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.
De l’audace, encore de l’audace, toujours de l’audace!
I was just on the radio talking Social Security with John Fund of The Wall Street Journal editorial page and opened with the elementary point that conservatives have never liked Social Security. They opposed its creation in the 1930s, campaigned for its abolition in 1964, and after the 1983 deal launched a “Leninist Strategy” (their words, not mine) to destroy it, the fruits of which we’re seeing today. Understanding this point is absolutely essential to understanding what’s happening in Washington, DC this year. There’s a debate going on that has nothing to do with Social Security’s finances and everything to do with Social Security — should it be preserved or should it be abolished and replaced with something else?
Fund replied that no, no, no, “I like the concept of Social Security” he just wants to improve and “modernize” it. Then during the next back-and-forth he called it a “Ponzi scheme.” Doesn’t sound like the sort of thing a person who likes the idea of Social Security would say, does it? Of course not. Sadly, the Journal isn’t available on Lexis-Nexis so I can’t go to the archives and seek definitive proof that its editorial page does not, in fact, like the idea of Social Security one bit, but if any readers have access to documentation of the point and want to write in with relevant excerpts I’d be interested in reading them.
As I enter my final 24 hours with this soapbox at my disposal, I’d like to shift gears a bit from unspinning the endless web of Social Security lies to offering some positive thoughts. To make a point Josh has offered a couple of times but not, I think, adequately spelled-out the Democratic Party seems to me to suffer from a surplus of tactical thinking. The elected officials and the strategists have fallen a bit dangerously out-of-touch with the content of liberalism. This isn’t to say that Democrats need to adhere more closely to some kind of party orthodoxy. Outside-the-box thinking is always welcome, and I think there are some issues where the orthodoxy is dead wrong. It’s to say that departures from the orthodoxy ought to be grounded in the merits of the issue and not just undertaken as heterodoxy for its own sake or as some short-term tactical ploy.
Generally speaking, too many people in this town seem to have things basically backwards. The idea should be for policy people to devise good ideas. Then political people think of ways to sell the ideas. If there’s no way to sell a particular good idea, then you put it on the back-burner and look at something else. What you don’t do is have the political people figure out what the public wants to hear and then go have the politicians adopt whatever that happens to be as the talking point du jour. That leads to the sorry spectacle I’ve seen on C-SPAN in recent weeks where you have Democratic congressman up there pretending that somehow a Democratic administration could magically make gasoline cheaper or force China to solve our economic problems for us.
So on Social Security: What is to be done? Ideally, nothing. The notion that we need to achieve perpetual solvency in 2005 for a program that’s in balance into the 2040s seems to be based on a version of the old adage that “a stitch in time saves nine.” And so it does. But you don’t open up your closet and start stitching up your least threadbare sweater. The future is uncertain. We can’t know right now if this Social Security deficit will even exist, much less how big it will be. The first thing to do is to work on the on-budget portion of the federal government, primarily through tax increases but also through budget reforms aimed at curbing wasteful spending. The good here should be, if not a balanced budget, then at least a declining debt-to-GDP ratio. The next-most-urgent economic policy problem is health care. Only then would tackling major changes to Social Security even be worth thinking about. In the interim, immigration reform, efforts to curb the incidence of disability, efforts to combat age discrimination, and achieving full employment as we had in the late 1990s are all ideas worth supporting on their own merits. And if achieved, they’ll make Social Security’s finances much better as a kind of bonus.
If for some reason it’s politically necessary to do at least something (and I’m skeptical of anyone who thinks it’s politically necessary to propose tax increases or benefit cuts) to narrow the Social Security gap the first best thing to do is to universalize the program by expanding coverage to all new state and local government employees. Next best, raise the FICA cap so that it covers 90 percent of payroll and change the indexing formula to ensure that it covers 90 percent of payroll forever. After that, rather than raising the retirement age, lower the benefits available to “early” retirees to encourage a larger proportion of the population to work up to the “normal” age — right now most people retire “early” which, as the terminology indicates, isn’t how it’s supposed to work. You could appoint a Federal Reserve-style board to oversee the latter two ideas and tweak them periodically as necessary.
That’s the Yglesias Plan for Social Security. Later on, the fraught question of add-on accounts.
FYI, here’s long-time Social Security commissioner Robert Ball’s ideas about the scope of the Social Security problem (small) and some ways to achieve solvency courtesy of the good people at The Century Foundation. Obviously, I’m enamored of my own ideas on this score, but he’s the country’s leading authority on Social Security and I’m, well, a guest-blogger . . . so you might want to listen to him. At any rate, these in-house disagreements between friends of social insurance are small potatoes compared to the epic struggle over whether or not we should phase it out.
