Why We Say Social Security Is Broken

by JoeTheEconomist August 31, 2011 5:10 AM

Milton Friedman once observed, “If the government ran the Sahara, in five years there would be a shortage of sand.”  He is right.  The government has run Social Security for 70 years, and now there is a shortage of security.   Today more than 80% of Americans believe that Social Security is heading for crisis if the government does not implement a major reform.  So a system that is supposed to provide security, now it only provides uncertainty for the vast majority of Americans. 

Social Security is theoretically an insurance product which provides supplemental income for people so that they do not outlive their savings.  This is how the Social Security administration describes payroll taxes "The payroll taxes collected for Social Security are of course taxes, but they can also be described as contributions to the social insurance system that is Social Security."  Insurance is essentially about trust, the trust that the insurer will make good on the payment.  More than 80% of Americans do not believe that Social Security will.  If Social Security is insurance, it is an abject failure.

If Social Security is not insurance, it is very difficult to tell you what it is.  It cannot be a Public Good.  First, the system benefits a selection of Americans not the entire public.  Millions of Americans neither pay into Social Security nor can they collect from Social Security.  Second, it creates nothing.  While it keeps some seniors out of poverty, it creates longterm poverty in the working generation.  The cost of Social Security to the average American is more than $500,000 in lost savings.  This is why people arrive at retirement in poverty.  I fail to see creating poverty as a Public Good.

Social Security cannot be a welfare program.  While the system can incorporate a bias into the formula to give advantages to lower income workers, the system has no idea whether beneficiaries are in need of public assistance.  Over 40 years of work, the workers situation may have radically changed.  So while Social Security may distribute a certain level of welfare, it has no idea whether the welfare served the public good or not.

So let's go back to the original theory.  Social Security is theoretically an insurance product which provides supplemental income for people so that they do not outlive their savings.  At insurance, Social Security is an abject failure.

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