Social Security Retirement Insurance

Teeing off on Robert Samuelson (as did PGL), Mark Thoma echoes a point I’ve made before and adds an important caution:

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.

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.

Not only is privatization a bad idea (also note that we already have private Roth IRAs, Traditional IRA, 401k’s and other employer-sponsored retirement plans), it’s a political loser. In fact, Matt Y. makes a great case that it’s been such a loser for Bush and the Republicans that they’re looking for a few Democrats to bail them out, and that Democrats would be wise to decline:

Today, on several separate occassions, several smart people who I respect seemed to be edging toward the “Democrats need an alternative plan” kool-aid. It is vital that people refrain from drinking said beverage and instead taste the sweet, sweet dogma that I will lay out herein.

… The only alternative: No alternative. Keep in mind that Bush has not put forward a plan, Democrats are under no obligation to put forward an alternative to nothing. What’s more, the Republicans do not — and will not, provided the Democrats stay united — have the votes to pass anything. The math of privatization requires some combination of higher taxes (à la Lindsay Graham), massive debt (à la Paul Ryan), or miserly accounts (à la White House background briefing). Any of these options will alienate some Republican legislators. You can try to find a balance between the various factors, but the GOP majorities simply aren’t large enough to finesse this dilemma. With Democratic cover — and the knowledge that with Democratic collaboration a bill will pass — you can put together enough Republican votes to pass something. Without cover, nothing will pass. Importantly, Democratic opposition need not be the key story here. The GOP has a majority — united they can pass what they want. If privatization fails, it will fail because of disagreements inside the Republican caucus.

Hold the line.