http://www.washingtonpost.com/wp-dyn/content/article/2011/03/06/AR2011030602926.html
Here's a shockingly bad blog post by Mark Thoma, an economics professor at the University of Oregon, in which Thoma attempts to rebut Samuelson's claim that Social Security has all the essential features of a welfare program —
http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html
In his attempt to refute Samuelson, Thoma uses an old fallacy in his blog post — that Social Security is an insurance program, similar to fire insurance.
I refuted the 'Social Security is insurance' fallacy in a previous post, since that fallacy is often repeated by people who wish to pretend that Social Security is a successful social program, and who can't answer legitimate criticisms of Social Security.
I called Thoma's blog post 'shockingly bad', because Thoma is an economics professor at a major university, and his post includes some obviously false statements, in addition to misuses of the term 'transfer payment' — which is a standard term, defined in introductory economics text books --
http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html
Social Security is *Not* Welfare
Robert Samuelson is making the same wrong argument about Social Security being welfare that he's been making for years:
Why Social Security is welfare, by Robert J. Samuelson: ...Here is how I define a welfare program: First, it taxes one group to support another group, meaning it's pay-as-you-go and not a contributory scheme where people's own savings pay their later benefits. And second, Congress can constantly alter benefits, reflecting changing needs, economic conditions and politics. Social Security qualifies on both counts.Since he is rolling out the same old column (and apparently getting paid for it), I'll just roll out the same old response. This is from March, 2005, just a few weeks after I started this blog:
Fire Insurance is not Welfare and Neither is Social Security: Robert Samuelson, and many others, appear to believe that any time there is a transfer of income between individuals or groups it is welfare. This is wrong. According to Samuelson:
Welfare is a governmental transfer from one group to another for the benefit of those receiving. The transfer involves cash or services (health care, education). We have welfare for the poor, the old, the disabled, farmers and corporations. Social Security is mainly welfare...Not it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not "mainly welfare."
Notice how Thoma mocks Samuelson for supposedly 'rolling out the same old column', even though the only thing Thoma can do in response is make a false comparison between Social Security and an insurance policy.
If it's true that Samuelson keeps 'rolling out the same old column', that's a good thing, because it will help to remind honest people of the problems with Social Security — especially when a professional economist like Thoma can't provide an effective rebuttal, while still being convinced that he should write a blog post in response.
It isn't clear why anyone would believe that Social Security functions like an insurance policy, since there are obvious and important differences between them — so much so, that no useful comparison can be made between the two.
When you purchase an insurance policy you are paying a fee (the policy premium) to be in a risk pool, in order to receive a payment for some uncommon harmful event. Thoma uses the example of fire insurance in his blog post, and a fire insurance policy only pays out in the unlikely event that a covered item (like your home) is damaged by fire.
Risk pools can only function by charging a fraction of the replacement cost of whatever is being insured, and by only paying out to a small fraction of the policy holders.
If every insurance policy holder of a particular insurance company were to suffer a significant loss that required a large payment from the insurance company, the insurance company would fail for dramatically underestimating the risk of the policies it issued, and the policy holders would receive only a fraction of the promised policy benefit — if they received anything at all.
None of these risk pool characteristics apply to Social Security.
Every working adult who lives past the maximum Social Security retirement age (70 in 2015) will receive Social Security payments, since the Social Security Administration automatically begins sending checks to contributors who reach age 70 — unless they apply to receive the payments even sooner, prior to reaching the maximum retirement age.
Not only do all Social Security contributors expect to receive benefits — they expect to receive more than they paid into the plan — just like a savings account.
That's the reason you can find studies like this, that compare Social Security to a private investment account — people expect their Social Security contributions to earn a positive return, not a negative return like an insurance policy —
http://research.stlouisfed.org/publications/review/05/03/part1/GarrettRhine.pdf
In short, it's common knowledge that people who have been forced to contribute to Social Security expect it to perform as a pension plan or saving program, despite Thoma's insistence that people should view Social Security as an insurance policy.
Since every working person expects to draw on Social Security (and will, provided they live long enough), it can't function like an insurance policy, taking in small premium payments to make rare payments to a small group of policy holders in the event of a catastrophe.
And since people are happy to never collect on an insurance policy, since then they are spared the tragedy that would cause a payment under the terms of their policy, their view of Social Security stands in direct contradiction with their view of insurance.
Note that this comparison of Social Security with an insurance policy isn't just somewhat confused — it's completely absurd at its root, since becoming too old to work is not an economic risk from a rare occurrence, as Thoma wrote — it happens to everyone, which is why Social Security will pay to every contributor who lives long enough.
Comparing Social Security with a risk pool is obvious nonsense, since drawing on any retirement plan in old age isn't a rare catastrophe — it's a necessary condition for every person who lives long enough. If only a small minority of people ever wished to retire, or lived to an age where they could not work, comparing Social Security with an insurance policy would make sense, since then the condition it was intended to address would be a rare occurrence — like one's home burning down.
In the next several paragraphs, Thoma demonstrates more confusion over the term 'transfer payment', as well as attempting to strengthen his comparison between insurance and Social Security, by writing that different people will collect different amounts from Social Security, just as they do with insurance policies. Different people will also collect different amounts from state lotteries — does that mean a lottery is also the same as an insurance policy and Social Security? --
http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html
Just because an economic activity transfers income from one person or group to another does not make it welfare. Fire insurance transfers income. Some people pay premiums for their whole lives and collect nothing. Others, the unlucky few who suffer a fire, collect far more than they contribute. Does that make it welfare? Of course not.
