Thursday, April 21, 2005

Hatcher Saves Social Security

I've had enough criticizing liberal columnists for awhile. It's look shooting fish in a barrel. So instead today I'm going to save Social Security (and the same winning solution will save Medicare as well).

Social Security reform is such a sexy topic that I know readers have been saying to themselves – I wonder what the Hatcher’s views are on such reform. Well, wonder no more, readers, because I’m offering my entire reform plan, the most novel you will have read, in this blog, as usual free of explicit charge.

There are two reasons why Social Security is becoming an increasing burden on the working generation – people are living longer, and birth rates have, on average, declined, causing the ratio of elderly to working stiffs to rise. The Ponzi scheme could continue apace if we passed a Logan’s Run law (does anyone remember that show?), and if birth rates remained the same.

Here is my take – make it more like a private insurance market. As I see it, the value of social security to the current generation paying the payroll taxes is not only what they expect to receive in benefits themselves down the line, it is the significant risk-sharing benefit of not having to provide for your parents in the unfortunate event that the courts someday don’t allow you to starve them to death once they’ve become an inconvenient financial burden to you. Some of us will be unfortunate enough to see our parents live a long time, and to hedge against that risk, it makes sense to buy insurance that provides for your parents should they live beyond their expected terms.

But here is the rub – the value of that insurance to an only child who might face the entire responsibility himself, is much larger than it is to a child who is one of, say, four, like both me and my kids. Presumably, in the absence of some old-age insurance market for our parents, my brothers and I face one-fourth the potential burden faced by Professor Vic, for example, who is an only child (explains a lot when you think about it). Collectively my brothers and I would be willing to pay the same amount for insurance as Prof. Vic, implying that we’d only individually face one-fourth the insurance premium he would willingly pay.

So it boils down to this – I should pay one-quarter of the payroll taxes as compared to Professor Vic. (And perhaps even less - a private insurance company would consider all relevant actuarial factors, and I suspect that lifespan is probably negatively related to the number of children one raises.) With my brothers and I being pooled with Professor Vic as equals, we are essentially required to subsidize his parents in their golden years. Implicit subsidies from large families to small get larger the bigger the disparity in family size.

Now, Professor Vic might protest – why should I get screwed? And he may have a point. Having only one child, his parents were in a better relative position to provide for all of their retirement needs through direct savings; they didn’t need to invest as much in the next generation. So another solution that would be equivalent in many ways would be to have all workers pay in at the same amount, but collect based upon the number of kids we parented. The more kids you had, the more social security benefits you get.

So you do one of two things – either gauge benefits to children spawned, or the tax burden of the individual to the number of siblings he or she has. There are different parental incentives created under the two systems. Under the “benefits gauged to kids” system, if I have more kids, I get more benefits, but this is at the expense of being able to save more on my own. Under the “tax burden dependent on number of siblings” system, my kids face a lesser burden, and I don’t feel it is as necessary to leave a bequest for them when I kick.

There is a welfare aspect to Social Security, which I would support maintaining, but perhaps as an entirely separate program. But for the bigger picture, make it more like private insurance in some manner.

2 Comments:

Blogger Professor Vic said...

As noted by the great Hatch, this is, indeed, the most novel SS reform plan most of us have seen. Ok, I a couple of major issues, and one philosophical point with Hatch's proposal.

First, Hatch assumes that the expenses that people incur on the government is for their retirement. While Hatch is entirely correct that his parents have done more to solve the Social Security problem than my parents, children also place burdens upon society. Large families place larger burdens upon public schools. If public education costs $8,000/year per student, at a real interest rate of 4%, 18 years of public education uses up resources that could be instead saved and invested to provide $1.25 million in retirement benefits for some lucky person in 68 years.

It also seems clear to me that charging me higher taxes rather than cutting my parents' benefits does not change incentives (except very indirectly) to solve the problem. I mean, I had little control over the fact I was an only child (except the fact that I was so perfect that my parents must have figured that they could never do better by having another child). Taxing me for something I had not control over is not only unfair, but it provides few incentives for modifying behavior in a positive way.

Hatch's proposal to instead pay SS recipients based on how many kids they had so that my parents would receive 1/4 the benefits of Hatch's, then gives (or more correctly, would have given) real incentives for my parents to alter their behavior in a way that would have worked to help out SS.

Philosophically, Hatch's idea illustrates one difference between liberals and conservatives. Liberals believe that problems should be solved at the national level while for conservatives problems should be dealt with at the individual or family level. For Sen. Clinton, caring for the elderly "takes a village" while for Sen. DeLay it "takes a family."

One quibble as well. SS is not a Ponzi scheme. A true Ponzi scheme, also known as a pyramid scheme, collapses upon itself because eventually you run out of people upon which the pyramid can build itself. The number of people needed for the next level of the pyramid evenually becomes infinite. In SS, we will never run out of young people. The ratio of young to old simply gets smaller over time, but it will never approach zero unless people stop having kids completely or people grow to be infinitely old. Of course, while there are fewer and fewer (to a limit) young to support the old, the young are earning more and more over time making it easier for them to support the elderly. Thus, SS can be saved through a handful of quite simple measures. The debate about moving to benefits indexed to consumer prices rather than wages is precisely this issue.

10:51 AM  
Blogger Hatcher said...

Good comments from Professor Vic. Let me respond with a few.

First, there is a public benefit to the societal resources marshalled in public schooling, and 12-16 years is probably the more appropriate assumption for duration. The incidence of the taxes that fund those efforts will generally burden families with kids more than those without to the extent such families need larger homes; also elderly increasingly move to retirement communities where all public funds go to supplying each with a personalized golf cart. There is a public benefit in that keeping the little truants in one building for the majority of the year makes it easier to stop what would otherwise be one long crime spree. If you cutoff a few old people's social security, you don't have to sweat a crime spree. But I knew Professor Vic would make this point, and it has some validity. But he walked right into my trap - privatize schooling, and the problem is solved. I also suspect that declining birth rates have a greater economic impact than what we see reflected in the SS issue; I'm guessing there has been a lot of research on this topic but I am too lazy to investigate.

Regarding his second paragraph, he makes another good point, which is why I suggested the alternative of capping his parent's benefits rather than increasing his tax burden. But even with an increased tax burden, with his parents able to save more and collecting the same amount as mine, as the lone heir to the fortune, intergenerational transfers make him even - this puts him in a position to have to be nice to his parents, whereas they are in prime position to screw him if they so desire. That is one problem with SS as it now stands - it relieved parents of some portion of the incentive to be nice to their kids.

Point taken - it's not a Ponzi scheme, but I just like that word too much.

11:23 AM  

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