Thursday, August 5, 2010

Earnings, Not Lack of Social Security, Increased Past Poverty

In an otherwise unremarkable article in the Huffington Post, Edwin D. Hill gives Social Security a little more credit than it is due. Hill, the International President of the International Brotherhood of Electrical Workers (note to self: ask for a title like that at next annual review) says, "In the years before Social Security more than half of the elderly were impoverished." He implies that Social Security fixed all that.

But the real reason that half of the elderly lived in poverty before Social Security was that about half of everyone lived in poverty then, for the simple reason that the country was a heck of a lot poorer than it is today. Currently, the average annual wage is around $43,000. In 1935, the average annual wage in inflation-adjusted terms was around $15,000. Remembering that most households of the 1930s were single-earner and most had kids, the poverty threshold for a family of four in today's dollars is around $20,000. Tripling real average earnings can do a lot to reduce poverty.

Similarly, one of the Left's favorite factoids is that without Social Security, half of all seniors today would live in poverty. This makes it seem as if the fall in elderly poverty rates from 1935 to today was purely a function of Social Security benefit payments.

What they really mean to say, of course, is "without Social Security benefits, but with Social Security taxes." In other words, if we taxed 12.4 percent of Americans' earnings all their lives and paid them nothing in return, yes, poverty would increase. But in the absence of Social Security as a whole—benefits and taxes—Americans would have more income to save and most would save reasonably responsibly for retirement. (See here for some evidence.) Yes, many are pulled out of poverty either by Social Security's progressivity or by the simple fact that without a requirement to save they wouldn't do so on their own. But these are a minority.

The important point is that over the long term it's not Social Security or other programs that lift people out of poverty or otherwise give them better lives. It's the growth of the economy, which lifts earnings and standards of living. As we think about potential reforms to Social Security, some of which could present disincentives for people to work and contribute to the economy, we should consider the role of rising incomes in healing social ills.

1 comment:

Arne said...

Although the data in this analysis,, (see chart 1)
only go back to 1959, they certainly suggest that rising incomes do NOT account for most of decrease in poverty from 1959 to 1973