Things To Keep In Mind When Discussing Social Security

Will Wilkinson writes:

  • * The Social Security tax is regressive.
  • * The overall benefit structure accomplishes, on net, either no downward income redistribution, or a small amount of upward redistribution. (I.e., it is either close to a wash, or regressive, redistribution-wise.)
  • *The system is structured to disadvantage current workers over current retirees, and is thus invalid as a “compact” between generations, if we take the contract metaphor seriously.
  • * Because the Social Security tax hits least wealthy workers hardest, Social Security prevents many from accumulating wealth, and reinforces the divide between investing an non-investing classes.
  • *Social Security makes it impossible for many of the least wealthy to accumulate wealth that they can pass on to their children or grandchildren, thereby helping to perpetuate generational inequality.

It is crucial to note that whatever else it might be, Social Security is not PRIMARILY insurance, if it is insurance at all. The redistribution to the elderly poor it does manage to effect is incidental to the huge volume of transfers back and forth from within the same income bracket. (Net income-related redistribution come to less than 10% of total transfers) There’s a huge amount of deadweight loss in all this pointless churn.

A system of personal accounts plus a means-tested safety net would:

  • * Be more progressive in every way.
  • * Eliminate most of the unjust intergenerational transfers that are at the heart of the current system.
  • * Almost entirely close the gap between the investing and non-investing classes.
  • * Help the least wealthy workers accumulate inheritable wealth.
  • * Protect the elderly against poverty AT LEAST as well.

32 Responses to “Things To Keep In Mind When Discussing Social Security”

  • Dude –

    You have got to stop the inherited wealth myth. The money in your Retirement Plan under the latest Bush proposal does not pass to your heirs, it goes into a life annuity, which by definition terminates upon death (this “life” annuity). The only way to change that is to buy this option in which case, a cut of youur money goes to Morgan Stanley or merrill Lynch or whoever. There is no proposal out there which allows a free pass through of your fund balance to your heirs like an IRA or 401K.

    This will not close the gap between the investing and working close almost entirely, as long as their is a lower capital gains tax rate than a tax rate on ordinary income, there will always be a gap and the president will always consider a dollar earned because you got a good tip while playing golf with your buddy at the country club, more valuable than a dollar earned busting your butt at your job.

  • Michael,

    It is my understanding that Bush’s plan has not been put into details yet, it is still based on what he has said.

    So according to what Bush said, it does have an inheritance part:

    Options like this will make voluntary personal retirement accounts a safer investment that will allow an American to build a nest egg that he or she can pass on to whomever he or she chooses. Americans who would choose not to save in a personal account would still be able to count on a Social Security check equal to or higher than the benefits of today’s seniors.

    If, on the other hand, the details of his plan omit this, than that would seem to directly contradict what he said above. But in the meantime, I don’t think it’s unfair for me to take him at his word.

  • I remember a few years ago a TV news show did a piece on SSI, and they noted that after 3 or 5 years all the money that was paid into the fund by an individual is recouped with interest by the individual. So, it would seem that all monies collected after the 5 year period is actually welfare. And when you consider that some of these entitlements are being paid out to individuals who are wealthy and are also receiving lucrative pensions it seems even more offensive.

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