Wednesday, December 26, 2012

What is social security?

I have no idea what social security is supposed to be. My dad thinks it is money that is going to be there when he retired because he put money into the fund when he was working. But he also tell a similar story about Medicare even though he knows Medicare is going to pay out many times what he paid in.

There was a good article at Bloomberg discusses the two main narratives about Social Security and how neither one is internally consistent. I'm too lazy to find the link.

Matt Yglesias at Slate discusses why Important People, which I think is code word for people who studied econ 101 but not econ 201, hate social security.

Matt's point is mostly right but it would help to distinguish the two parts of social security: the retirement component (what my dad think it does) from the welfare component (the part where money is redistributed to the poor). Important People probably only dislike the welfare component because the retirement savings component has very little efficiency cost.

Why does retirement savings not do the damage the welfare part does? The shortest answer is that it is a mandated benefit: if you work, you get some money but it can only be used to save for retirement. If the payroll tax costs $1 and workers value that $1 of extra social security benefits at 75 cents then the "real" tax is only the missing 25 cents. The easier way to see it is that the payroll tax does create an incentive not to work if you don't get social security benefits if you don't work.

The welfare part, though, is like any other tax. It's part of a tax system we setup that changes people's decisions from things like "should I work part-time at McDonalds for $7/hour?" to "should I work for $2/hour?" Sometimes people don't work because they're too dumb, but in a lot of cases people are too smart to work for next to nothing.

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