years, paying 15% of my income to Social Security the entire time, I’ll get a lousy $1800 a month benefit from the system. If I saved that money myself and made a 5% return I’d have over $2.1 million (if I did the math correctly). Something’s a little off.
So at this point I’m still stumped as to how they convinced so many people that this was a good thing. Oh, but I never said what my other reason was for having the government do old-age insurance. It doesn’t explain how they sold it to people, but it may explain its utility. The other reason to have the government do it is because they can force you to participate. I know libertarians hate to consider it, but maybe most people really just are too irresponsible to plan for their futures. It really is possible. If it’s true that most people will not plan ahead, then we don’t really have any good options. We can still kill the system on principle, but then all the old folks will just end up on welfare. In itself that’s not so bad; at least it would apply some stigma to being too irresponsible to plan ahead. Thing is, without mandatory savings, it’ll be the responsible paying all the bills and the irresponsible paying none.
I actually do believe that a large fraction of the people (maybe half?) are too irresponsible to plan ahead. In theory we could just leave these people to their fate and get rid of both Social Security and welfare. It’s certainly the libertarian thing to do, since it doesn’t force people to save if they don’t want to, and it doesn’t reward stupidity and punish responsibility. At the same time, it’s almost certainly politically impossible. Old people dying on the streets? Or worse – moving back in with their kids? Oh, the horror!
I have no solution to this problem. I have no illusion that eliminating Social Security altogether is even an option. Maybe private accounts aren’t such a bad idea given the political realities. If we got to the point where we were forced to save for our retirement, but at least the savings was in an account with our own name on it – and we could see it growing at a normal market rate of return, would it be so bad? The odds are pretty good that you are already setting aside some savings anyway. If the requirements were set to provide enough savings only for the most basic survival type retirement, then the amount ought to be quite small. Maybe it’d be a palatable alternative even though it’s not pure in principle.