Monday, August 18, 2008

More on Social Security and poverty…

It seems one of my comments from yesterday struck a nerve, both here and over at Arnold Kling's blog. Here's the offending passage:

Sen. Obama says, "Social Security has lifted millions of seniors and their families out of poverty. Without it, nearly 50 percent of seniors would live below the poverty line." This is a common talking point, but let's be clear on what it means: if we forced people to pay Social Security taxes all their lives but didn't pay them any benefits, yes, nearly 50 percent of seniors would live below the poverty line. But this is a silly standard. If we were truly "without" Social Security, we would also be without Social Security taxes, which individuals could then save on their own for retirement. So the better question would be, "Without Social Security taxes and benefits, what would the poverty rate among seniors be?" The answer is, about the same as the current rate.

I made two points:

First, saying that a system that collects an eighth of people's wages all their lives and pays them a benefit at retirement reduces poverty versus an alternate system that collects the same amount of taxes but doesn't pay them a dime at retirement is a silly comparison. This was my main point, but it's also one that you either accept or you don't. To me, it seems so obviously a silly comparison that if you don't understand that I'm not sure what else I can do.

Second, I said that in the absence of Social Security the senior poverty rate today would be around the same. This I'm willing to concede is too strongly stated, though it's worth considering the range of issues pro and con (see below). That said, what I'm conceding is that the elderly poverty rate would be higher than the current rate (officially around 9.5 percent), not that "nearly 50 percent of seniors would live below the poverty line." That I believe is simply wrong. In any case, here are some things to think about:

Individual saving: Would people most at risk of poverty in retirement save as much in the absence of Social Security? Probably not, which is the strongest reason to believe Social Security reduces poverty (if not by 50 percent…). That said, I'm not convinced that run of the mill low earners (meaning low skilled, versus due to health or social reasons) simply wouldn't or couldn't save.

Progressivity: The Social Security benefit formula is progressive, such that low earners get higher replacement rate than higher earners. This will reduce poverty rates versus an un-weighted scheme, though I wouldn't over estimate the effects of progressivity. Redistribution in practice is often quite haphazard; while Social Security likely reduces poverty versus an otherwise identical program with no redistribution, it would be quite easy to design a system with better poverty protections than the current program.

Average rates of return from Social Security: Social Security pays a below-market average rate of return today because it paid an above-market rate of return to early participants. In the absence of Social Security, past retirees would have been poorer and current retirees, on average, richer. This would reduce poverty in retirement.

Total saving rates: Fuchs, Krueger, and Poterba surveyed public finance economists, asking what the personal saving rate would have been if Social Security had never been enacted. The median response was that the saving rate would have been 60 percent higher. If so, output per worker today would be around 20 percent higher. Presumably this would drag more than a few low earners out of poverty.

Labor force participation: Social Security contributions are viewed by many workers as a pure tax, meaning that (accurately or not) they don't expect to receive anything in return for them. This will tend to reduce labor force participation. Moreover, Social Security benefit rules tend to encourage earlier retirement, which would also reduce lifetime earnings.

Portfolio allocation: Social Security is in many ways equivalent to mandatory saving in an all-bond portfolio: low risk, but low return. For higher earning individuals this doesn't make much difference since we can alter our non-Social Security savings portfolio to get the mix of risk and return we like (this is one reason why personal accounts wouldn't be a "better deal" for higher earners; if we want more stocks we can already do it). For lower earners, though, Social Security constrains their portfolio to one that is probably lower risk than they'd prefer.

Additionally, Arnold Kling makes the point that the reduction in elderly poverty over time is as much attributable to the growth of the economy than to Social Security. Per capita national income today is far higher than it was in the 1930s, so even assuming no Social Security program we should expect to see poverty declining over time.


John Bailey said...

One of the most important points that this dicussion misses, is the fact that the life expectancy
for the average black male did not reach 65 until 1995.

My interpretation of that fact would be that from the inception of the program until 1995, about 60 years, that the black male paid into the system without receiving most benefits.

As of 2004, their life expectancy had reached almost 70, while white males lived another 5 years. That translates into roughly twice the benefits.

It is likely that this data is a rough surrogate for the difference in life expectancy between the less and more affluent.

Paul Lawin said...


I certainly agree that it is “silly” to talk about SS benefits without talking about SS taxes. When politicians do this, you are correct in pointing out their error. Similarly, let's not talk about taxes and ignore the benefits.

Reading your post, the key sentence seems to be “I am not convinced that run of the mill low earners simply wouldn’t or couldn’t save.” I assume the meaning here is “In the absence of SS, a meaningful portion of the taxes-not-paid by low earners would have been saved”. Without this statement, the rest of the post (e.g. the returns on stocks) is irrelevant.

When I estimte how much of those taxes-not-paid would have been saved, I have to include the impact of benefits-not-paid. Consider low earners and their parents. Let's assume that the benefits paid to the parents in any given year were equal the taxes paid by the earners in that year. What happens if there had never been either the taxes or the benefits? I imagine a continuation of the traditional paygo private retirement program called “children care for their parents in their old age”. The taxes-not-paid, on average, would have been transferred to parents to offset benefits-not-paid.

