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Home Publications Blogs Beat the Press Social Security Does Not Redistribute From Young to Old, It Is a Public Pension System

Social Security Does Not Redistribute From Young to Old, It Is a Public Pension System

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Sunday, 29 September 2013 20:22

One of the most pernicious myths of the Fix the Debt Gang and other Peter Peterson type outfits is that Social Security redistributes money from the young to the old. This is bizarre because people pay for their benefits with the taxes they contribute during their working lifetimes. In fact, the average return current beneficiaries receive is not especially high (less than 2.0 percent real).

If workers contributed the same amount to a privately managed pension fund and then collected an annuity in their retirement no one would call it a redistribution from young to old. It hard to see how it becomes a generational redistribution because Social Security is run by the government. But that is what Robert Samuelson is telling readers in today's column.

There is a bit more of a case of a redistribution with Medicare, but it is not from young to old. While the cost of Medicare benefits on average exceed what workers pay into the system this is not because of the generosity of the benefit but rather because the United States pays so much for its health care. If per person payments in the United States were comparable to those in other wealthy countries then the cost of Medicare benefits would not exceed the taxes paid in. Given the excessive cost of health care in the United States Medicare can be seen as a redistribution to drug companies, doctors, medical equipment manufacturers and other health care providers.

Samuelson also refers to economists who believe that productivity growth will fall off sharply in the years ahead. While there are some prominent economists who argue this case it is worth noting that this view is still far from being accepted in the mainstream of the profession. It is also important to point out that it is 180 degrees at odds with the robots will replace all the workers view.

Since this one seems complicated for Washington policy wonk types, let me repeat. If you believe that productivity growth is slowing then you absolutely do not think that we will have a problem with robots replacing workers. These views are completely opposite to each other. If you don't understand this point, please refrain from discussing economic issues until you do.

Addendum:

I see the comment on Social Security and redistribution has prompted much response. Yes, Social Security is redistributive in the sense that the people who are collecting it are not working for the money in the year they collect it. In this sense, the items they consume must be produced by the working population at the time.

However a 401(k) account is redistributive in the same way. A retiree living off their 401(k) income must rely on the goods and services produced by the working population. In the latter case, we say that the worker's purchase of assets held by the 401(k) gives them claim to the income in later years. The same logic applies to Social Security.

If people want to complain about 401(k)s being redistributive from young to old, then there is a claim against Social Security. The folks who don't see a problem with 401(k)s should not see a problem with Social Security either.

Comments (15)Add Comment
Sometimes SS pays the young
written by Robert Salzberg, September 30, 2013 12:55
Social Security also pays survivor benefits if you die with young children. Would fix the debt then say this is redistribution from the old to the young?

As a side note, Republicans say they gravely concerned with debt and deficits but are hinting they will allow the government to stay open,(for at least a week or so), if Democrats will just allow a $29 billion dollar tax cut to medical manufacturers. If the Republicans do a rumored CR for a week, $29 billion would be equivalent to a bit more than 41% of the government budget. If the CR goes to December 15th, it would be about 8% of the budget. (But since the medical tax cut is forever and not a budget window, the actual cost could be many times higher.)
Great Samuelson Conclusion if you take it out of context
written by Robert Salzberg, September 30, 2013 1:21
Samuelson concludes:

"The ambitions of many of its most talented members can be satisfied not by adding to the total output but simply by subtracting from someone else’s. They are merely rearranging economic assets among themselves. If taken too far, this promises more political division and economic decline."

If Samuelson had just pointed out that 99% of our economic growth had gone to the 1% in the last few years it would be perfect.
Sorry about late night math error
written by Robert Salzberg, September 30, 2013 1:48
In my comment above, it would be 4.1% of the budget for 10 weeks, not 8%.
...
written by watermelonpunch, September 30, 2013 2:10
Samuelson also refers to economists who believe that productivity growth will fall off sharply in the years ahead.
...
If you believe that productivity growth is slowing then you absolutely do not think that we will have a problem with robots replacing workers. These views are completely opposite to each other. If you don't understand this point, please refrain from discussing economic issues until you do.


