Monday, November 28, 2016

Social Security Helps Reduce Poverty, and Your Point Is.....?

Social Security is one of those policies that can be politically difficult to criticize without being hit with some argument of "you don't care about the elderly." Not only do many Americans receive these benefits, but many on the Left laud it as the American government's most successfully anti-poverty program (see here, here, here). Most recent is the Left-leaning Center for Budget and Policy Priorities' study that breaks down state-by-state the levels of poverty reduction. Essentially, the CBPP researchers calculated the number of households that would have been below the poverty line without it, and compare it to the number that are below it with Social Security. By using Census data in that fashion, they found that Social Security saves 22 million Americans from poverty. This is not to say the finding is wrong per se, but it could use a little more contextualizing, instead of being used as a non-starter for Social Security reform:

  1. Even with Social Security, 10 percent of the elderly are still in poverty, which is unsurprising given how low Social Security benefits are in the first place. 
  2. Many elderly depend on this as a sole source of income. This is going to be all the more pronounced when the Social Security Trust Fund runs out of money and the current protocol of reducing benefits by 21 percent sets in. This is worrisome for the elderly because for 33 percent of elderly beneficiaries, nearly 90 percent of cash income comes from Social Security. 61 percent of elderly beneficiaries depend on it for most of their cash income. 
  3. This problem framing assumes a false dilemma between Social Security and elderly people dying on the streets because they have no money in their savings. It makes the all-too common erroneous assumption that a lack of government intervention means that the only alternative is inaction. If Social Security were to go by the wayside, the question is whether individuals are able to procure alternative sources of income when they retire. This is coupled by the fact that removing Social Security would also remove a significant portion of the payroll tax, which would mean higher wages for employees. Given the substitution effects, the poverty reduction effect of Social Security is overstated. 
  4. This false dilemma assumes there is not a better option for those saving for retirement. Considering that Social Security functions both as a retirement plan and and an anti-poverty measure, the primary metric of Social Security is rate of return. As I pointed out a while back, there are better ways to invest for a better rate of return, such as stocks or AAA-corporate bonds. Even voluntarily investing in government bonds yields a higher rate of return. Being able to invest your payroll tax into capital assets is all the more important, especially when Social Security's annuitized benefits are not inheritable. 

According the Social Security Administration, the Trust Fund is expected to run out in 2034. I'm sure that Americans are more interested in the here and now, especially with President-Elect Trump. However, if we want to help the poor out and make sure their retirement savings are solid enough where poverty is a minimal-to-non-existent issue, then we need to think differently about the issue. Because of the superior rates of return on private investments, I am for keeping retirement benefit accounts in the private sector. I know there are some out there who think that "privatization" is the "p-word," which is why next-best alternatives include President Bush's idea of putting part of one's payroll tax in a personal retirement account (PRA) or New Zealand's approach of having the Social Security Administration pay a flat dollar benefit with the intent of helping lift seniors out of poverty, the latter of which would help Social Security return to its anti-poverty roots. We need better ideas than raising payroll taxes, raising payroll tax caps, lowering benefits, or increasing the retirement age. It might be easy to kick the can down the road because the Trust Fund expiration date is so easy, but if we don't find innovative and effective ways to deal with Social Security, we could very well see social unrest on our hands because at that point, the poverty reduction effects of Social Security will be ever diminished.

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