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.