More on Social Security

In my last post on social security Honest Partisan entered a post by Matthew Yglesias. I believe that the relevant part which he was referring to is this:

What I really don't know how you do in a sound-bite, but which is also important, is something that gets to the difference between social insurance and a retirement plan. Social Security is a social insurance plan that insures working people against disability, death of a breadwinner, or some combination of longetivity and low earnings that would make retirement with dignity impossible. Private account schemes simply don't do this. Most proposals would leave a disability insurance program in place, but completely eliminate the longetivity/low earnings insurance. People who earn little will have little in the way of an account balance, and people who live longer will simply have to stretch their money further. Talk of average returns and so forth obscures all this. The whole point of social insurance is to compress the range of outcomes, reducing downside risk through methods that limit upside gains. Moving the mean point around isn't the point. On average, fire insurance is a bad idea, since very few people's homes actually burn down. This is the only way for companies to make a profit selling the stuff. People don't buy fire insurance to maximize their expected financial outcome, they do it because avoiding the possibility of catastrophic loss is worth something to people. For fires, private insurance works well enough so we don't have social insurance. Hedging against longevity on the private market, however, will be extremely difficult thanks to adverse selection. Hence social insurance, which Bush wants to eliminate.

First off, I agree that we need to support poor people who can't work. I don't know that Social Security is a very good method of doing this however. First off, I would prefer this money to come from an income tax rather than a payroll tax. I regard the Social Security payroll tax as being an extremely regressive tax and can find no justification for it's structure. Regardless of this though, I think we can agree that the core of the social security debate is over how a person's retirement years should be financed, not how to help the disabled. Yglesias says that hedging against longevity on the private market is extremely difficult. I find that argument to be fairly weak, as life insurance companies do that all the time and are fairly successful. A great number of people participate in such programs and they have mechanisms to deal with adverse selection. Life Insurance (more properly death insurance) would seem to be exactly like longevity insurance, except hedging against the reverse. Yglesias does have a very good point about insurance in general however. It is not a way to achieve maximum financial value, it is a way to avoid maximum risk. It is important to remember that you cannot insure against a certainty and much of Social Security is an attempt to do just that. This TCS Article about Health insurance explains better what I am talking about here. A lot of what he talks about obviously applies to Social Security as well. Essencially though, unless I am misreading Yglesias is what he likes about Social Security is that it is a means of wealth redistribution. I agree that it is. However, unlike some wealth redistribution schemes which take money from the rich and give to the poor (which I have my problems with, although I can see some merit in some of them) this particular scheme takes money from workers and gives to retirees. Yes, some workers are rich, and some retirees are poor, but the opposite is true as well. In this regard, I fail to see how any liberal could like Social Security as it is currently constructed. Now, I will agree that as a corrollary to my first point (we won't let poor people starve) it does seem that we have a public interest in ensuring that people plan for their retirement. Social Security as it is presently constituted however doesn't seem like a very good vehicle for that. Now, this doesn't mean that the Bush reforms are a good idea, but it does seem like a discussion over what should be done, and a willingness to do something seems to be in order.