The Core Problem with Social Security

I am happy to see others making the point I have tried to make for years:  That the coming financial problems with Social Security are not its biggest problem.  Megan McArdle and Clive Cook say it very well:

In this post on Paul Krugman and Social Security,
Clive, as usual, targets with laser accuracy the real problem with the
Social Security system: not that it is bankrupt, but that it encourages
people to make extremely bad decisions about providing for their future.

It starts with childbearing:  social security systems seem to exert downward pressure on birthrates,
in effect undermining their own actuarial base. Social security
socializes the benefits of childbearing in providing for retirement,
but no one has yet figured out how to socialize the main cost, which is
turning your life choices over to a screaming pre-verbal dictator.
People are thus tempted to free ride on the childbearing of others, and
the more generous benefits are, the more they seem to free ride. This
is one reason that Social Security, which used to have more than 30
workers for each retiree, now has only three, headed towards two.

Social Security also encourages people to leave the workforce
earlier than they otherwise would. People are healthier than ever at
65, but while in 1950, almost half of all men over the age of 65
worked, that number is now less than 20%. This appears to be highly
correlated with the spread of defined benefit pensions such as social
security, which offer no advantage to delaying retirement. Indeed,
Social Security perversely penalizes anyone who takes early benefit but
continues to work, docking a third of their earnings.

Finally, Social Security discourages private savings. This is
terrible for two reasons. If future fiscal problems force the
government to reduce benefits, the people who didn't save enough
because they relied on those promises will be made much worse off than
they would otherwise have been.

The other problem is that Social Security is not a productive
investment. Privately saved money is mostly lent to corporations that
mostly use the money to do things that make the economy more
productive, such as R&D and capital equipment upgrades. Social
security "contributions" are lent to the government, where they are
mostly spent on things that could not be remotely described as
improving our economy's productive capacity, such as farm subsidies.

Excellent.  I ran the numbers and discussed what a bad investment return was paid by Social Security here.  I discussed Social Security as intellectual welfare here.


  1. Mesa Econoguy:

    Socialist Security is basically generational warfare, in addition to redistributionist crap.

    Not only does it enourage bad decisions, it makes everyone de facto wards of the state, as there is no opt-out.

    Paul Krugman should be shot for making what amount to “it’s okay because the state said so” fraudulent economic arguments designed to sway those with shoe-size IQs.

  2. Flash Gordon:

    This is certainly an accurate statement of the problems with social security. While perhaps not obvious these circumstances are not hard to understand or contemplate. So why is there so much resistance from so many quarters to doing anything about this until it implodes on it own?

    It may be mostly liberal Democrats refusing to face up to this, but they find plenty of allies among professed conservatives as well. Everyone can see that the ship is taking on water but have decided to sit and wait to be dumped into the sea.

  3. ErikTheRed:

    I'm currently reading the book Boomsday by Christopher Buckley, and it contains a rather innovative modest proposal for dealing with the social security problem...

  4. David B:

    SS is a victim of its own success: it was created so that the elderly weren't starving on the street. Now, the elderly are the most affluent and influential social group. Obviously something's broken - the only question is whether it should be fixed, scrapped, or what.

  5. Jim Collins:

    The main flaw in Social Security is the way that it enabled companies to dump their pension programs. A local school district just had a teacher's strike. While negotiations were going on, one of the newscasts interviewed a man who said that the teachers didn't need medical insurance after they retired because they had Mecicaid. As far as savings go, I was in a 401k program where my bonuses were considered my contribution. I maxed it every year for 5 years. I was let go from my job 2 days before I would have been vested. $80,000 gone just like that. Nine other people who were in the same situation, were let go on the same day.

  6. Andy:

    Jim, were the only contributions in the 401k your bonuses? I'm not sure I understand how and what it was that you lost.

    Don't mean to be callous but if it was something that the company totally controlled, then it wasn't really an investment rather, it was the company pretending to give you company stock & you pretending it was income. I thot that this type of dirty trick was outlawed. Or?

  7. Jim Collins:

    We had the option of having our performance bonuses paid into our 401k. Because I'm single I took that option because of the losses I'd take in taxes. The deal was that the company would match 2 for 1, but you didn't own the match until you were vested. I wasn't vested until the first day of the month after my five years were up. That would have been September 1st. I was downsized on August 30th. This plan had been changed a few years before, but we were grandfathered in under the old plan. The ten of us who were let go were the last people in the company eligable for the old plan. I've already talked to a lawyer who said that there is nothing he can do for me.

  8. MarkG:

    There is one big fallacy in the argument that SS discourages savings. Consumer spending fuels 2/3 of the economy. If people save more they spend less. Less spending results in less investment in production by business.
    Unfortunately many people do not take the time to learn a fiat money system. The true shortfall of the Social Security system is whether the economy will produce the goods and services with a smaller workforce. It's all about productivity gains. Money is not the issue.

  9. Jim Collins:

    If a person is relying on their savings for retirement, they are going to be severely disappointed. Investing is where it's at. Long term investing in a stable diversified mutual fund is probably your best bet. Let's face it, all a savings account does is make money for the financial institution you have your account with. They take your money, invest it and then pay you a small percentage of the money they make with your money. If the Social Security would have been allowed to keep it's money out of the General Fund and had been allowed to invest this money, we wouldn't have the problems that we face now.

  10. Andy:

    Jim, that's a bummer -- older but wiser. In retrospect I guess you would have taken the money and sheltered what you could via other investment vehicles.

  11. Jim Collins:

    That's true Andy, but the point I was trying to make is that under the old style pension system, I would have been partially vested after five years. When companies started to dissolve their pension systems in the 70's, the attitude was "Oh! Don't worry about it they can always collect Social Security.". Social Security was originally intended to cover those people who were not covered by pension plans, not to be a replacement for pension plans.

    What I find strange about my situation is that I can't carry over my balance in my 401k to my 401k at my new job, I'm going to take a 40% loss. If our Government was at all concerned about this, there should be a way for me to transfer my balance to a designated retirement account without taking this penalty.

  12. Andy:

    Jim, rather than take the money under my old 401k when I quit to start my business, I went to my Chase bank and opened a 401k account. I'm still waiting for the transfer to take place any day now.

    You ought to check into it. There's other IRA schems, but to do the 401k, I believe you have to own a business. But so what? You should be able to go to State and establish an LLC w/o a lawyer and get er done for a couple hundred bucks. Even if you don't intend to do business, it could just sit there & who knows, one day you may decide to go into business and as far as anyone's concerned, you'd be in business for all that time. Any of the above ought to beat giving Uncle Rangle 40%