Sunday, September 02, 2012

Social Security is not welfare


In general, I share some of the concerns of Nicholas Eberstadt, who writes in the Wall Street Journal lamenting the explosion of entitlement spending (though I also agree with this response by William Galston). In particular, I think much of the "health care" spending that we've been doing has been waste (which goes for private-sector health spending too btw). I'd like to see a lot more of our tax dollars go to public goods like education, research, and infrastructure, and less go to "health care".

BUT, I think Eberstadt makes a big mistake in lumping Social Security in with other entitlement spending. Social Security involves small transfers from rich to poor, but most of it is just a forced savings program, like a mandatory-enrollment defined-benefit pension. Eberstadt writes:
Government data on public transfers can be used to divide entitlement spending into six baskets: income maintenance, Medicaid, Medicare, Social Security, unemployment insurance and all the others... 
For their part, entitlements for older Americans—Medicare, Social Security and other pension payments—worked out to even more by 2010, about $1.2 trillion... 
The U.S. is now on the verge of a symbolic threshold: the point at which more than half of all American households receive and accept transfer benefits from the government. From cradle to grave, a treasure chest of government-supplied benefits is there for the taking for every American citizen—and exercising one's legal rights to these many blandishments is now part of the American way of life. 
As Americans opt to reward themselves ever more lavishly with entitlement benefits, the question of how to pay for these government transfers inescapably comes to the fore. Citizens have become ever more broad-minded about the propriety of tapping new sources of finance for supporting their appetite for more entitlements. The taker mentality has thus ineluctably gravitated toward taking from a pool of citizens who can offer no resistance to such schemes: the unborn descendants of today's entitlement-seeking population.
But Social Security, which comprises over a quarter of entitlement spending, is not a "treasure chest of government-supplied benefits", nor does it represent a "taker mentality". The reason is that Social Security benefits are related to contributions - the more you pay in Social Security taxes, the more you get in Social Security benefits.

Actually, Social Security is a lot more complicated than a normal pension scheme (and I think the system should be simplified), but basically it works very similarly. The basics are well explained by this email from Dan Sacks:
Social security benefits are a function of lifetime earnings history. They take your 35 highest quarters of earnings and over those quarters calculate your monthly earnings (Note: actually, it's years, not quarters!). Your monthly benefit from social security is a piecewise linear function of this monthly earnings amount. (They do some adjustments for inflation, too.) You get 90 cents for each of the first $767, then 32 cents for dollars 767-4624, and then fifteen cents for all remaining dollars. Social security contributions are capped at about 100,000, and you neither pay taxes nor get a benefit beyond that. 
For more information, see here, here, and here.

So the more money you pay into the system, the more you get out of it. This is no coincidence; the program was invented back in the Depression, when the idea that people should work for what they get was almost a religious belief in America.

Have people forgotten that Social Security pays you more for earning more? Do today's Americans simply view Social Security as a bottomless cookie jar paid for by someone else? This 2011 paper by Jeffrey Liebman and Erzo Luttmer (also h/t to Dan Sacks) suggests that no, Americans still understand that Social Security rewards a function of work:
To measure the perceived linkage between labor supply and Social Security benefits, we administered a survey to a representative sample of Americans aged 50-70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply. Indeed, respondents generally report a link between labor supply and future benefits that is somewhat greater than the actual incentive.
So people understand what Nicholas Eberstadt seems not to understand: Social Security is (mostly) not a transfer from the rich to the poor, nor is it (mostly) a transfer from unborn Americans to today's Americans. It is a "transfer" from your young, working self to your old, retired self.

Should we really call that a "transfer program"? I don't think we should.

In general, this is emblematic of a bigger thing that annoys me. People often say "government is X percent of GDP". But what is the significance of this? Suppose I say to the government: "Here, government, please hold all of my money for five seconds and then give it back to me." Is government then 100% of GDP? If I do that ten times, is government 1000% of GDP?

The number of dollars, or the percent of GDP, that go through the government does not really tell us much about the government's impact on the economy. In fact, it's very difficult to characterize the government's impact with one number, since different types of government spending are so different from each other. But when we talk about "transfers", we should talk about net transfers, not gross transfers. Using the gross numbers might be useful for getting people worked up and scared about the "size of government", but it does not help people make an informed choice about policy.

