It's a mixed up muddled up shook up world except for Lula


The Economist carries a story about Brazil's reform of its antipoverty programs. Given the marked disparity between classes and regions in Brazil, I'll be watching with interest to see if this works. What really caught my eye, though, was this:

The state already spends an ample 16% of GDP on social programmes at the federal level alone. But little of this reaches the poor. Pensions consume two-thirds of social spending; health and education, universal programmes that offer little extra benefit to the poor, account for much of the rest. Social assistance specifically for the poor accounts for just 0.4% of GDP.

In a sense, we've got the worst of both worlds in a lot of government programs: everyone seems to love huge redistributive programs like Social Security, but people are so wigged out at the thought that they might be, yes, welfare recipients (which they are) that it's politically impossible to do the kind of means testing that would at least lower the cost of serving the program's nominal purpose of reducing elderly poverty.

The delusion that Social Security isn't a welfare program, but some kind of "social insurance" seems to be one of the major obstacles to reform. "I paid in to the system," people say, "no fair changing the rules on us now!" Except someone has to get shafted here, eventually. It's just a question of who. It can be in 2017 and on, when outlays exceed FICA reciepts, or it can be sooner (and a smaller amount) if we fund the transition to private accounts up front. But because people don't think of Social Security as welfare, they're under the (legally unsupportable) impression that they've got some kind of divine right to the same "rate of return" that the last generation saw.

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  1. There isn’t much point in running around shouting “welfare! welfare!” at Social Security recipients, since these will resent it and no one is proposing to cut their benefits anyway.

    The issue is benefit levels for future retirees. The reason to means test them is that if we do not, our ability to perpetuate Social Security’s main (and very considerable) accomplishment — the dramatic reduction in poverty among the elderly — will be jeopardized.

    I will grant that at the moment this is something of a moot point, as the only people in politics talking about reforming the system are trying, halfheartedly by now, to sell privatization schemes no less expensive than the system we have now. The point is that if we are to address this problem effectively we will have to do so in a way that addresses the purpose and financing of the system, not whether future retirees are deserving or not. That argument advocates of economy will never win.

  2. I was going to add that comparisons of Social Security with Brazilian social spending are inappropiate. Most of that spending is for pensions to individual, mostly government, employees; it’s as if Social Security benefits only went to military and Civil Service retirees. Both fiscally and in terms of equity, Brazil’s situation is much worse than ours.

  3. Obligatory note of protest:
    “privatization schemes no less expensive than the system we have now”
    Over the long run, that’s just not true. Investment would at least create real wealth, rather than merely shuffling it around. You can confirm this by looking at the scoring on the three plans proposed by the President’s Commission on SS.

  4. While government welfare of any kind seems unwise, in my view, means-tested wealth transfer schemes are at least preferable to “universal benefits” which are incredibly costly and attach the vast majority of the population to welfare entitlements they don’t need.

    This is the fatal error of the current form of the proposed expansion of Medicare to prescription drugs. Even if we agreed that a subsidy for prescription drugs was in some cases necessary (instead of liberating medical care from government’s grip once and for all and lowering costs across the board), it should only go to those who are actually in dire straits and require such a subsidy, not to *everyone* regardless of financial ability to pay. Same is true for Medicare, generally, of course.

  5. I for one look forward to being taxed to pay for Warren Buffet’s prescription drugs.

  6. Julian – quite a kinky title there.

  7. One of the best songs ever (Lola), but I don’t get the reference. Anyone care to enlighten?

  8. If SS were firmly tied to member contributions, the first people to receive benefits would have been those who started paying the payroll tax, when they retired; and the benefits would have been according to the amount they paid in. So the first full retirement checks wouldn’t have come out until the 1970s.

    Anyone here like Harry Browne’s idea of selling off federal land to liquidate the government’s liabilities to those who have already paid in, and then shutting up shop?

  9. Josh-
    The leftist president of Brazil goes by the nickname “Lula”

  10. I pay 401k and a huge amount to social security out of my paycheck. if i am not going to be receiving benefits from social security, it would be nice if they stopped charging me for it. i believe social security is just an excuse to take more money from us, and then it is used for whatever congress wants at the time.