We have a winner in The Wall Street Journal editorial page competition — thanks to all the many readers who’ve sent me something. “Public Trust Busting” appeared in the Journal on my seventeenth birthday, May 18, 1998. It’s mostly dedicated to praising the late Senator Daniel Patrick Moynihan’s support for partial privatization. But, they also write: “Now, let us acknowledge that ‘privatizing’ Social Security is not what Mr. Moynihan desires. His political goal is to reform Social Security just enough to be able to save its universal guarantee.” A misguided strategy, but not, I think, a malign one. More Washington Post editorial page than WSJ edit page. Certainly the Journal-ists do not approve: “No doubt many conservatives will want to go much further than the New Yorker, us among them.”
In other words, they wanted then what they want now — the elimination of Social Security as we know it.
Thanks to reader M.A. for the tip. I’d send you a t-shirt, but I don’t think I have that authority.
What can you do about a guy like Joe Klein? As if his support for the Bush phase-out wasn’t bad enough, he needs to insist that Democratic opposition to Bush’s plan is not only misguided (by his lights), but is, in fact, comprised of “phony bleats of outrage from leading Democrats” who are “more interested in the demagogic exploitation of the issue than they are in the impact of baby boom retirement on their grandchildren.”
I can assure everyone that my outrage is entirely genuine. It’s also never been clear to me why the High Lords of Punditry think it’s unacceptably “demagogic” to point out that the Republican Party wants to gut middle class retirement security. And then there’s this shameful effort to pretend that privatization is all about helping out young people. But as I’ve point out before, under Bush’s plan the younger you are the more your benefits are cut! If you think it’s crucially important to the future of the country to finance tax cuts for today’s wealthiest individuals by sharply reducing the living standards today’s twentysomethings will enjoy when we retire, then fine. I’ll say you’re wrong, but lots of people have misplaced priorities. But to pretend that you’re doing my generation some kind of favor is just absurd.
I don’t like the term “add-on accounts” which, to me, frames the issue poorly and suggests a feeble-minded tactical response to the effort to phase-out Social Security. Programs designed to broaden the scope of asset ownership in America are more than defensible on their own terms, and like lots of other things I support (health care for the uninsured, a military capable of handling post-conflict stabilization missions better, etc.) shouldn’t really be viewed as either a substitute for, or an enhancement of, Social Security as such.
The narrow economistic case for asset-building is simply that the national savings rate is very low and there’s reason to think we’ll be more prosperous in the long tun if we can turn that around. The broader moral case, however, is more important. The remorseless logic of technological progress and globalization is that the trend toward income inequality will continue apace. Inequality per se isn’t the worst thing in the world. In addition to the bad inequality of the 1980s and 2000s where folks near the bottom see their income fall even as the economy grows and the rich get richer, you can get the 1990s full employment scenario where everyone wins. But it’s not the best thing in the world, either. We can — and should — try to combat the trend through policies aimed at full employment and strengthening labor unions, but this is a tough nut to crack and it’s worth deploying every tool one can think of.
The idea of asset-building is that instead of relentlessly inegalitarian capitalism or infeasible collective ownership of the means of production, that we ought to build what John Rawls called a “property-owning democracy” where productive assets are in private hands (like in today’s America), but they’re also widely dispersed (unlike in today’s America) so that everyone has a stake in economic growth and everyone reaps the gains of growth.
It’s an idea that’s very much in the best American tradition. The Homestead Act in the 19th century created a situation where the government would give away for free the main productive asset of the era — farm land — to anyone willing to work for it. That’s not feasible today, but the basic picture of letting every American who’s willing to work hard acquire ownership over a home and some assets is still a sound one.
How to do it? Well doing it right would be hard, but fortunately this is an ambitious agenda that can be implemented in steps. The first step we should take is the surprisingly easy one of changing the default rules for 401 (k) plans. Right now, to start a 401 (k) you need to fill out a bunch of forms. A better plan would be to automatically enroll people in 401 (k) plans and make it so that you need to fill out forms in order to not contribute. This sounds pointless, but research indicates that it would dramatically broaden participation in these useful savings vehicles. There’s also no reason for this to face opposition from any sort of entrenched interests or even the no-taxes brigade in the GOP. The next step, as Gene Sperling has argued is to switch the tax treatment of savings and investment around to make it more friendly to middle- and working-class people: “Without measures to have robust matching credits for low- and moderate-income workers and tax reform that would lead to a flat tax credit for savings, those arguing only to make 401K enrollment more automatic will do little to reach the huge numbers of Americans who are falling through the cracks or to turn our upside-down system for savings incentives right side up.”
