the absurd observers

Wednesday, February 23, 2005

A bizarre claim from the NYTimes

To give you a sense of how incredibly unfair social security is currently examine closely what the New York Times is objecting to:

What if you died before you retired? As with many claims Mr. Bush makes about Social Security privatization, the fate of your private account in the event of your untimely death is unclear. But one issue that raises big doubts about whether that money could be inherited is the question of how the trillions of dollars the government would have to borrow to set up a privatized system would be repaid.



Under the president's proposal, when you retired, your traditional Social Security retirement benefit would be cut by an amount equal to all the deposits you had made into your private account plus interest. (The interest would be three percentage points higher than the rate of inflation.) The benefit cut would be each person's contribution to repaying the huge debt the Bush administration would take on to "pay for" privatization.



But if you died before you retired, you would have already used some of that borrowed money to set up the private account and yet would never have made any contribution to repaying the debt. So in that case, how would the government recoup your share of the amount it had borrowed? Well, it could let your share of the debt go unpaid - in effect bequeathing to your heirs and their fellow citizens ever-higher deficits. Or your spouse could inherit your private account and the benefit cut that went with it. Or the government could take its cut from your private account before the money went to your survivors - a grab that could wipe out your stash.



They essentially are complaining that it will cost the system money if people who pay money into the system their entire lives but die before retiring are able to leave some of that money to their heirs. If the people live past 65, then the government can deduct the amount they put into their private funds from the benefits they receive. If they do not live past 65, then the government cannot make this deduction and they can keep their benefits. The Times neglects to mention that people who die before reaching age 65 receive no benefits at all and thus dramatically subsidize the retirments of everyone else!!!



Proponents of the current system justify this inequity by arguing that social security is an insurance system, and like all insurance systems, those that do not need to claim the benefits of it will inherently subsidize who do. Social security, however, differs from typical insurance plans in three important ways. First it is unlike most insurance systems in that most people receive the benefit and it is only a few people who do not. Second, unlike most insurance plans, the people who can claim the benefit had nothing bad happen to them while the people who cannot claim the benfit died prematurely. Lastly the system makes no efforts to gauge the respective risks of the various people it insures. These factors all combine to screw people who are predisposed to die young. They end up paying just as much as everyone else even though they are unlikely to ever receive any benfits (and thus the value of insurance is significantly lower for them). Not only are they treated unequally, but the gap between them and those more fortunate is enhanced not diminshed. They do not get to live a long life and end up losing money becasue of it while people who are enough to live long lives take their money get to live comfortably. The Bush plan, for all its fuzzy math, false panic, and fiscal irresponsibility at least mitigates this fundamental unfairness.

2 Comments:

  • Two things:
    1. There is no "Bush plan" besides the theoretical embrace of private savings, which, of course, everyone supports. Is this blog only going to deal in the theoretical realm, or will you acknowledge the realities of situations (see the death penalty discussion)? The reality is that savings rates are incredibly low in the U.S., and some subsidization is necessary to avoid the mass poverty that befell our ancestors.

    2. The "risk" involved in this "insurance plan" is not of dying, but of living. Just as you pay insurance to protect against the risk that you will get into a car accident, with Social Security you pay insurance against the risk that you will live longer than you can work. It's the same principle, just slightly altered.

    By Blogger CB, at 3:58 PM  

  • CB, you ignore the fact that social security is not merely an insurance plan, but a pension plan. People who live normal lifespans nonetheless receive social security benefits. There is no unique risk for them that it is guarding against as a traditional insurance scheme would do. Instead it is merely subsidizing their retirement on the backs of people unfortunate enough to die young.

    As to your challenge to discuss non-theoretical issues, see my post from yesterday on the Sudan.

    By Blogger Seth Y, at 7:43 PM  

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