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.