Update: Naturally, I am hardly the first to make this point. See Mark Thoma. But conservative writers just keep pressing onward relentlessly with the claim that Social Security = welfare. America is not buying it.

Update 2: In the comments, Matt Rognlie points out that it's the top-earning 35 years, not quarters. That makes more sense, and is consistent with what I've read on other websites.

48 comments:

  1. This. This should be THE debate in the US today. You will wait a long long time before the mainstream media will take up the cause of educating the people about this crucial issue.

    There is also a debate to be had (and public education) about the Republican lie that over 40 percent of the American people pay no taxes. And how income taxes scale with income and only have a marginal transfer (if any) to the poorer amongst us.

    ReplyDelete
  2. Comparing today's government spending against that in say 1900 is a false comparison because there have been at least three fundamental changes that contribute to higher "entitlement" spending.

    The first - people are simply living longer. If the working class all died by age sixty, there would be no need for social security or medicare.

    The second - medicine became effective. Before about 1950, if you got sick there was not a lot the medical profession could do for you. Once medicine became effective, the pressure for universal access became substantial.

    The third - society became richer and could better afford to provide for weaker members of the society. We can argue whether support for the poor is justified on economic grounds (I believe it is) or is merely a Christian moral obligation (I believe that too).

    I agree that more money should go to education, research and infrastructure.

    And I agree that health care spending should be squeezed - both by squeezing providers and by looking long and hard at what works and what does not. The other western nations show that in health care spending a lot more can be accomplished with a lot less. The Republicans have reacted almost hysterically to President Obama's attempts to squeeze providers and investigate effectiveness ("death panels") even while the Republicans say that medicare is unaffordable going forward.

    We are not living in 1900 and the Republicans should stop wishing that we were. It was not a nice time for most people.

    ReplyDelete
  3. Anonymous4:22 PM

    Indeed, spend less on health, it's just not that important.

    ReplyDelete
    Replies
    1. Anonymous3:27 PM

      lol that is ridiculous.

      Delete
  4. The health of the people I think is the most important to give attention of the government. Because healthy people means healthy economy.

    ReplyDelete
    Replies
    1. Agreed...will soon write something about this...

      Delete
  5. Excellent post -- I entirely agree. The characterization of Social Security as some kind of lavish welfare program leads a lot of conservatives to a position that completely contradicts the rest of their platform. Often they advocate means testing because it will lower the "size" of government, even though it surely increases the size of government in the sense that matters: net redistribution and the distortionary impact on incentives.

    (Note: although I think that asset or income-based means testing would be a particularly perverse tax on savings, I am happy to support "means testing" insofar as it means slightly reducing the slope of the schedule relating the AIME to the PIA at high incomes. Relative to the current baseline, this seems like a fairly efficient form of lifetime income taxation, and it would make the tax-and-transfer system as a whole more progressive, though of course there is always the worry that it would erode middle-class political support for Social Security if overdone.)

    A few comments on the excerpt on Social Security. The note says

    Social security benefits are a function of lifetime earnings history. They take your 35 highest quarters of earnings and over those quarters calculate your monthly earnings. Your monthly benefit from social security is a piecewise linear function of this monthly earnings amount. (They do some adjustments for inflation, too.)

    Two clarifications:

    1. It is, of course, your 35 highest years of earnings, not quarters. (And good that it's 35 rather than 40 or 45 -- don't want my low-earnings grad student years to be thrown into the mix!)

    2. Unlike most adjustments for inflation, the initial adjustment is for "wage inflation"; to calculate your Average Indexed Monthly Earnings (the AIME the 35-year average that is fed into a piecewise linear function to produce the "primary insurance amount", or PIA), they scale up your wages in each year by the ratio of average wages today to average wages in that year. So if people are making, in nominal terms, 4 times as much today as they were in year x, your earnings from year x are scaled up by 4 before being fed into the 35-top-years average.

