[Pen-l] Re: Social security

[Michael Nuwer <nuwermj@xxxxxxxxx>]

David B. Shemano wrote:
>  
> I am all for "insurance against poverty," whatever that means.  I don't 
> believe that is what social security as presently constituted is.  It is 
> simply a scheme to increase present government revenues to pay for 
> present government expenditures.  When it stops being a net contributor 
> to revenues, the Congress is going to do something relatively dramatic.  
> Only time will tell.

Mark Thoma offers another view:

Social Security is about insurance, not savings, By Mark Thoma, February 24, 2005

[snip]

Social Security was never intended to be an individual savings account. It was 
intended to provide a social safety net for people in retirement and families that 
lose a primary wage earner, and to provide the insurance at less expense than 
could be done privately.

People saving for their own retirement must save enough to sustain themselves 
should they live a long time or incur large health care costs. But this is not the 
optimal arrangement. Precisely the same goal can be attained with a smaller amount 
of savings by each individual. If everyone pools their funds, then each person 
needs to contribute only enough to support the average life and health expectancy 
of the group.

It is no different than fire insurance. Without such insurance, people would need 
to save enough to replace their homes should a fire break out. All risk must be 
borne individually, and most people end up saving far more than needed compared to 
an insurance program providing identical benefits. Others are left without any 
protection at all. With fire insurance, each person pays a smaller amount into a 
fund, and those unlucky few who need the insurance collect. There is no 
expectation that the amount paid in and the amount collected will necessarily 
match. Social Security insurance is no different.

But why does the government need to provide such insurance? Couldn't the private 
sector offer it instead to those interested in participating?

Before 1935, there was no such private insurance system available, so that is one 
reason to suspect the private sector will not offer such insurance. The lack of 
adequate pension plans offered by employers today is another.

In addition, economic theory suggests this may be an instance of market failure - 
that is, a case in which the private market does not provide the optimal amount of 
a good or service, such as insurance. Government intervention is necessary to 
correct the market failure.

Even if insurance is provided by the private sector, when left to provide for 
themselves many people do not make good decisions on saving for their retirement 
years. Social Security was created to solve the problems that arose when such 
insurance was left to the private sector.

The privatization debate has not paid enough attention to the insurance aspect of 
Social Security. It is social insurance, not an individual savings program, and it 
is important to recognize why it is optimal for government to provide social 
insurance collectively rather than leaving it to individuals.

Leaving it to the private sector didn't work before 1935, and there are good 
reasons to believe it won't work now.

Whether Social Security actually needs fixing is another debate. If it is to be 
fixed, anything that threatens to undermine the social safety net - and 
privatization is a step that pushes in that direction - also threatens the social 
contract the government forged with its citizens to provide for their economic 
security.


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