  11. Zathras,

    What research/articles/anything could make you possibly think that SS played any sort of major role in solving the “issue” of elderly poverty? By partially removing ones ability to create tangible wealth, and acting as an inefficient transfer of resources from the working class to the elderly, SS has exacerbated the poverty situation of the entire country. Sure, there may have been a few good years for the elderly when the ratio was 16:1, but now that it is 3:1 and still falling, SS has left us with an economic and cultural time bomb.

  12. Ah, thanks, Julian. Guess I’m not too up to date with World Current Affairs, which isn’t surprising, considering I left home just a week before, and I never ever kissed a woman before.

    If I went to Brazil, would Lula say, “little boy, I’m gonna make you a man?”

    Probably not.

    What were we talking about? Oh yeah. Social Security. I’m more of a Risky Recluse, myself.

  13. I’ve conceded that the government will always force certain people to be taken care of through various social programs. Whether I agree or not, I just cannot imagine the US becoming a place that piles up the diseased and poor without helping them. My issue resides in the fact that, currently, I am responsible for giving a financial crutch to some through taxation. So, how do we remedy this when it comes to Social Security?

    I say that the feds should drastically increase the contribution limit on all retirement accounts (Roth IRA, 401k, 403b, etc) and get rid of universally mandated social security. If I contribute a total of over X% (TBD) of my income towards various private retirement accounts, I am considered “opting out” of social security. Those who fail to save a reasonable amount for retirement, less than X% (TBD), are automatically ?opted into? Social Security. This would be part of the annual tax form filed with the IRS. Those ?opting in? will pay the extra taxes monthly the following tax year.

    This way, the economically responsible will not be burdened by the irresponsible. While God Helps Those Who Help Themselves, government (the devil?) will help those who don?t help themselves by forcing them to be responsible with their finances.

  14. Julian: I acknowledge that investment is likely to produce growth, and if the numbers could be made to work would have no objection to private Social Security accounts or some other device that would allow some SS contributions to be invested and produce a higher rate of return for future retirees than the system now provides.

    I suspect, however, that you know the problems with this idea as well as I do. They involve a number of issues, including the reality of Social Security as a program that uses most of its contributions to pay benefits of current retirees. This means a substantial infusion of funds would be needed up front to finance private accounts while still maintaining benefit payments, and with deficits at $300+ and climbing this is impractical right now. Additionally, just how long is the “long run” in which a privatization scheme would be less expensive than the one we have now? Politically speaking, too long, especially after the end of the 1990s boom has weakened the faith of many Americans in a future of continual, irreversible growth.

    Lastly, and with all respect to the members of the President’s SS commission, if there is one thing I am apt to agree with Democrats on it is the need to view any budget projections made by this administration or its appointees with extreme skepticism. This is a big difference between Reagan’s administration and Bush’s. Reagan’s got some things wrong and was apt to play games on the year to year budget stuff, but on the major long term projections they generally operated in good faith. I don’t trust the crowd in power now as far as I can throw the Washington Monument.

  15. Kevin,

    Sounds like a damn good idea to me. Its like killing two birds with one stone as they say. You get the govenment to quit the wealth transfer from young to old, and it puts federal land in the hands of priviate individuals who could do something useful with it. I’m not holding my breath on this happening any time soon though.

  16. First of all, Social Security _that exceeds current payouts_ is absolutely, de facto, a tax – all revenues are simply rolled into the general fund and spent. It never, and will never, get to seniors.

    Social Security is not a bank account – it has no running balance. If they collect 1.1 billion and need only 1 billion, then the other 100 million just gets thrown over to the general fund and spent along with everything else they spend money on. Furthermore, the stunningly corrupt practice of Government Accounting (at least at the federal level) then proceeds to count SS pay-ins as revenue, rather than properly labeling them as a liability – thus they have “Surpluses”. Har har har – if you believed that, man oh man did they take you for a ride, right along with just about everyone else in the country.

    What _should_ happen, if nothing else, is to decrease the SS taxes such that they are as close to equalling total pay-outs needed as possible, because we sure as hell know (or should) that the other fix is impossible – that they simply sack the money away and don’t touch it for a few decades until it’s needed. Hee, hee, hee – in a deficit spending environment that wouldn’t even make sense anyway, as debt service on the deficit would be higher then they could get as returns on the saved money anyway.