    Since this is just a crude ratio of average earnings in each year, it's not really an adjustment for "wage inflation" either; unlike with the CPI, there isn't even an attempt to hold constant the type or quantity of labor being supplied as changes in wages are measured. Not that it necessarily should be; the idea is that the wage scaling facilitates rough comparability among years in your earnings history, and it adjusts for changes in the overall standard of living over time.

    Once you start drawing Social Security benefits and your primary insurance amount has already been calculated, then the "cost-of-living" adjustments are done according to inflation in the usual sense -- the CPI, not wages.

    ReplyDelete
    Replies
    1. Matt, you win the "best comment" award. Thanks.

      Delete
    2. Anonymous11:25 AM

      You are wrong. It previously was 40 quarters of work (10 years) as mention on
      http://www.ssa.gov/retire2/credits2.htm
      but now it is 40 "credits" (for which 4 credits for the year can be earned in one quarter if the FICA wage is high enough)
      "If you were born in 1929 or later, you need 40 credits (10 years of work)."

      Delete
    3. This is the minimum to qualify for SS, not the history over which the amount of the benefit is calculated, which is 35 years.

      Delete
    4. Anonymous3:30 PM

      It is welfare. Period. It is a government funded program. You worked, you got your checks already. After that you apply and get Social security. money and not working. That is welfare. Accept it. Just because you put a saddle on a donkey does not make it a horse.

      Delete
  6. "Should we really call that a "transfer program"?"

    Should we really call so much of this a transfer program; so much of it is forced (and simpler and more convenient and secure) saving -- and insurance.

    When you pay fair premiums (taxes) for an insurance policy, and your house burns down (you lose your job), are you a sponge when you collect? even if you responsibly and fairly paid fair premiums, and were responsible with how you managed your home, but the fire was due to faulty wiring you didn't put in, or your neighbors house having a fire that spread?

    The world is really risky and complicated today; insurance can tremendously increase total societal utilities, and the government is often great at providing it due to unmatched economies of scale, simplicity, strength to payoff, and not having a profit incentive to fool people and not pay with the fine print when people really need it.

    ReplyDelete
  7. Anonymous11:46 PM

    Have people forgotten that Social Security pays you more for earning more?

    They don't care; SS haters hate SS on principle and are quite happy to misrepresent what it does in the service of the greater "good". See Ryan, Paul for a current example of this phenomenon on other policy issues.

    ReplyDelete
  8. I don't see any real argument made challenging the three graphs he presents. In the space of an article he presents the best three graphs that put the clearest picture forward. You argue as if he had written a journal article. Of course that is pretty much the standard of all economics blogging these days.Social security may not be welfare 100% but What percent is it ? If you had put more time analyzing that than blame conservatives who predicted this all along, then the people paying attention to your writing would be more than the same kind of pseudo intellectual fools who scrawl through liberal blogs looking to re validate their constipated world view. Of course I understand that is the biggest market out there and from that perspective you are spot on.

    ReplyDelete
    Replies
    1. This comment may contain valuable thoughts. However, I can't tell if it does or not, since it is written incoherently. Without being overly rude, I would like to suggest that you take some time to lay out your thoughts in a clear, concise manner, focusing on conveying information and explaining ideas, rather than employing a stream-of-consciousness approach.

      Delete
    2. There is no big idea here except the observation that you are criticizing a WSJ article like it is an economics journal article. And while doing so, you do not go ahead and actually put in a real figure for how much of Social Security is actually welfare which is clearly not zero%. Fundamentally that makes this just another partisan blog article out of 10000 others.

      And When my stream of thought is ready for more clarity I will stop commenting and do other things :) But remember what Michael Dell said - Those who are not confused do not understand. I am for now happily confused.

      Delete
    3. Anonymous11:55 AM

      Thank you Kabir. Your trenchant ad hominem attack has convinced me that I am indeed a psuedo-intellectual fool with a constipated worldview. I am forever in your debt.