Bravo.
And thank you.
But it's face-and-economy saving, to redistribute to medical device lobbies
written by JaaaaayCeeeee, September 30, 2013 2:21

NYT reported Sunday was mostly just finger pointing, that Senator Cruz thinks the Senate should have worked Sunday (NYT found his only statement that wasn't a lie, for 100% fact check free reporting by Peters and Weisman), and that House Republicans may offer a face-saving tax break for Medical Device manufacturers. NYT doesn't point out this defunds revenue already assigned to the ACA/Obamacare. The GOP extortion for this redistribution is to threaten an amendment forcing pols and staff onto ACA exchanges, without the employer subsidy. http://www.nytimes.com/2013/09...ed.html?hp

The Editorial Board of WaPo just brushes off our constitutional crisis and governance by extortion, saying the solution is for leaders to stop blaming and start compromising, "Both sides are inordinately concerned with making sure that, if catastrophe comes, the other side takes the political hit". http://www.washingtonpost.com/...ml?hpid=z3

No wonder voters go against their own self interest, when the best they get is play by play opposing spin, and false equivalence obscuring fact.
...
written by skeptonomist, September 30, 2013 9:16
Social Security is a program that redistributes money from young to old - working people pay their payroll taxes and this is immediately paid out to retirees, except for disability benefits, which is a redistribution from able to disabled. Of course the baby boom caused a temporary and partial resort to a funded program.

I think it is dangerous to obscure this fact because most people apparently think that SS is a funded program like 401k's or IRA's - they have been convinced that when the Trust Fund runs out there will be no more SS benefits. This is probably the most important misconception to correct.

Samuelson wants to have it both ways - he often gives the impression that the payout of the Trust Fund will mean doom, but he disparages SS as redistribution. But then in claiming that it is not redistributional, Dean does the same thing on the other side of the argument. Dean's point that there are distributional aspects to other types of retirement might be worth pursuing, but this can get extremely complicated.

Support of old people by their offspring is actually the traditional, conservative thing. When most people lived on farms the old people were just supported at home by the new heads of the family. The industrial revolution changed this, so now the government is an intermediary. The idea that everyone has to save up during working years for their individual retirement is a fairly new invention whose beneficiary is the financial industry. This is really the ultimate difference - why does Wall Street have to get a huge cut of all the money which goes to support the elderly?
...
written by skeptonomist, September 30, 2013 9:42
Should workers be forced to devote part of their wages to building up the store of private capital, which is disposed of by corporate CEO's, pension fund managers and investment banks? Why should support of the elderly involve this? The current system of private pensions, including funded government pensions, is incredibly inefficient, allowing all sorts of rake-offs and outright graft. A direct system of redistribution for pensions would be far better in most respects, and this could be done only by the federal government. SS is actually a small step in that direction - it should be taken much further. Capital accumulation can be done in other more efficient ways, whether the allocation of that capital is directed by plutocrats or the government.
falacy upon falacy....
written by pete, September 30, 2013 10:04
Beating the dead horse of a pension fund...a pension fund without a fund, now that is an interesting concept. As skepto points out, this is a fraud. The only thing available for SS payouts are future taxes. Thank goodness the powerst that be substituted 401s and 403s for increases in pension payouts. I figure to collect over $35K per year in SS in 5 years. Somebody somewhere is paying those taxes. About $17.5K per worker, apparently. That ain't chicken feed, thats a transfer from young workers like my son to good old me.
...
written by skeptonomist, September 30, 2013 10:07
To help clear up the semantics: all pensions are a kind of "redistribution" from young to old. If you save up money for your own retirement, your young self is redistributing to your old self (with a huge cut for the financial industry). SS is a more immediate, collective redistribution; all workers support all old people with immediate transfer (with a small cut for SS bureaucrats).
Integrating SS with Fed Budget was a big mistake
written by Stefan Stackhouse, September 30, 2013 11:17
The big mistake was in integrating Social Security within the federal budget. While it makes a certain degree of sense to count it as a government outlay for the purposes of econometric modeling, its incorporation in the federal budget has led to just the sort of political mischief that is outlined in this article.

