Social Security, how art thou an insurance program? Let me count the ways.
My good friend Julian Sanchez, blogger and Reason magazine Assistant Editor doubts that it is in a column for his publication’s website: “Neither is the notion of Social Security as ‘insurance’ terribly coherent, if it ever was. Even when Social Security was first instituted, over half of Americans who reached the age of 21 would survive past age 65. As of 1990 the percentages were over 72 percent for men and 83 percent for women. Aging is not a ‘risk’ to ‘insure’ against; it’s a normal part of life to plan for.”
First and most obviously, Social Security provides insurance against disability. Through the survivor’s benefits it also provides a kind of life insurance. Third, through the fact that you keep drawing benefits until you die rather than until some lump sum has been exhausted, it provides a kind of longevity insurance. Living until over the age of 65 is a very common and quite predictable feature of contemporary life, but none of us know exactly how long we’re going to live. Someone who dies at 78 and someone who dies at 100 would need nest eggs of very different sizes to live comfortably in retirement. One’s ability to keep working during the earlier portions of old age is also not-exactly-predictable. In my line of work it’s a reasonable bet that I’ll be able to keep on writing away for the vast majority of my lifetime, but many careers aren’t like that. The guarantee of benefits starting in your mid-sixties serves as a kind of second-tier of disability insurance against the possibility that the vicissitudes of life will leave you unable to ply your trade into your late sixties and seventies even though you might be healthy enough to live.
As compared to private accounts, Social Security also provides insurance against poor market performance. Small investors are usually best off parking their money in broad indexes rather than trying to outwit the markets. This is a good strategy for the long haul, but it leaves you exposed to risks that are entirely beyond your control. Over the long term, the market goes up pretty reliably, but at any given time your investments may be in bad shape. Guaranteed benefits give you a cushion in case you wind up retiring in the midst of a downturn and need to be able to ride it out for a little while.
Last but not least, there’s a mild redistributive element. What Bush wants to do is basically disaggregate all of this. The insurance elements will be eliminated or else (through forced annuitization) contracted-out to the private sector which tends to be less efficient at providing insurance against these sorts of risks. Then on the side there will be this welfare program which, as I’ve been saying, folks on the right say isn’t part of a medium-term plot to phase out even the redistribution, but their actual behavior (“revealed preference” to put it in libertarian-speak) suggests that they’re not serious about this. Both the redistributive elements and the insurance elements are important and worth fighting for on their own terms. The liberal view is that linking them together has been a successful policy over a period of decades and that whatever changes may or may not be made to the program should preserve this linkage.