      Delete
    4. @Anonymous: Thanks for proving that I was not entirely incoherent before :)

      In my confused state I found this to confuse me further. Of course I will persist with this confusion as long as possible because it seems to lead me more easily to the truth. Closer to it at least.

      http://www.washingtonpost.com/wp-dyn/content/article/2011/03/06/AR2011030602926.html

      Delete
    5. Anonymous4:18 PM

      You don't make much sense, but I get the gist of it. I agree with Noah's comment. In future posts, please focus on clarity and brevity.

      Delete
    6. The first step is to stop using drugs before you post! ;-)

      Delete
    7. The inability to understand the views of the opposite side these days is related more to the level of bias in the reader than the incoherence of the writing. I see better opinions out there which clarify why social security is actually welfare. But they too are partisan. If there was a real Economist who had control over his own bias he would tell us what is the actual percentage because that leaves no space for partisan haggling.

      But as I said, coherent uselessness is the current standard in Economics blogging these days. So I get it.

      Delete
  9. Alan Goldhammer7:16 AM

    Hmmm, it looks like you got a nice spam comment from ba san. Very good post on this topic.

    The key point here is that Social Security really benefits the less well off who may not have investments/pensions to cushion their retirement. If one looks at the statistics, it's quite appalling how little money a lot of these individuals have to get by. One also needs to work to get Social Security; if you don't work you don't get it which is a fair trade off.

    Remember also that capital gains and interest earnings are not counted towards Social Security taxes. I retired two years ago and make a small pittance by doing consulting. 95% of my income at this point (aside from my wife's income as she is still working) comes from pension, cap gains, and interest. So I only contribute to Social Security based on the pittance income. It's legitimate in my mind that the pension income should be exempt from this, but I'm not sure that exempting cap gains and interest income are fair since I categorize myself as mainly an investor right now in terms of my major occupation.

    It also should be noted that the same types of income are exempt from Medicare taxes as well which can be quite significant to the health of that program since there is no yearly cap on the payment of those as there is for Social Security. In my mind, hedge fund and leveraged buy out managers who make mega-money under pay into the Medicare trust fund because of the carried interest loophole (they do pay more in terms of the Medicare premium on retirement as that is set according to AGI).

    ReplyDelete
  10. Anonymous8:14 AM

    SocialSecurity is INSURANCE. Republicans want to make it into an investment scheme. BigF would love to be able to skim fees off the large SSTF. It would be a huge upward transfer of wealth. Republicans and wealthy special interests have been trying to convince our youth that SS will not be available when they retire and spend millions per year on disinformation campaigns.
    -jonny bakho

    ReplyDelete
    Replies
    1. "SocialSecurity is INSURANCE. Republicans want to make it into an investment scheme. "

      They want to steal it, pure and simple. 'Privatization' is just a cover for stealing it, since they can't steal it openly.

      Delete
  11. Anonymous9:18 AM

    I thought that SSI payments as well as payments to the disabled also came out of the social security fund. SSI goes to the very poor, most of whom never paid into social security, and many of the disabled were unable to work. Does anyone know if this is the case?

    ReplyDelete
    Replies
    1. Yes, you're right. These parts of the program are welfare, and are only called "Social Security" by historical accident. They're just not nearly as big, numerically, as the forced-savings program.

      Delete
    2. Some Guy2:46 PM

      Supplemental Security Income (SSI) is welfare paid for out of the general fund not a dedicated trust fund like Social Security. The payments bear no relationship to the career earnings of a beneficiary.

      SSI requires that one be low income and disabled or aged to be eligible. The maximum an SSI beneficiary can receive from the federal government is $698 a month (adjusted yearly). You cannot have more than a certain amount of resources (real property, savings, etc.) to receive it. SSI beneficiaries are either not eligible for Social Security (typically not insured) or the amount they receive in Social Security disability payments is particularly low.

      This is distinct from Social Security Disability Insurance Benefits (DIB). DIB is based on earnings and what one pays into the system. Unlike SSI, assets are not considered when determining eligibility. In my opinion, while DIB seems like welfare, it's insurance. This is because pooling risk underlies DIB. Also, DIB maintains the connection between working and receiving benefit (though the eligibility and earnings calculations are modified).

      SSI and Social Security DIB are easily confused because SSI is administered by the SSA and the acronym SSI (Supplemental Security Income) is so similar to the acronym SSDI (Social Security Disability Insurance).

