I have received a surprisingly large amount of email in response to my post on money markets investments and Social Security. To remind everyone, the small point I was making was that even if people can invest some of their Social Security money that does not mean they have to invest it in the stock market. They could invest it essentially risk-free in a money market account and get a low-risk, low-return payoff. So no one is being forced to accept risk that they don’t want. (A particular witty response that I enjoyed was whether political critics would consider it “too risky” if people invested their portion in Treasury or other government bonds.)
Most emails, however, did not respond to that particular point but were more general. It is said that I have missed the point about the purpose of Social Security. The argument is essentially that notwithstanding the fact that people could invest in money market funds, some people might foolishly invest in the stock market (for any number of proffered reasons), and the purpose of Social Security essentially is “stupidity insurance”—i.e., to protect people from their own stupidity. Relatedly, it is also to “keep old people from starving in the streets.”
It may be obvious to point this out, but the alternative to Social Security is not that old people will be destitute. It is just that old people might not get to retire (and worst case scenario might have to work until they died), or more realistically, that they might have to work longer in order to get enough money to retire at 70 or 75 instead of 65. And the proposal on the table isn’t even to eliminate SS, it is simply to allow people to invest some of it, and the concern is that some people might invest their sliver poorly. So no able-bodied person will be destitute if he makes bad investments, he might just have to retire at 68 instead of 65 (and if he makse good investments then he can retire at 62) .
Retirees who aren’t able-bodied are covered by a huge web of other social welfare programs, not the core Social Security program that we are discussing. So the recurrent theme of my email traffic that old people will be destitute because of bad investments is not a coherent position. It may be unfortunate that someone who makes good investments can retire a few years earlier than someone who makes bad investments, but that is a long, long way from saying grandma will be sleeping in a cardboard box. But first consider why the “stupidity insurance” argument doesn’t add up more generally.
The Stupidity Insurance Argument Proves Too Little. First, the “stupidity insurance” argument proves too little in that it doesn’t explain Social Security as it actually exists. First, imagine a hypothetical able-bodied guy who makes such stupid economic decisions that he decides to never gets a job—say he lives with his parents at home his entire life, plays Madden on Playstation 2 all day, and lives off an allowance from his parents. He turns 65. His parents die. He has no job and he is destitute. Is he eligible for SS? No—because he never worked and never paid into the system. You have to actually work a certain number of quarters during your life in order to be eligible. The primary purpose of SS is simply not a social welfare program designed to keep people from being destitute, or stupid guy would be entitled to SS. The logic has something to do with something like an earned entitlement—and part of that earned entitlement involves making the decision to work rather than not work. Second, it pays benefits to high-income people who don’t need it. Surely there are plenty of other eligibility requirements that prevent someone from receiving SS. Nothing about eligibility turns on someone’s income or how destitute he is or how stupid his economic investments have been. Again, those are covered by other social insurance programs.
Nor does Social Security actually insure you from being destitute. You could take your SS check every month and invest it speculating in the stock market and if you make bad investments you are still destitute. It is still up to you not to make stupid investments, so it simply changes the time of the decision to post-retirement rather than pre-retirement. Or you could have very high credit card bills or other liabilities when you retire, such that almost all your money goes to paying your creditors. It is not clear to me why a 64 year-old cannot be trusted not to invest his social security entitlement in the stock market wisely prior to retirement, but can be trusted as a 65 year old post-retirement to spend his money wisely. So unless we actually control every investment someone makes, we are not providing destitution insurance anyway.
The Stupidity Insurance Argument Proves Too Much. It also proves too much, in that it doesn’t explain why we would prohibit this one particular “risky” investment, but allow people to make all kinds of other risky investments that could make them destitute. If the idea is to protect people from their own stupidity, what do we do about the guy who drops out of Harvard to start his own computer company (which will probably fail)—and is not named Bill Gates? Or someone who uses his kid’s college fund to start a new business? Most new businesses fail, and when they fail, people often lose their life savings and could become destitute (although they wouldn’t be entitled to Social Security). Should we prohibit people from investing their life savings in a new business (rather than forcing them to put it into a passbook savings account) because they are too stupid to realize what a bad investment it is? Indeed, could we in good conscience ever allow someone to quit their job to try to become a painter or an author? Should we only allow 30 year olds to start a new business but not 58 year olds because the latter is too close to retirement age?
In short, if there is a coherent justification for Social Security (and opposition to SS reform) it must be something more along the lines of what I understand it actually to have been its original purpose when it was set up during the New Deal—that Social Security is a retirement entitlement that people earn by working. The idea is that people who work hard for their adult lives are entitled to some degree of leisure in their golden years. And that regardless of whether Homer Simpson works for 25 years as a blue-collar worker at Springfield Power or Montgomery Burns works for 25 years as the president of Springfield Power, they are entitled to the same minimal degree of comfort and leisure in retirement, regardless of what they earned while working. What matters is that they both worked hard for the requisite number of years—if you work, you get it and if you don’t work you don’t get it. Paternalism and protecting old people from destitution have nothing to do with this. Thus, the program is in fact designed to have some redistributionist, or perhaps more accurately stated, “equalizing” component to it.
This might also provide an argument for why we are concerned about people frittering away some of their SS on bad investments. If you invest the bit of your money that would otherwise go in SS in a bad investment, that may mean that you have to work an extra couple of years before you retire. If we think that people have an entitlement to retire at the age specified by SS, then perhaps this is contrary to the purpose of SS. I personally don’t find the argument to be all that persuasive, but it strikes me that a persuasive argument against Social Security reform must be grounded in the actual purpose of the program, rather than overwrought and unrealistic concerns about starving old people.
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