What Is Social Insurance? Take Two

By James Kwak

More than a year ago I wrote a post titled “What Is Social Insurance?” about a passage in President Obama’s second inaugural address defending “the commitments we make to each other – through Medicare, and Medicaid, and Social Security.” In that post, I more or less took the mainstream progressive view: programs like Social Security are risk-spreading programs that provide insurance against common risks like disability, living too long, poor health in old age, and so on.

Since then, I undertook to write a chapter on social insurance for a forthcoming Research Handbook in the Law and Economics of Insurance, edited by Dan Schwarcz and Peter Siegelman. In writing the chapter, I decided that things were somewhat more complicated.

In brief, I still think that social insurance programs—or, rather, the programs that are generally thought of as social insurance, since there is no good definition of them out there—provide risk-spreading insurance when viewed over a long time horizon. So from a lifetime perspective, the insurance function means that most people are made better off, even though a program as a whole may be a zero-sum game in dollar terms. But in the short term, it’s pretty clear that Social Security and programs like it are largely redistributive rather than risk-spreading, because in the short term I have no chance of collecting retirement benefits and little chance of collecting disability benefits. (Given the nature of my work, there aren’t that many disabilities that would prevent me from earning more than I would make in disability benefits.)

In other words, I think a crucial feature of social insurance is that it is redistributive in the short term (in an ex ante sense, not the trivial ex post sense that is true of all insurance) but risk-spreading in the long term. I happen to think that the world would be a better place if we considered the long term and, therefore, decided to maintain these programs. But I don’t think it’s obviously true that a lifetime perspective is correct and a one-year perspective is incorrect.

In particular, if you think that Social Security won’t be around when you retire, then you would logically take a short-term perspective in which you pay taxes but never receive benefits (unless you go on disability, or you die while Social Security still exists). Then you should rationally want to eliminate Social Security as soon as possible. Conversely, if you believe that Social Security will be around when you retire, then you will evaluate the whole thing, including its insurance value, which will make you more likely to vote for it. So it’s not surprising that a major component of the anti-Social Security campaign consists of trying to convince young people (who ordinarily gain the most from insurance, since they face the most uncertainty) that Social Security cannot exist when they retire.

If you want to read more, the draft chapter is up on SSRN. Enjoy.

20 responses to “What Is Social Insurance? Take Two

  1. Assuming that economic thinking is dominant, effective, or even ‘correct’ is not necessarily accurate. There is another way of considering the statements about Social Security not existing long enough for a payout: it is about fundamental honesty and the trustworthiness of advocates.

    If it is about mathematics, both the advocates for and against Social Security (etc) can say that the program is underfunded. One can demand further funding to save it, the other state that it has failed and should be cancelled.

    If people are considering and voting trust, rather than mathematics, then this argument will always favor cancellation. The program was sold as a ‘you get out what you put in.’ If it has become a black hole, then the advocates for it have been demonstrated untrustworthy. This is a straight path to their defeat.

  2. Moses Herzog

    I haven’t read the SSRN paper yet, but am I the only one having a hard time understanding this sentence from Kwak’s post??

    “(Given the nature of my work, there aren’t that many disabilities that would prevent me from earning more than I would make in disability benefits.)”

  3. Joe in Morgantown

    @Moses: disability pays on the order of $1000/month. An unskilled manual laborer might easily be injured enough that he couldn’t make that much as a laborer.

    But for an office worker, even a severe disability— like becoming unable to walk— would only slightly decrease earnings potential. And since the baseline earnings are typically also way over $1000/month, finding SS disability insurance useful is unlikely.

  4. Perhaps these programs are underfunded because the funding goes to general revenues and it gets lost in the shuffle.
    Leslie

  5. “So it’s not surprising that a major component of the anti-Social Security campaign consists of trying to convince young people… that Social Security cannot exist when they retire.”

    My opinion is that this strategy is working. I have heard three interviews with young people over the past week who all said, in some form, “We are not counting on Social Security.”

  6. “So it’s not surprising that a major component of the anti-Social Security campaign consists of trying to convince young people… that Social Security cannot exist when they retire.”

    The implication here is that, if someone is convinced that SS will not exist when they retire, then they should be against paying SS taxes? Perhaps that might be true in the idealized game-theoretic world of self-interested individuals, but what is the reality? Surely some would not agree, since doing away with SS taxs will harm present day folks who rely on SS distributions, no? Are there statistics on self-interested vs altruistic thinking wrt SS?

  7. http://en.wikipedia.org/wiki/Fiat_money

    Now re-discuss “insurance” against violent weather, global food shortages due to environmental pollution, wars more costly than the booty that they steal under their created fog of war, stock valuations 2000 times what their FIAT value is in the “open market” (think biotechs), and a capricious, avaricious, hedonistic and delusional tribe of political Nihilists doing math….yeah, – snark – Social Security is the problem….

  8. Well, for anyone wondering where taxes will go to individuals needing health care, without any argument:

    http://www.huffingtonpost.com/2014/05/14/chelsea-manning-gender-treatment-transfer_n_5320772.html

    Bur Grandma who cooked 3 meals a day for her family, without pay, for 50+ years – no “social security” for her if she can no longer do free labor for “family”…??!!

  9. Anonymouse

    Who wants to open up grandma’s closet and see what else is hiding in there besides making meals and doing free labor for like minded “family” members. And I won’t bend over for no stinkin member to stick a knee in my drug hole either.

