Marketplace did an interesting story on what the under-30 set thinks about the economy. A recent poll found that the economy is the number one issue for this group in this election cycle–the first time in five years that that honor did not go to the Iraq war.
During the reporter’s interviews with twenty-somethings, Social Security came up a few times. And while this wasn’t mentioned explicitly, it’s fascinating to me that the public perception of how this program functions is so completely different from the reality. There is no box with your name on it, into which all of your contributions are deposited; the tax you pay is immediately transferred to a current senior citizen. Most people do not realize this, and that confusion is of course intentional. It’s easier, politically, to sell a retirement program that everyone thinks they benefit from than to sell a social insurance program (cf. Medicaid, Medicare, Welfare), but Social Security is most definitely the latter type of government initiative.
What makes Social Security so successful is also its largest flaw: that it is funded by a dedicated tax. This makes it trickier to adjust the program’s funding. It also makes people feel like they are investing in something. But while it’s sort of true that their money is going towards a stake in future benefits (though there is no guarantee what those benefits will be), Social Security is not an investment vehicle. Nor should it be. And it drives me crazy to hear people compare the return on their Social Security contributions against the returns they’re seeing in the stock market–and then use this as evidence that the program should be transformed into something like a 401k. We all have plenty of opportunity to invest in 401ks–and stocks and bonds and houses and education and every other risky asset under the sun. What we don’t have–and what only the government can provide–is a safety net if all those other investments don’t work out. (Take a look at your investment portfolio this week. You really think people don’t need any insulation from the market?)
Social Security is generally described by economists as insurance against living too long–i.e., longer than you expected to live. You will receive benefits for as long as your live, and a larger payoff if you outlive the average person on whom benefits are based. Women, especially, often outlive their spouses and their savings, and would be destitute without some other source of income. Social Security also provides insurance against income risk: Not everyone will earn enough during their working years to adequately save for retirement, and Social Security’s very progressive benefit structure makes up for this a bit. Yes, personal responsibility is important and moral hazard is bad. But pure luck has a massive impact on our lives–where we’re born, who our parents are, where we go to school, the friends (and networks) we make along the way. Not everyone fully “deserves” what they get.
There’s a lot of talk of means-testing the program, and that would be fine if it weren’t for the political consequences of doing such a thing: Far, far fewer Americans will have a stake in its long-term health and funding, and most will begin to see it as something for some “other” group–which will almost certainly lead to its demise. There are other intermediate steps that we can take to shore up Social Security’s finances, and it’s really a pretty basic math problem: Raise taxes and/or cut benefits to make up the known shortfall. That’s it. This is particularly striking when we compare it to much more intractable issues like Medicare and health care spending generally, where prices continue to increase exponentially with no end in sight. If you want to worry about the return we’re getting on our investments, and government programs’ effects on our nation’s solvency, worry about those.
