Monday, May 02, 2005

Why and what sort of Social Security

Bush's plan, everyone now understands, is to turn Social Security into a program just for the poor.
The standard liberal/left/Democratic response is offered, naturally enough, by Paul Krugman, who says:
"It's an adage that programs for the poor always turn into poor programs. That is, once a program is defined as welfare, it becomes a target for budget cuts.
You can see this happening right now to Medicaid ..."
My take on this is quite a bit different than Krugman's, although the quoted statement has some truth. (But then again, over the years Medicaid has grown quite rapidly. The latest proposed cuts do not at this point establish much of a trend. They are fairly small and contested even among Republicans. Plus Bush wants to cut Social Security for the middle class as well as Medicaid for the poor.)
Anyway, let's grant Krugman's point for the sake of argument. The problem with it, as an argument for keeping Social Security a middle class program so that it will remain progressive, is that, when we camouflage things, they sometimes become the thing we are pretending they are, rather than what we really want them to be. In other words, you universalize Social Security and Medicare, and while you're at it muddy their transfers so they are hard to see, and what you end up with is a huge program that crowds out other budget items and is not itself enormously progressive on a lifetime basis. Thus, giving the middle class a stake so the programs will endure is a bit like giving Scrooge (pre-transformation) a huge cake so that Tiny Tim will get a couple of crumbs.
There is a better rationale for keeping Social Security a universal program rather than just poor relief. The argument, a dirty word in many circles but nonetheless apt and justified here, is paternalism. People are prone to save too little of their lifetime incomes for retirement. By taxing people when they are young and giving them benefits when they are old, Social Security and Medicare in effect force them to save. They can respond by saving less on the outside, but not by zeroing out their future benefits by borrowing against them in advance. The paternalistic limit only hits people who would otherwise save too little. If you are saving enough anyway and adjust for this forced saving component, you aren't hurt at all (leaving aside the analytically distinct question of the program's transfer content).
This type of program makes a great deal of sense. And it is not only paternalism. Also moral hazard, since we would presumably rescue people who entered retirement with nothing saved, so we might as well make them save it for themselves.
Anyway, this is a rationale for a universal program, although in the upper tiers it is unlikely to make much difference.
One could say that Bush recognizes this via the private accounts element of his plan. But the problem there is that people's bedrock tier of saving oughtn't to be invested riskily. From a rational planning standpoint, you start with a fixed real life annuity, and build the 401(k)'s et al on top of that. And if the forced saving is all you have, then it should be invested safely rather than riskily.
This point is pretty familiar already to people who have been following the debate - Peter Orsag, for example, made it eloquently in his testimony before the Ways and Means Committee, which I mentioned in an earlier post. So I will close here.

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