I say this largely because I think that the “windfall” benefits paid to the parents of low earners were not spent on country club memberships. They were spent on necessities. These parents didn’t have the option of simply “reducing consumption”. (In those unusual cases where the parents of low earners were in pretty good shape financially, SS benefits probably increased inheritances or some other parent-to-child transfers.)

If SS really was “progressive”, the benefits paid to the parents were greater than the taxes paid by the low earners. In this case, these families got a net gain from SS. If SS had any impact on savings, it actually increased the savings of low earners. (In this case, of course, it would have also decreased the savings of high earners.)

So, in my alternate universe where we didn’t enact SS, when I consider both taxes and benefits and concentrate on low earners, I see savings at similar or even lower levels than we actually had.

Andrew G. Biggs said...


I'm not sure I really understand your post. But it might help to run through a couple of cases:

1. Too poor to save: These folks will have a forced reduction in consumption while working, due to payroll taxes, but a (larger) increase in consumption in retirement due to benefits, which are progressive.

2. Low income, but saves: These folks will offset the payroll tax against their personal saving, and probably by a greater than 1-to-1 ratio because of the progressive retirement benefit. For these people saving likely declines.

3. Middle income, saves: These people receive benefits roughly equal to their taxes,so they'll offset personal saving roughly dollar-for-dollar against payroll taxes. No real change in saving.

4. High income, saves: These people receive less in benefits than they pay in taxes. The effect on their saving is ambiguous: they may save more due to the negative income effect, but they might also work less due to the tax levied on their labor income.

For these reasons, Social Security taxes/benefits probably don't reduce saving on a dollar-for-dollar basis. But it's very likely and widely accepted that they do reduce saving.

Paul Lawin said...


I think we are talking past one another. As you pointed out earlier, we can look at SS two ways. One is to look at what happens in each calendar year. We know that SS was mostly paygo up until the late 80's, so what came in the door usually went out the same year.

The other is the birth-year cohort or one-person view. It looks at one person or a group of people across time.

Your response seems to be entirely the second view. I'm trying to get you to consider the first.

When I say we need to connect taxes and benefits, I'm connecting them in single calendar years because SS is paygo. If it had not been enacted, taxes-not-paid would not have been available to [low wage] workers for either personal consumption or savings. The workers in your group 2 would not have saved any portion of the taxes-not-paid, they would have sent that amount to their parents so the parents could afford to eat.

Remember that this post is on "Social Security and Poverty". I'm thinking about what would have happened to low earners absent SS. I'm not addressing what would have happened to the over-all saving rate.

In all four of your cases, you are ignoring an important variable in the worker's decision - "how much do I need to send to my parents each month?" You are assuming the SS had no impact on that question, hence you are ignoring SS benefits when you estimate what the workers would save. (It's easy for us, living in a world with SS, to forget that question used to be very relevant.)

I'm not asking you to compare the taxes worker's paid with the benefits those worker collected. I am asking you to compare the taxes a workers paid to the benefits those worker's parents collected in the same year that the workers were deciding how to allocate there incomes between saving and consumption. That is the actual historic view that drives "where we would be today without SS".

(With appropriate mods, it's also very relevant for the policy decision on what to do with SS next, but this comment is already too long.)

Andrew G. Biggs said...


You're right that I've been looking at things from a cohort or individual basis, but to know the aggregates in each year you need to stack everyone up.

You're right that in the absence of Social Security people would have needed to send more money to their parents. Part of the rationale for Social Security was that as people moved from farms to cities the multi-generational households were breaking down and so these informal payments weren't being made.

You can argue that Social Security merely substituted for child-to-parent payments that would otherwise have taken place, so poverty wasn't much affected. My guess is that SS payments pretty significantly exceeded what otherwise would have been paid and so poverty fell, although not as much as you might think in a static sense.

I'm not sure how well this addresses your question, although I still don't think I completely understand it.

Paul Lawin said...


I think we're now on the same page regarding the theory. You are correct that we may differ on the extent to which SS taxes and benefits simply formalized the informal transfers that would have been made anyway, as compared to the extent that they caused a real increase in consumption by old people (and a corresponding decrease in consumption or saving of workers).

I think there may be a difference between "in total" and "for low-earner families". For low earners, it's possible that the aged parents received more dollars in SS benefits than they would have received from their working children, while at the same time the dollars that the workers paid in SS taxes were about equal to the dollars they would have sent their parents.

I'm not sure if the net impact of past SS taxes and benefits was a decrease in the amount low-earners had available for savings, or if it was an increase, or a wash. It does seem clear to me that the benefits paid to parents had a favorable impact on the financial options of the children, and these benefits need to be included as offsets to taxes when we're thinking about "where today's retirees be if we hadn't enacted SS".