Max Sawicky on Bush’s Program

While the Left are pretty much in agreement that Bush’s plan sucks, they really seem to be scattered on why it is a mess. Max Sawicky’s post on it says it is bad because Social Security is a public good. Frankly I find his arguments flacid. Public goods are goods where one’s use of the good does not reduce another’s ability to use the good. Classic example is national defense. The army protects the entire nation, thus we all benefit equal and consume exactly the same amounts. Social Security doesn’t strike me as having this element. For example, if Max is paid $1,692/month that money is gone and I cannot also get it.

As for his first item,

1. There is no other way to obtain insurance against, not only destitution, but also low support for retirement. How low is ‘low’? The bigger the program, the higher the standard. The standard’s metric is the wage replacement rate (benefits divided by earnings at retirement time), now around 40 percent, due to plunge to half that (and in the infinite horizon, to zero) under privatization proposals.

I think this is somewhat misleading in that there are other ways to try and prevent destitution during retirement they just come with a higher level of risk.

2. There is no other way to preclude those who make bad savings choices from prevailing on society for support in their pitiful old age.

I’ll grant him this. With the way the government works this is true. This is in my view very much a result of time inconsistency. Suppose the government announces the end of Social Security. If you make bad investment decisions too bad. However, if people believe this and make decisions accordingly it becomes possible for the government to improve welfare by reneging on the “too bad” part of the new policy. Rational forward looking agents would realize this and not believe the “too bad” portion of the policy and will take unnecessary risks in investing knowing that if they make bad choices they wont end up destitute (i.e. the government will take care of them). This is the problem with activist government, but we are very far down this road and I don’t have much hope of things changing. Still, this point does not mean that we have to freeze Social Security in amber and go with the program as it is currently structured. Further, I don’t see how this relates to the issue of public goods…public policy sure, but not public goods. So I find this reason…well just irrelevant.

3. There is no comparable market for disability and survivors insurance.

4. There is no comparable market for low-cost, inflation-proof, lifetime annuities.

I don’t see anything about these two reasons to support the claim that Social Security is a pubic good. Markets can fail to form for a variety of reasons, but I don’t see this as necessary justification for government intervention. Further, one thing that I wonder about is the lack of markets in these two areas a result of the existence of Social Security?

5. There is no good reason to enlarge the existing, separate welfare programs for the elderly. Nor is there the same likely political durability of such programs.

I see this as having absolutely no bearing on whether or not Social Security is a public good.

This strikes me as just plain ridiculous,

If only the first generations under SS had provided invoices to their children for parental services to both children and grandparents.

If you have a child it is your responsibility to take care of that child. As such billing the child for services is rather pathetic. As Sidney Poitier said in Guess Who’s Coming to Dinner,

“I don’t owe you a damn thing! Why should I owe you for doing what you were supposed to do?”

FILED UNDER: Social Security
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. John Thacker says:

    So, since Bush’s program doesn’t touch disability, I assume that knocks one part out.

    For the rest, it seems like that if his objection 1 holds that 2 is vitiated. If Social Security only grants enough to keep people out of destitution, or to put it another way, grants the retirement currently given to those in working class, then the middle and upper class still have reason to save. If everyone is guaranteed the same low minimum income, then there is no moral hazard. Even if people only end up with the low minimum income if they really need it, then the moral hazard is still low because the retirement income would be much lower than those middle and upper class people could make by investing safely.

    Of course, if we “fix” his problem with #1 and ensure that people get a good wage replacement rate guaranteed, so that the middle class and upper class are guaranteed middle and upper class retirement incomes, but then add add-in accounts, moral hazard becomes very real.

    1 and 2 are arguments against add-in accounts, surely. They are not arguments at all against progressive inflation.