  17. Our leftist doesn’t go by the nickname “Lula”. He legally changed his name to add that nickname (which means “squid”, btw) because that is how most people know him. His name is now “Luis Inacio Lula da Silva” — and when the press calls him “Mr. Silva” or “Mr. da Silva”, most people chuckle.

  18. Like many of my generation (actually somwhere on the fuzzy line between boomer GenX) I view money paid into SS as lost and gone forever. I have no illusion that I will see a dime of benefit and I make all of my financial plans accordingly. I have become basically apathetic about the entire issue. I would like to see it privatised on principle – but I don’t see much chance of it hapening in my lifetime. There are too many votes involved.

  19. Tomorrow’s workers will supply goods and services to tomorrow’s retirees. If there’s too many retirees for the workers it isn’t going to work no matter how you fund it.

    It’s not a matter of private vs. public accounts. The same thing will happen with either one: the retirement age will be raised.

    If with a public program, it’s a law change: raise the retirement age so that the ratio of workers to retirees is acceptable to workers.

    It’s it’s with private programs, then _the average rate of return on investment will fall until the average retirement age goes up_. The fact has to do with an invariant: too many retirees, not enough workers. The particular mechanism the market will use to enforce this is probably something like too many sellers of stock and not enough buyers at the appropriate time. So you have to save longer before you retire, which means you’re retired less time before you’re dead, and it works out for everybody.

    The flip side, the bright side, is that Social Security isn’t a deep hole financially. The books reflect not immense future overhanging liabilities but a simple future law change to raise the retirement age. An assumption change fixes everything.

  20. Kevin: I like Browne’s idea too.

    Brady: The sorta-libertarian ACT party in New Zealand proposed something like what you’re describing awhile back. The idea was that you would have to pay into a special savings account until you had enough in savings that you wouldn’t become a ward of the state upon retirement, and then once you had done that, you would be free– no forced savings, no payroll taxes, nothing. I don’t have a link, but if you browse around on you might find it.

  21. Nicholas:

    Thanks for the link. I’ve seen the idea of personal accounts tossed around over at the Cato site, as well.

  22. Another way to phrase Ron Hardin’s point would be to say that (currently) promised SS benefits are claims on future wealth. When we reach the situation where some outrageous proportion of the nation’s wealth is promised to those 65 and older, there will have to be a backlash against that by the young. It will simply be an unsustainable situation. Youngsters will be pushing grandma down the stairs if it means they’ll get to retire someday.

    I predict the system will go down in flames. Today there is simply too much political inertia to change Social (In)Security. Too many current beneficiaries and too many soon-to-be retired boomers who have never saved a nickel (speaking figuratively) for their retirement privately. I can only hope that the whole program is disbanded when the day of reckoning finally arrives.

    My current pet theory is that the whole notion of retirement has really just been a big experiment in modern society. There was no such thing for most people until the 20th century. You worked until you couldn’t work anymore. I used to plan on/dream of retiring in my 50’s (I’m 30 now), but I honestly don’t think that’s likely to happen, given the demographic bomb that’s about to hit the U.S., and my persistant inability to pick winning lottery numbers.

  23. As observed above, to compare Brazil’s pension situation with that of the US is misleading. Brazil has two separate systems, one for public-sector employees and one for private sector workers. This latter program, called INSS is quite similar to Social Security in the US (both employees and employers pay a percentage of the first about US$800 per month of earnings) but runs a slight deficit. Public sector pensioners, while making up about 10% of those receiving pensions account for about 85% of the annual shortfall.

    This is one of a number of instances in which poor Brazilians pay taxes (not on income, but on goods and services) so that the relatively well-off can receive benefits. Another is the perverse public university system. State and federal universities are completely tuition free and of generally good quality. Brazil spends a higher percentage of GDP on higher education than any other country, while public primary and secondary schools are of almost univerally poor quality. As a result, the vast majority of public university students come from middle and upper-middle class families who could afford to pay for private primary and secondary schools.