The trust fund should have been set up and operated as a truly independent and free-standing trust fund. The trustees should have been directly elected by the voters rather than appointed, so that they would be directly accountable to the ultimate beneficiaries of the Social Security system. The contribution rates and benefit schedules should have been based upon the calculations of actuaries, not politicians. It should have been possible for the trustees to invest the trust fund assets in a broader range of things than just US Treasury securities. I am not so keen on the idea of the trust fund being invested in corporate stocks, but there are plenty of other good alternative investments that are considered perfectly appropriate for annuities and pension funds. Had the trust fund been earning a better rate of return over all these years, it might be in much better shape today.
paid in advance
written by coberly, September 30, 2013 5:25
people who think SS is "the young paying for the old" can't seem to realize that "the old" paid SS "taxes" their whole working life. And when they retire their SS benefit is calculated based on what they paid in. As Dean points out it is typically exactly what they paid in plus about 2% real interest. This interest comes from the growth in the economy. The people paying now for their future retirement have incomes larger than the people who paid in a generation ago. That is exactly how interest is created in the private sphere... the money you use to buy a bond or stock is used to generate growth so the next generation will have more money in order to pay you back plus interest.

This isn't very different from what happened before money was invented. The parents worked hard and not only fed their kids, but built things that made it easier for their kids to live a better life (the house, the barn, the fence...). In return... though I think most kids did it out of love and not out of calculation... the kids supported their parents when they got too old to work. SS works the same way.

But some people seem to get hung up by the idea that the money comes directly from the people paying in today. Do try to think it through.

By the way... the "average return" is not the right number to think about: Social Security is insurance, the workers insure each other against reaching old age without having ever made enough money to save enough to retire. So those who do better contribute a little to those who do worse. A poorer than average retiree might get a "return" more like 10% real. While so far, even the richest retirees get a return that is at least what they paid in plus enough "interest" to cover inflation.

People who complain about that should never buy a loaf of bread because if they saved the money instead for fifty years they would have enough to buy three loafs.
Re: paid in advance
written by Carl Weetabix, October 01, 2013 8:36
Well put.

That said, given the current paradigm I have no argument, however the current paradigm posits growth forever.

Since we live on a finite world, that however would seem unsustainable unless we get a Star Trek economy. A Star Trek economy seems unlikely due to the "Fermi Paradox", so it is likely we are going to stay constrained on this little ball, or perhaps at best, to the solar system.

In short, we need a plan B vis-a-vis "growth". That's something I wish progressive economists would address - a working economy that doesn't require growth (ie: the destruction of the planet as we know it).
Taxs verses paying for something
written by Floccina, October 01, 2013 3:08
This is bizarre because people pay for their benefits with the taxes they contribute during their working lifetimes.


No one pays for their benefit rather they are taxed. The difference is that taxes are never voluntary and you do not get anything in particular for your taxes. There is no one above the Federal Government to force the Federal Government to deliver what you may have thought you paid for. Rather the taxes will be spent on what ever the Voters and politicians want them spent on.
contract between the generations
written by jeff fisher, October 01, 2013 6:07
I have read that in France the old age pension system is referred to as a "contract between the generations".

This seems to me to be a much healthier way to think about social security than the "it's mine I paid for it" attitude which seems to prevail in the US.

"it's mine, I paid for it" is an invitation to say "that's not yours, you didn't pay for it" on issues like healthcare for children, education, etc.

It's the thinking of a selfish society. An "I got mine" society.

Of course we are such a society, so it appeals.
...
written by watermelonpunch, October 02, 2013 8:59
There is no one above the Federal Government to force the Federal Government to deliver what you may have thought you paid for. Rather the taxes will be spent on what ever the Voters and politicians want them spent on.


That's a self-contradictory comment.
As well as somehow sounding like you're criticizing democracy in favour of dictatorship?????

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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