On top of that you could add some version of the ASPIRE Act which would give each child born in the United States “a starter deposit of $500 from the government and children from households below the national median income would be eligible for a supplemental contribution up to an additional $500.” Those numbers are pretty modest, but it would be a foot in the door for bigger things to come, and could easily be linked up to some version of the Automatic 401 (k) which, in turn, should be given a more appealing name. A revived estate tax would seem to be a fitting and proper way of financing this sort of thing. At any rate, there’s plenty of room for disagreements about the details here, but the Sperling article linked to above provides what are, I think, sound guidelines for what is and is not acceptable from the liberal point of view.
Mississippi Republican Senators turn out to be not too thrilled with the idea of “progressive” indexing of Social Security benefits. And how’s this for mumbo-jumbo? The president’s “aides say the benefit cuts proposed by Mr. Bush have to be judged against what will happen if nothing is done to shore up the system as the baby boom generation ages and life expectancy increases. Social Security’s trustees estimate that if no action is taken, the system can pay full benefits until 2041, and after that will take in only enough through payroll taxes to cover about 73 percent of promised benefits.”
Fair enough, sort of. If we change nothing until 2041, and the Social Security Administration’s estimates prove correct, then to achieve balance after 2041 wholly through benefit cuts, we would need to cut benefits by about 27 percent. Under the Bush plan, average workers would have their benefits cut by 28 percent by 2075, and 49 percent for higher-income workers. On top of that, the Bush plan doesn’t even achieve its ostensible goal of solvency! You would need unspecified further benefit cuts to make the numbers add up, cuts approximately equal in size to the ones Bush has already put on the table.
Can you taste the integrity?
Several months ago, we knew the president wanted to kill Social Security somehow, but he wouldn’t tell us what his plan was. Back then, the Heritage Foundation was backing across the board price indexing. The Cato Institute had this plan that would have forthrightly eliminated Social Security. Then Bush said he wanted “progressive” indexing. And — like magic — Cato and Heritage now support just that. The White House sure is persuasive!
My time here will be done shortly, with Kenneth Baer taking over in just a little while. It’s been a real pleasure to blog for you all here and to get feedback from Josh’s massive audience of readers. Speaking of which, a person doesn’t just undertake uncompensated work for his own amusement. No! This was all a devious plot to promote my own work. So I hope that if you like what you’ve read, you’ll check out my writing elsewhere. My blog has mostly been dedicated to silly stuff since I’ve been saving serious content for TPM, but after the handover there will be a return to substantive political commentary over there. In addition, I co-write Tapped with my colleagues from The American Prospect and you can browse my archived columns and magazine articles for the Prospect if you’re so inclined.
If you really, really like what you read here you might want to call up The New York Times Book Review and say something like, “hey, have you heard of this Matthew Yglesias character? Wouldn’t it be great if you actually printed that review of two books about Ronald Reagan you have on file and that you already paid him for?”
People also should know that I am capable of writing about things other than Social Security, I just thought it would be appropriate to focus on that issue this week since we’re in the midst of a major now phase-out push and as we all know it’s both a crucial issue and something TPM has played a big role in throughout the year. But to prove I have ideas on other subjects, and because Kenneth says he’s going to be writing some about the British elections, here’s a concluding thought. Tony Blair, as everyone knows, has moved the Labour Party to the right, dubbing it “New Labour” and antagonizing the apostles of “Old Labour” ideology. This, it seems, has greatly endeared him to “New Democrats” here in the USA who’ve been engaged in a similar project. But how similar is it, really? Iraq War aside, it seems to me that Blair’s substantive views on domestic policy — on the NHS, say — would place him well to the left of mainstream thinking inside the Democratic Party. Which is to say that while he plays a similar role to Bill Clinton relative to the British political scene, in absolute terms his views are quite different simply because “Old Labour” was far to the left of anywhere the Democrats have ever been. So what gives?
There seems to me to be some muddled thinking on both sides of this question. The DLC should like Blair less, and my distinctly Old Democrat bosses at the Prospect should like him more. Since my successor literally wrote the book on the DLC, perhaps he can enlighten us about this. I’ll also note that anyone who thinks the Liberal Democrats have gotten to Blair’s left by opposing fees for university students needs to think harder. Free college tuition is a subsidy to the upper middle class, not to the poor. Given the availability of student loans, the main barrier to higher education for working class kids isn’t tuition, per se, it’s primary and secondary school systems that don’t let them compete on a level playing field in the admissions sweepstakes. Now I’ll doubtless enrage you all by suggesting that No Child Left Behind is a step in the right direction in that regard and sign off. But remember: Social Security now, Social Security tomorrow, Social Security forever!