It's Monday and Robert Samuelson Doesn't Like Social Security and Medicare

Monday, 12 November 2012 08:06

In case any Washington Post readers were unsure, Robert Samuelson used his column today to tell readers that he doesn't like Social Security and Medicare. The piece begins by telling readers:

"If you doubt there’s an American welfare state, you should read the new study by demographer Nicholas Eberstadt, whose blizzard of numbers demonstrates otherwise. A welfare state transfers income from some people to other people to improve the recipients’ well-being. In 1935, these transfers were less than 3 percent of the economy; now they’re almost 20 percent."

Samuelson goes on to tell us how awful this is because these transfers:

1) take money from other government programs;

2) undermine work incentives and thereby reduce growth; and

3) encourage gaming.

Let's take each of these one by one.

If we start with the biggest government transfer program, Social Security, it would be interesting to know how it takes money from other programs. It is financed by a designated tax. Maybe he thinks that people would be just as happy to pay their Social Security taxes to support the Pentagon, but that is not what polls show. In the case of Social Security, and likely most of the other transfer programs despised by Samuelson, the tax revenue is there because the programs are there. Most taxpayers don't like the things that Samuelson apparently wants to spend money on as much as he does.

Of course if it is possible to lie to people and use taxes designated for Social Security for other purposes, then there can be more money for Samuelson's agenda. But this is a discussion of how to deceive the public, not a debate over social programs.

Samuelson also claims that there is a tendency for these programs to expand over time. In fact over the last three decade Social Security has gotten considerably less generous. The age for getting full benefits has already been raised from 65 to 66 and in another decade will be 67. Also, changes to the way the consumer price index is constructed have reduced the annual cost of living adjustment by approximately 0.5 percentage point.

In the case of Medicare, benefits were extended to cover prescription drugs, but this only became an issue because government granted patent monopolies sent the price of drugs through the roof. Drugs were not included in the original program in 1966 because their cost was trivial, but patent monopolies for drug companies now allow them to sell drugs at prices that are close to $250 billion a year above the free market price. Serious people might worry more about all the waste associated with these patent monopolies than the fact that the government is helping seniors pick up the tab for their drugs.

As far as the second point, anything that makes people wealthier reduces work incentives. The fact that so many people on Wall Street are able to play financial games and make fortunes in their 20s and 30s undermines their work incentive by allowing them to retire early. Why should we be concerned if people opt for a modest Social Security benefit rather than working? After all, they did pay for it.

This raises another point that has Samuelson very upset. He tells us:

"The Wall Street Journal recently ran a story about a couple (he 66, she 70) touring the world. They’ve visited London, Paris, Florence and Buenos Aires. Their financial adviser sends them $6,000 a month from investments and proceeds from their home sale. They also receive Social Security."

This is likely true. They probably also receive some interest on government bonds. In both cases they previously paid in money to get their current income. In the case of Social Security, they paid Social Security taxes; in the case of their interest payments, they had to buy a bond. Odds are that they are getting a much better return on their bonds than their Social Security taxes because of the program's progressive benefit structure. So what exactly is Samuelson's problem here, he doesn't think rich people should be able to get interest payments on government bonds because they don't need it?

There is one other point with highlighting here. Social Security, and to a lesser extent Medicare, are insurance programs run through the government. (Social Security is self-financiing, Medicare would be much closer to self-financing if the government did not have so many protectionist restrictions that raise the cost of health care.) If these programs were run through the private sector, which they would be if the government programs did not exist, then there would be much more money wasted in administrative costs. 

In twenty years Social Security benefits will be roughly 6.0 percent of GDP. Privatized systems eat up 15-20 percent of the money paid into the systems in administrative costs, as opposed to 0.6 percent with Social Security. This means that a privatized Social Security system would mean throwing 1 percent of GDP (@$160 billion a year in today's economy) into the garbage in the form of resources being wasted in the financial sector. This prospect would concern serious people, but apparently not Samuelson. 

Finally, the concern about gaming is entirely reasonable, but this exists everywhere. Hasn't Samuelson ever heard of insurance fraud? Social Security's retirement program has a very good track record in limiting fraud and improper payments. Other programs are less effective. This is hardly a reason for eliminating programs that serve important social purposes. But hey, it's Monday and Robert Samuelson doesn't like Social Security and Medicare. 



I also should have mentioned, in reference to Samuelson's older couple on a world tour, there just are not enough of these folks to make a difference. If we start a means test for Social Security at non-Social Security incomes of $80k and above, it barely makes a difference in the program's finances. We can make some dent by starting it at $40k, but this gives a whole new meaning to the word "wealthy."