Commentary

Insuring Against the Inevitable

By Will Wilkinson
This article appeared on Tech Central Station, March 25, 2005.

Do you think Social Security gives you a raw deal? I do.

Every two weeks my wages are docked by 12.4 percent — not chump change. If the Social Security system doesn’t collapse under the weight of smug complacency, I can expect a modest Social Security retirement benefit that pays about half my current modest wages.

However, if I had the option to invest half my payroll taxes in a personal account, along the lines laid out by the Cato Institute’s Michael Tanner, I could buy an annuity at retirement that would pay me thousands of dollars more than Social Security every year from retirement to the end of my life.

Maybe I’ll have a fat IRA by the time I hit retirement, and won’t especially need the money in my personal account. In that case, I could buy the minimum annuity, which pays 120 percent of poverty, and continue to grow the remainder of the savings in my personal account. Because that money is mine, not the government’s, I can pass it on to my wife or kids when I die.

I like that. I like the idea of having choices, having freedom, and having more. So why shouldn’t I have it? Why shouldn’t you?

According to opponents of reform, I’m guilty of a fundamental confusion. The New Republic’s Jonathan Chait writes, “Privatizers portray Social Security as a kind of low-performing 401(k) plan. But the program was never intended as a personal retirement plan. It’s a form of social insurance, designed to spread risks throughout the population.”

On the popular academic blog left2right, University of Michigan philosopher Elizabeth Anderson criticizes the Heritage Foundation’s Social Security calculator on the grounds that “It forgets that Social Security is a form of social insurance, not a simple retirement plan. So it’s comparing apples with oranges.”

However, if insurance is about spreading risk, one might wonder how retirement counts as one. When Henry Rogers Seager wrote his pioneering tome Social Insurance: A Program for Reform way back in 1910, the life expectancy for Americans was about 50 years, and so it made some sense to write about the problem of “living long enough to become superannuated.”

When Social Security was enacted in 1935, life expectancy hovered around 65, the retirement age. So there was a point in time at which outliving your ability to take care of yourself was unlikely, but possible, and therefore a “risk” to guard against.

But not today. Retirement, like paying the mortgage, is an inevitability to prepare for, not a risk to insure against. As Seager put it, “If the need is one the wage earner clearly foresees as certain to arise, then I should be the last person to wish to relieve him of responsibility for meeting it.”

By removing retirement from the category of “risk,” demographic trends have largely removed Social Security from the “old-age insurance” business. So what business is it in? For most people, it’s in the business of supplementing their retirement plan.

If Social Security functions for most citizens like a retirement plan, and not as insurance, then it makes sense for those citizens to judge it by the standards of a retirement plan. If the stream of Social Security checks is going to be part of our retirement income, whether we need it or not, it’s right to ask whether we’re getting a fair deal. If we’re not, then it’s right to demand that the government make it fair.

Even if it made sense to think of retirement as a “risk,” it remains that Social Security was never insurance in any intelligible sense. As Milton Friedman noted in a 1972 debate with Wilbur “Mr. Social Security” Cohen:

“Social Security is not in any meaningful sense an insurance program in which individual payments purchase equivalent actuarial benefits. It is a combination of a particular tax — a flat rate tax on wages up to a maximum — and a particular program of transfer payments, in which all sorts of considerations other than the amount paid determine the amount received.”

Cohen’s evasive, half-joking reply was that Congress, at his behest, defined Social Security as insurance, as did an article, from his pen, in the Encyclopedia Britannica. Congress or the encyclopedia: “Take your pick,” Cohen said. When Friedman accused Cohen of committing deception through rhetoric, Cohen said, “I believe in rhetoric because it makes a lot of things palatable that might be unpalatable to economists.”

The rhetoric of social insurance is a spoonful of sugar for the middle class to help the medicine of redistribution go down. But words mean things, and the combination of a tax and a government transfer, each part of which is subject to the vagaries of legislative whim, is not “insurance,” even if you call payroll taxes “insurance contributions.” (Here’s a risk: try not “contributing.”) A pig in a dress in not therefore pretty. And an apple in an orange peel can’t prevent an apples-to-apples comparison.

Will Wilkinson is a policy analyst for the Cato Institute.