      Delete
  12. Noah: "In general, I share some of the concerns of Nicholas Eberstadt, who writes in the Wall Street Journal lamenting the explosion of entitlement spending (though I also agree with this response by William Galston). "

    Noah, any chance you could link to his columns decrying trillions wasted money on the Bush Wars?

    Just kidding - we know he had no problem there.

    ReplyDelete
    Replies
    1. So you think Eberstadt is a GOP bandwagon sort of guy? I don't know, I've only read this column and something else about Chinese demographics.

      Delete
    2. Don't you have to suspect that ANYONE who writes regularly for the WSJ would of necessity be a GOP bandwagon guy?

      I hope you're right about American's not buying the SS = welfare canard. But I'm quite sure there's not 1 person in ten who has even the vaguest clue how it works, and that's a big majority ripe to be misled.

      JzB

      Delete
    3. Concerning the ideas Americans have about SS, please see the paper I linked to.

      Also, note that the rebuttal to Eberstadt is also in the WSJ. I'm not sure which of those guys, if either, is a regular contributor.

      Delete
    4. I'll check later - thanx. Now I have to go deal with my mother in law, spending some time in an extended care facility, courtesy of Medicare.

      What is the right approach to old people in decline? This is expensive as hell, and without Medicare she would literally be penniless.

      Should society just abandon her?

      JxB

      Delete
    5. We can't spend infinite dollars keeping old people alive for infinitessimal amounts of time, Jazzbumpa. At some point it has to stop.

      Delete
    6. Well, first off, it's finite. Second - What do you consider infinitesimal? Another year? Another decade?

      Third - what do you recommend - death panels?

      Should we not clean out her carotids? Not treat her emphysema? Not do the PET/CAT on the nodule on her thyroid? Not give her 24 hour skilled nursing care that she temporarily needs?

      I asked a serious question and got back a fatuous platitude.

      One of the reasons I read here regularly is that I know you can do better than that.

      JzB

      Delete
  13. You can tell Eberstadt is a reactionary hack by his language. "Taker mentality" is pejorative and inaccurate.

    But there is context here that you haven't mentioned - the growing wealth disparity and declining economic mobility.

    Entitlement programs are more important to the bottom 50% of society because the top 50% - and, of course, proportionally up the scale - have claimed every penny of productivity and GDP growth over the last 40 years.

    As tax rates have declined, so have Economic growth and the last tattered vestiges of what used to be The American Dream.

    JzB

    ReplyDelete
  14. As I read Eberstadt's article, his point seemed to be "Gee, we spend a lot on welfare." So I wondered how our "social protection"
    spending compared to Europe's. This was what I found with a quick Google, so let me know if I missed anything. But it doesn't really look like we spend an inordinate amount on transfers.

    Expenditures:
    Eurozone (avg) healthcare - 7.5% of GDP
    US Medicaid/Medicare - 5.5% of GDP

    "Social protection services"
    Eurozone - 19.9% of GDP
    US Social Security - 4.8% of GDP
    US income security programs - 2.7% of GDP

    http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/General_government_expenditure_statistics

    http://www.fas.org/sgp/crs/misc/RL33074.pdf

    ReplyDelete
  15. Anonymous5:49 PM

    This is an interesting perspective that has some merit, but if Social Security is a forced savings program with benefits considered (essentially) withdrawals later in life, then the payments into the system should not be considered federal "taxes." Deferrals into 401(k) and similar plans are not "taxes." Payments into the Social Security system should be considered investments or deposits or deferrals. That, however, is exactly contrary to what progressive (!) analysts contend when trying to rebut the notion that only the relatively wealthy pay federal taxes. See, for example, here: http://www.cbpp.org/cms/index.cfm?fa=view&id=3505 ("These figures cover only the federal income tax and ignore the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay.")

    ReplyDelete
    Replies
    1. Wrong! Contributions to 401K's lower your pre tax earnings. SSI contributions do not.

      Delete
  16. Whenever I read Eberstadt, I am reminded of Rose Friedman's observation, that political ideology trumps reason and evidence in that so very curious economics profession.