  24. Ron Hardin,

    Businesses are also going to need older workers more and more in the future.

  25. Heh-heh, y’know I remember hearing someone on NPR going on about Social Security “lock boxes” on 9/11 when NPR finally decided to trash its normal programming…

    Okay, now I fully take Julian’s point about the discrepancy between how Social Security is perceived and how it actually operates, and what others here say about the same phenomenon. But I think it’s a paradox that goes beyond reality versus image. Consider how Bush’s partial privitization plan would work. If I’m not mistaken, the idea is you get to “opt out” of up to 1/4 of the program as it currently exists, which means you get to invest that 1/4 as you like (nice of ’em to let us do what we want with our own moolah!), but then you only get 3/4 of the government supplied benefits when you retire, right? Both the nature of this trade-off and the fact that current benefits would not be lowered by the current revenue deficiencies caused by such a change (as described here by Zathras) play into the idea of SS as pension. Again, I understand all the arguments regarding why that’s not what it is, but I don’t think it’s so simple one way or the other. There’s still much to create the implication that your money being taxed today gets you something in the future, even if the reality is that your money will be long spent and it would be up to future generations to be taxed for your own retirement….

  26. Ron Hardin hit the nail right on the head. The private versus public issue is more of an ideological one – I would prefer a private account myself, as I feel that I could invest the funds more appropriately for my personal financial goals than the government could. Someone else could make an argument for a “public defined benefit pension”, which is essentially what SS is, in its present form. The real problem with SS, in either form, is that, given the current retirement age and our current age demographics (i.e. a bunch of aging 40 and 50-something Boomers about to hit retirement), the projected ratio of workers paying into SS versus retirees receiving SS is not sustainable. The solution: simple. Gradually raise the retirement age until this ratio can be sustained.

    On another note, it is interesting to note how SS has morphed over time, at least in the minds of the American people. When FDR originally signed it into law, it was more of a “safety net” for the old, decrepid segment of the population that truly could not fend for itself. Back in FDR’s day, life expectancy was much lower than it is today, hence only a small minority of the population ever received any payout from SS. Over time, as life expectancy has increased, the age at which one receives SS has not. As a result, SS has been transformed from a “safety net” to a sort of “nationalized defined benefit pension plan” for all American workers. I don’t think that’s the original intent of SS at all.

    Of course, good luck trying to convince AARP of this… 😉

  27. Whether or not you support Harry Browne’s plan specificially, Julian is wrong to say, “someone has to get shafted here, eventually. It’s just a question of who.”

    I think the government owes a debt to everyone who has paid into the Social Security system. It CAN cover its obligations in a decent way – it’s just a matter of reducing spending on all the stupid things that AREN’T obligations.

  28. Brad S,

    Your description of SS could be applied to many other government programs. They start out small, wanting to “help” some segment of the population and morph into multi-billion dollar catastrophes.

  29. Brady and Nicholas,

    The opt-out thing will only work if there’s an eventual cap on benefits. Otherwise, paradoxically there is an incentive to substitute social security for private investment. Consider that the reason we got into this situation in the first place is people are living way, way longer than they were when this plan was started. The result is that current retirees have recieved far more than they put in. I know, if you invest properly you’ll also get more than you put in too but that amount is limited by its actual market performance, whereas SS benefits are payed out indefinitely until you die, and in same cases longer in the form of spousal survivor benefits. Depending on what you think your chances are for beating the current odds (think new life extention tech in the next 30 to 40 years) you might be better off picking the government guaranteed plan. And if everyone starts doing that, you’re back into the same situation, or possibly worse.

    Ron Hardin hit on a good point, that maybe it’s finacially infeasible for the majority of the population to live 50% or more of their adult lives unemployed. Having to contemplate living for the rest of your live on $X in your own savings will force people to make appropriate choices about how much to save and how long to work.

    Also ignored in my analysis above is the problem of risk. As we’ve all seen in recent years, you can do quite well on private investiment or quite poorly, or both at different points in time. People make mistakes, bad decisions or just plain get unlucky. When you factor in also the benefit of risk reduction in guaranteed benefits, no wonder SS seems to have broad support among the population, even though fears that it will ultimately fail appear just as common.

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