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.