Social Security is no different, it is an insurance program against economic risk as I explain in this Op-Ed piece. Some people will live long lives and collect more than they contribute in premiums, some will die young and collect less. Some children will lose their parents and collect more than their parents paid into the system, others will not. But this does not make it welfare.
Is gambling welfare? Gambling transfers income from one person to another. Does that make it welfare? Loaning money transfers income when the loan is paid back with interest. Are people who receive interest income on welfare?
Notice how badly Thoma confuses the definition of the term 'transfer payment'.
A 'transfer payment' is a redistribution of income, not a payment for goods and services, as Thoma states in his description of gambling and loan payments. Here's a common definition —
A noncompensatory government payment to individuals, as for welfare or social security benefits.One economics text I have defines transfer payments as —
payments made to individuals for which no goods or services are concurrently rendered.The same economics text lists the three key money transfers in the U.S. system as welfare, Social Security, and unemployment insurance benefits.
Transfer payments are not counted in the national income, because they do not constitute an exchange of goods and services — money is simply being taken from one person and given to another, for no economic benefit — which is the main reason Samuelson called Social Security welfare. Thoma's examples of gambling and money lending do not meet the definition of a transfer payment, because both examples constitute a payment for service — that is, a voluntary payment given for economic benefit.
In the quote below, Thoma acknowledges that welfare is a transfer payment (using the traditional definition) — but he attempts to isolate welfare in a special class of transfer payments he calls 'pure money transfers', which he acknowledges provide no economic gain, since they are a zero sum game — but Thoma hangs on to his false analogy that Social Security is insurance (even though, short of an early death, retirement is a certainty), in an attempt to pretend that Social Security does not fit his description of a 'pure money transfer' perfectly --
http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html
There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives). ...
Angry Bear agrees with me on this and the two of us have been independently saying the same thing (in fact, I first encountered AB in a Google search on Social Security, insurance, and risk). As AB said (the full text is well worth reading):
What does all of this have to do with Social Security? Those who are hard-working, fortunate, and not too profligate will have a large nest egg at retirement and Social Security will account for only a small portion of their retirement portfolio. This is tantamount to paying for insurance and then not needing it. This happens all the time -- every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That's the nature of insurance: if you don't need it, then you'll always wish you hadn't purchased it. Only in the context of retirement insurance is this considered a crisis.When I think of welfare, I think of pure money transfers from one group to another without any economic basis for the transfer. In such cases, one person’s gain arises from another’s loss. But economic activity that results in the exchange of goods and services is different. It is not a zero sum game. One person’s gain does not come at the expense of someone else.
On the other hand, those with bad luck or insufficient income will not have a nest egg at retirement. Because of Social Security, instead of facing the risk of zero income at retirement, they are guaranteed income sufficient to subsist.
This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large.
The main feature of Social Security is not welfare as Samuelson asserts. The main feature is insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading and causes unnecessary class distinctions and resentments from the losers ex-post. More importantly, it ignores and obscures the important role Social Security plays in society as insurance against the economic risks we all face.
If you think you are so rich and powerful that you don’t need such insurance, consider this. The stock market collapse of 1929 at the onset of the Great Depression wiped out substantial quantities of wealth. The typical stock was worth only one sixth its pre-crash value once the bottom was reached. Whatever insurance existed in the stock market evaporated as the crash unfolded.
It wasn’t the poor jumping out of windows on Wall street. If you think it can’t happen to you, think again.
Notice that the supposed 'pure money transfer' quality that Thoma ascribes to welfare, does nothing to differentiate welfare from Social Security, even given his description of Social Security as a form of insurance against economic risk — it's just as easy to view welfare as an activity that results in the exchange of goods and services. Welfare is more properly viewed as a form of insurance against economic risk than Social Security, given that the vast majority of people will pay taxes to support the economic assistance that welfare provides, but will never need that assistance themselves.
That is, welfare really can operate like a risk pool — an insurance policy against economic risk — because the condition for which it applies — the inability to support oneself at a subsistence level — is a relatively uncommon condition in society overall, whereas the need of individuals to retire from working to support themselves is not. Welfare in any form would not be possible if poverty were the norm, since it would be impossible for a small minority of people to support a group many times their size at a subsistence level.
And notice that Thoma does not even address another critical point that Samuelson made regarding Social Security that makes it a welfare plan — there is no promise of any benefit.
Samuelson points out that Congress has repeatedly altered benefits, and that people only complain when they reduce benefits, as if a 'contract' (like an insurance policy) has been broken. Samuelson then points out the 1960 Supreme Court decision Flemming v. Nestor, where the court explicitly rejected the argument that Social Security contributors have a contractual right to Social Security benefit payments.
How well would an insurance policy work, if an insurance company could change the terms of an existing policy at their whim? No reasonable person would purchase such a policy, since it would not offer any real protection for the economic risk they were attempting to protect themselves against. With this in mind, no government program can be viewed as insurance, since no government program makes a specific promise of a benefit that is enforced by law.
As I read Thoma's blog post, I kept having to remind myself that he is a professional economist at a major university. I feel sorry for any students that must take his classes.
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