TCS Daily


Conservative Crack-up Over Social Security?

By Arnold Kling - April 4, 2005 12:00 AM

"If we were not so used to it, we would find it odd for the government to collect money from young workers and give it to the old (mostly workers' parents)."
-- Robert Barro

 

The headline that Business Week put on Robert Barro's column quoted above was "Why Private Accounts are Bad Public Policy." And the headline that the Washington Post put on a story that referred to Barro and others was Conservatives Splitting on Social Security. Is that the real story?

 

I would describe Social Security as a program with a dubious economic rationale and very large costs. As currently structured, Social Security is very nearly indefensible. Every conservative economist, including Robert Barro, would gladly see it abolished. Some of us might support instead a welfare program targeted at the poor and the disabled among the elderly. Some of us might also support a forced saving program to try to reduce the number of people who rely on such a welfare program. But none of us wants to see Social Security continue.

 

As bad as Social Security is, it is difficult to reform. It is structured diabolically, in that we cannot exempt today's young workers without either reneging on promises to the retired or else incurring a short-term increase in the Budget deficit. This "transition cost" is always cited as a barrier to reform. Trying to change Social Security is like trying to stop a car that has been booby-trapped with a bomb attached to the brake pedal.

 

Conservatives do not agree on the best way to defuse the bomb. Some conservatives hope that with personal accounts, individuals will develop confidence in saving for their own retirement, and they will become increasingly willing to do away with Social Security. Some conservatives would prefer to reduce the impact of Social Security by cutting the growth of benefits. There are three ways to do this:

 

1. treat the Social Security benefit as a fixed, just-above poverty income floor for everyone, rather than linking it to your actual earnings.

 

2. switch from wage indexing to price indexing, which would keep real benefits constant but keep them from growing with productivity.

 

3. schedule increases in the retirement age, and raise the retirement age along with longevity

 

Conservatives differ in terms of which of these approaches we think is the best. Barro actually advocates all three! My reading of Barro is that his problem with private accounts is that they leave too much of the existing Social Security system intact.

 

Conservatives agree that Social Security is a terrible program. If we disagree, it is about tactics. Personally, my favorite option has always been raising the retirement age. But that does not mean that I would be opposed to any of the others. On the contrary, I can probably support any reform that will pass.

 

Solvency is not the Issue

 

From my perspective, the debate over Social Security has been diverted onto several irrelevant tracks, such as the issue of whether or not Social Security is "going broke." Deep down, neither side really cares. Even if Social Security's defenders believed that it were utterly insolvent, they would still oppose reforms and instead advocate tax increases. By the same token, even if I were to accept the premise that Social Security's promised benefits could be met with only a small tax increase (i.e., that there is "no crisis"), I would not want to go that route.

 

Regardless of whether the future taxes are adequate to pay the money promised to future recipients, I think that Social Security is a really bad idea. It is funded by a regressive tax that punishes people for working. It rewards spendthrifts and punishes savers. It delivers benefits to the affluent as well as to the needy. Because longevity is growing faster than the retirement age, it socializes an ever-increasing share of our economy.

 

A Challenge

 

I would issue the following challenge to those on the Left:

 

What would you tell a young worker to convince that worker either to (a) voluntarily participate in the Social Security system or (b) vote to coerce all workers to participate in Social Security?

 

Imagine that Social Security had been structured to phase out, so that only those workers now over the age of 30 are required to be in the system. Under this assumed scenario, workers under age 30 would only have Social Security if they chose to participate voluntarily or if they voted as a group to continue Social Security rather than phase it out. My challenge to the Left is to come up with a convincing rationale for young workers to renew Social Security, either voluntarily as individuals or collectively as a group.

 

One argument for Social Security runs like this: "Social Security works. Look at how much less poverty there is among the elderly than their was in the 1930's."

 

That is a silly argument. There was a Depression in the 1930's. We have had 70 years of productivity growth since the 1930's. Of course there is less poverty among the elderly. But we did not need Social Security to make that happen.

 

Another argument for Social Security runs like this: Social Security is a form of insurance that only the government can offer. People do not know how long they are going to live past retirement. Annuities markets, which otherwise would allow people to insure that their retirement savings do not run out before they die, are not widely used. This leads some economists to suspect a market failure, one which justifies Social Security as the solution. However, as I wrote in What's Wrong with Social Security?, it is more likely the case that the need for annuities is just not all that large to begin with. By annuitizing income, Social Security is forcing people to take something they do not need, rather than giving them something that the market fails to provide.

 

The Political Challenge

 

My contention is that the overwhelming majority of young workers would not sign up for Social Security if it were voluntary. In fact, I am fairly confident that if they could vote as a cohort either to join or not join Social Security, the majority would vote against. And I believe that opting out of Social Security would be the right choice for young workers, both individually and as a generation. Unfortunately, the politicians, particularly those on the Left, refuse to give them the option.

 

This is a political challenge, not an economic one. The problem is not just that young people's interests and old people's interests conflict. If that alone were the issue, a compromise could be reached. The problem is that the AARP and elderly politicians really believe that they have the right to force Social Security down the throats of the younger generation. I applaud any conservative effort to try to beat the AARP, even if we crack up trying.

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