  10. Stop projecting – there is nothing in Grandma’s closet.

    Maybe the reason you don’t know any truly decent people is because you are just a crab embedded in the pubis of people on THE LIST that is put out by The Department for the Disembowelment of the Living.

    A liceform spouting psychobabble (moral judgement?) about the host life form that it is feeding off of is one sick cartoon….

    Taxes paid for the sex change operation for the military person in jail…Grandma be damned….

  11. Anonymouse

    Well she’s got something inside her that’s about to kill her.

  12. Gotcha – I supposedly logged in to the internet from Tehran, Iran when I was physically at a Ramada Inn in East Hanover NJ….LOL

    you POS liceform….

    This is the typical USA chick response to the POS liceforms in that timewarp that allows hell to exist on earth – AKA “Middle East”:

  13. Correction, my laptop registered that I was logging in from URMIA, Iran, not Tehran when I was PHYSICALLY in NJ – like there aren’t enough a-hole MEN to deal with in NJ, I have to be exposed to some freakin’ NUT JOB from Iran having the capacity TO RUIN MY FINANCIAL LIFE!!!!

    Government is too big???!!!

    Meanwhile, here is PROOF that no one is doing “God’s Will” on this planet what does everyone tell you? “….you can’t do anything about it….”. THIS IS THE REALITY IN IRAN – what a POS USA is to pile on “economic sanctions” supposedly because some DELUSIONAL religionists insult each other in the Middle East!!!!

    http://www.latimes.com/world/middleeast/la-fg-iran-lake-20140321-story.html

    You all (Gen X and Y) need to sit down and STFU about taking away social security…no one is going back to Dickens England…..where is your “marketing” and “psychology” analysis of what people NEED to be CIVILIZED….great that Manning can become a girl, but why does Grandma have to die of hunger and neglect in that trade of “tax” FIAT DOLLARS?

  14. Anonymouse

    School kids might get wiped out on your watch, or already been, but even if they had, you would have missed it. Good fishin at Sandy Hook this time of year, I hear. Before you die of hunger or neglect, you should consider it. Maybe just a pass by for good luck sake.

  15. Moses Herzog

    I know at least one of the hosts of this blog is a basketball fan. Thought this might be of interest.

    A TigerMom very intimate with Bigdaddy Johnson.. I am curious if the TigerMom will have anything in the way of “social insurance” if this relationship comes to a close?? (Will the male leopard change his spots?? Do male leopards often change their spots?? Or rarely change their spots??) Keep an eye on the daughters….. keep an eye on the daughters…..
    http://deadspin.com/the-man-who-helped-bring-down-donald-sterling-is-an-ass-1576960521

  16. Anonymouse

    If the husbands finds out you’re keeping an eye on the daughters, deaths will occur for very strange reasons.

  17. http://rt.com/usa/159244-operation-american-spring-washington/

    The reason these movements are not succeeding, at this point in time, is because they are not being liceforms – need to sneakily embed like a crab in the pubis and destroy the host from within….

    If I have recorded over the years the CRAP that spewed out of men’s mouths – how they REALLY “feel” – one thing is for certain, the entire AIPAC leadership would be IN JAIL.

    At least I have succeeded in reminding everyone that if some scum bag FROM A FOREIGN LAND’s “security” force comes around asking for information about a neighbor, friend, or family – IT IS CRIMINAL if a USA citizens provides those a-holes with information – squealing on your fellow American. Yup, it is a CRIMINAL ACT to provide information about your fellow USA born and bred citizen to a LYING goon from Switzerland, Israel, Saudi Arabia, RUSSIA, POLAND, etc etc etc – even if they PRETEND that they have the right to gather that information using a “global corporation” smoke screen that it is for screening a person for a “job”. Bullsh-t. It’s SPYING AGAINST USA and a CRIME. All they have the right to collect is PUBLIC INFORMATION such as, after a court case, were you CONVICTED of the crime.

    Innocent until proven guilty.

    Shocker how the MEDIA does the exact opposite 24/7 – it’s sickening and people are seething with outrage – watching people NEVER BEING INNOCENT UNTIL PROVEN GUILTY on TV.

    Keep it up, “Moses”. Your red herrings are so smelly, a person goes INSANE to try and get as fast and as far away from them as is humanly possible.

  18. It’s Friday, so time for your friendly health care provider’s weekly PSA (Public Service Announcement) as you all head into the weekend:

    http://www.wikihow.com/Treat-Crabs-(Pubic-Lice)

    The virtual shampoo version coming out soon :-) Clean your “private” internet service provider’s dark hairy corners…

    Nothing like health care costs covered by killing a few Grandmas:

    http://www.foxnews.com/health/2014/05/08/syphilis-cases-on-rise-in-us-men/

    No one LOCAL eats the fish caught off Sandy Hook NJ….but since your FIAT $$$$ is all vapor, you might want to consider getting a food cart to cook the fish you catch and serve it up to your imported slave class that poops in the street off to the right of the cart – they’ll worship you as a good Mass’er, yup, teach them all about the “god” you believe in….

  19. This is a peculiar comment community.

    A brain injury could very well make Mr. Kwak not able to find employment that would pay more than disability.

  20. Anonymouse

    So what Zach, everyone can fit into that category, so what’s your point?