    ReplyDelete
  17. ML_EngAmer5:56 PM

    I agree on the points regarding Social Security.

    Regarding healthcare- from a fiscal standpoint, most of the difficulties we face in dealing with healthcare costs (private, Medicare and Medicaid) have to do with inflated billing on the part of pharmaceutical and medical supply companies as well as hospitals. The actual costs billed, which ultimately impact insurance costs (Medicare certainly included), support extravagant profit margins.

    This is not a matter of free-market supply and demand so much as market manipulation. These companies have nearly unending resources to create political pressures that allow them to continue with this behavior.

    Noting that, cutting back on payments to the entities should be the plan in general:

    Many studies have drawn attention to the fact that the United States spends roughly twice as much on health care – as a fraction of GDP and on a per person basis – than the average of other economically developed nations without achieving substantially better health outcomes. (see http://1.usa.gov/TpfQ10)

    ReplyDelete
  18. Those that paid into SS are entitled to the return of their investment as promised by this government mandated program, I have no issue with that. However, like any retirement program, mismanagement of the funds or the overpayment of benefits in the past can leave it substantially short of funds to continue paying the previously promised payouts.

    Life expectancy has changed substantially from the original conception of SS as a retirement plan. Early surpluses in the plan because of few recipients also allowed the managers and politicians to expand the the pool of recipients, thus increasing the financial burden of the plan.

    One underlying complaint I have with all Government programs--if they are so good, why are they mandatory? Even government plans should be left to the consumer as the whether or not to participate. Is it because government programs are really inferior to private sector plans?

    ReplyDelete
  19. This is all fine and good but the ss shortfall is still a reality due to demographic changes bla bla bla...

    We still need a conversation about how to deal with that.

    Social Security != welfare might be an emotionally satisfying proposition, but it doesn't help us avoid structural realities....

    ReplyDelete
  20. Attempting to make ends meet when someone disabled or unable to work due to illness can be a challenging and frightening task. Fortunately, if someone cannot work a 40-hour week due to documentable disability or illness, the Social Security Disability program offers the financial assistance you need from the Social Security Administration, allowing you to focus on your health and recovery.

    ReplyDelete
  21. Anonymous11:37 AM

    Noah,

    You're description of social security as a forced savings scheme rather than the transfer program suffers from the same extreme categorization as Eberstadt's. As you noted, it’s "complicated" but almost all of the complication is about the effective transfer portions of the scheme.
    For instance, 90 cents on the first dollar versus 15 cents on the last dollar means that the last dollar gets a lot less benefit than the first, or, in the language of your savings analogy, the effective interest rate paid is dramatically lower (i.e. negative in some cases). You classify this as a “small transfer from rich to poor” by which I take it to mean that it’s small relative to the need of the poor (I agree). However, if I am earning $106,800 a year, then I earn about 9,000 at the top rate, about 46,000 at a rate of 36% (32/90) of the top rate and about 52,000 at 17% (15/90) of the top rate, I have a right to feel like I am being taxed pretty heavily on much of my earnings.

    You are right that "simplification" would be desirable if you mean that taking the "savings" portion of the program and separating that from the "transfer" portion. Otherwise, attacks on it as a transfer program are as justified (partly) as any other attack on a transfer program.

    P.S. these are not transfers from “rich to poor” unless you find some way to classify those making $100,000 a year as rich. More fairly, they are transfers from everyone else starting at the bare middle class to the poor.

    ReplyDelete
  22. Anonymous2:25 PM

    If the social security retirement age had been correctly adjusted for life expectancy none of this would be a problem.

    ReplyDelete
  23. Anonymous2:17 AM

    Oh please, it's welfare. Many do die before drawing many benefits, but lots don't. All the expensive meds, bypasses, knee replacements, treatments, etc. Very few ever paid in what they collect before death. Not to mention the wives who never worked or earned as much as husbands. So many elderly alive now collecting at least a thousand per month and more in meds and health care. They never paid in that much. It's welfare and free. No criticisms like the younger get who need food stamps. Free money til death after paying in a pittance.

    ReplyDelete