Posted by: Jeff | November 8, 2010

Rick Perry’s Not Thinking Straight About Social Security

So Joe sent me this video with an email saying, and I quote, “Go get him Spross.” (Warning: This is a long post.)

Oh God in Heaven, where to begin? First, Social Security is not a Ponzi Scheme. Second, it’s not broke. The money Social Security pays out is on a path to exceed the amount it takes in (it may already have done so) but that’s just a financing problem — it’s the equivalent of going broke only if having any debt on your credit card at all is the equivalent of being bankrupt.

The Social Security Trust Fund — which is meant to serve as a cushion for when benefits exceed revenues — is invested in a special type of financial security that only the Social Security Administration can redeem. If the government doesn’t have the revenue on hand to redeem those instruments, it just borrows the needed money. Now, obviously that adds to the national debt, and can’t go on forever. But the point is, as long as the country doesn’t go broke, Social Security won’t go broke either — its finances do not exist separately from the government’s as a whole, and cannot be “fixed” separately either. The only way to “fix” Social Security (and I use scare quotes because it doesn’t actually need to be fixed in any meaningful sense) is to fix the finances of the country writ large (and the latter really does need to get fixed).

Now, on to Perry’s suggestion that we let states opt out of the Social Security program and create private retirement pensions instead: There are some details here worth going over, and I’ll confess I’m not 100 percent opposed to the idea — in the sense that it clears the very low bar of “not the worst idea I’ve heard from a conservative Republican” — but I think Perry gets away with some dishonesty and unspoken assumptions. And to explain I’ll need to back up a bit.

In my not-a-Ponzi-Scheme post, I said we should think of Social Security as a wealth redistribution program. Which we should, but it’s also an insurance program. (And when you think about it, insurance involves taking payments from large numbers of people, but then giving payments out only to a very small number — which is redistributive by definition.) Basically, Social Security is a hedge against the possibility that you will outlive your savings — you pay the government over your lifetime, and in exchange you’re guaranteed a steady flow of checks from retirement until you die. There are insurance programs on the private market that do the same thing, called life annuities; so Social Security is just a public, government-run version of a life annuity.

Now, the classic Republican scheme to privatize Social Security has been to just take the money people usually pay in Social Security taxes and invest it in the stock market instead. That was the reform George W. Bush tried to push through after the ’04 election. Given the economic crash of ’08, I think we can all see why that would’ve been a terrible idea.

But Perry’s suggestion is a bit more interesting. He mentions Galveston, Matagorda and Brazoria counties — and in Galveston County at least, what they did was take the money people would’ve payed into Social Security and bought them private life annuities instead. So their retirement wasn’t tied quite as directly to the stock market, and thus was a bit more protected form the ups-and-downs of the economy.

Still, a life annuity is just an insurance program. And the thing about any insurance system — whether it’s public or private, and whether it’s a life annuity, health insurance, or whatever — is that it operates as a risk pool. And the bigger the pool, the better it operates; the more people you have paying in, the fewer any one individual will have pay to make sure everyone who needs to be covered is covered. In other words, bigger pools mean lower premiums.

Also, you want a pool that is as representative of the overall population as possible. If you’re running a health insurance system, you don’t want your pool over-representing people who get sick. Ditto people who will live to 100 if you’re running a life annuity system. If your risk pool over-represents the people actually at risk, premiums will again have to be higher to cover everyone the insurance system pays out for.

To sum up, the bigger your risk pool is, and the more representative of the overall population it is, the better your insurance system will work. And there’s no pool bigger or more representative of the overall population… than the overall population. This is one of the primary economic reasons why things like health insurance and retirement pensions just work better when run by the government. (On this point, I’d go read Joseph Heath’s excellent book, Economics Without Illusions — specifically the fourth chapter, which I’m totally ripping off here.)

So, if having your insurance pool run by the government just works better, what’s the point of all this? I’m sure the reason Perry would give is that his reform brings Social Security’s revenue and benefit payments back into balance. Also, it removes the liability of maintaining Social Security from the government’s shoulders, making it one less thing to possibly add to our debt. Which is all true. (I think.)

But this sort of privatization reshuffle is hardly necessary to accomplish the first goal — and as long as you can meet the first goal, meeting the second goal is entirely superfluous. For one, we could could just cut the benefits given out by the Social Security program as it exists now; either by lowering the size of the payments themselves, or by raising the retirement age. Conversely, we could increase revenue; either by raising the percentage of income that is taxed or by raising the cap on the taxable income. (Right now, FICA taxes for Social Security rest at roughly 12 percent, and only apply to the first $100,00 a citizen earns.)

But Perry’s a conservative, and thus ideologically opposed to tax increases. And the public, needless to say, is hostile to both tax increases and benefit cuts. (Though arguably more hostile to latter than the former.) So instead, he’s proposing this privatization scheme to try to work around that impasse. In point of fact, I find a lot of everyday conservative voters defend privatization on the assumption that it doesn’t involve benefit cuts.

Which would be great if it were true, but it’s not. Remember, the problem with Social Security is that it’s paying out more than it’s taking in. So bringing what it pays out in line with revenue will of course involve benefit cuts. And privatization simply involves taking the amount paid in and shifting it onto the private market. But the amount people are paying in is still the same in either case, so how can privatization not involve benefit cuts? That extra money we’re getting now has to come from somewhere.

The answer is that privatization cuts benefits by stealth. Right now, Social Security is progressive; the ratio of benefits-received-to-taxes-paid is better for poor people than it is for rich people. Not hugely so, but by a bit. But under Perry’s scheme, since the value of a participant’s annuity is commensurate with their payments into the system, that progressivity goes away. In Galveston County, poorer participants are worse off than they would be under Social Security, and richer participants are much better off. There being no free lunches in the real world, this outcome should surprise no one.

Of course, Social Security’s progressivity is precisely what annoys conservatives about it — they don’t like wealth redistribution in principle. And since conservatives tend to be richer than the mean income in America, they also feel like they’re getting a raw deal out of the program. (I hope I don’t need to point out the solipsism of this attitude, as it rests on not caring what kind of deal other people less fortunate than you are getting.) And such conservatives make up the voter constituency to which Perry responds.

In sum, Perry doesn’t support privatization because he has a nonpartisan, technocratic desire to fix Social Security. He supports privatization because he’s a conservative ideologue.

What we should do is lift the income cap on the FICA taxes. Make all income everyone earns taxable for Social Security, not just the first $100,000. That would be a significant step towards stabilizing our country’s finances, and it would ensure that the framework of who pays what into the system — and what they get out of it — remains fair, just and morally defensible.



  1. And Rick Perry recently knocked Massachusetts’ health care plan. Why would he knock the health care plan passed by the current 2012 GOP front runner?

    Beats me.

    Perhaps he’ll share on The Daily Show tonight.

  2. Actually, one thought I had but didn’t add to the post — as it was already grotesquely long — was that, performance-wise, I thought Perry was extremely impressive in that clip. He’s good-looking, confident and charming in an easy-going way, and while what he’s saying is complete nonsense he constructs it in a manner that seems commonsensical. If the economy still sucks in 2012, I could see Perry giving Obama a genuine run for his money. Which is just hugely depressing.

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