Paul Krugman is thrilled by a bold new idea going around Washington: expanding government entitlements, instead of cutting them. This original and innovative plan — after all, who can even remember the last time government expanded entitlements? — is a real game changer.
Democrats have decided to break with Beltway orthodoxy, which always calls for cuts in “entitlements.” Instead, they’re proposing that Social Security benefits actually be expanded.
This is a welcome development in two ways. First, the specific case for expanding Social Security is quite good. Second, and more fundamentally, Democrats finally seem to be standing up to antigovernment propaganda and recognizing the reality that there are some things the government does better than the private sector.
Yes, finally, politicians are standing up to antigovernment fundamentalists and seizing more of taxpayers' money to hand out to special interest groups and voting blocs. It’s a big step for them, but I’m sure they’ll get the hang of it.
Krugman knows that expanding entitlements is smart because Social Security is “where government excels.”
Maybe we wouldn’t need Social Security if ordinary people really were the perfectly rational, farsighted agents economists like to assume in their models (and right-wingers like to assume in their propaganda). In an idealized world, 25-year-old workers would base their decisions about how much to save on a realistic assessment of what they will need to live comfortably when they’re in their 70s. They’d also be smart and sophisticated in how they invested those savings, carefully seeking the best trade-offs between risk and return.
In the real world, however, many and arguably most working Americans are saving much too little for their retirement. They’re also investing these savings badly. For example, a recent White House report found that Americans are losing billions each year thanks to investment advisers trying to maximize their own fees rather than their clients’ welfare.
You “ordinary people” aren’t perfectly rational, so your extraordinary political leaders will need to take your money away, lest you squander it. We all know that politicians are perfectly rational, prudent, far-sighted beings from another galaxy.
In reality, politicians are just like the rest of us: biased, flawed, and self-interested. In politics, where no one can afford to look beyond the next election, handing out money and passing the bill to someone else is an age-old way of getting votes. But we have no reason to expect that the political system's combination of ignorance, myopia, and bureaucratic hubris will produce anything worth having.
So what of Krugman’s claim that Social Security is a huge success, a testament to the power of government planning over personal responsibility?
It’s true that this forced savings plan does give retired people more in benefits than they paid in taxes, but the relevant comparison is how Social Security stacks up against other private investment opportunities.
As economist Antony Davies demonstrates, it’s not great:
The rate of return the average American worker can expect from her payments to Social Security is just 1.2% annually. Compare that to the average return on stocks (5.1%), corporate bonds (3.5%), or even US government bonds (1.7%).
Standard retirement plans mix stocks, bonds, and Treasuries to get the best balance of safety and return, but putting your money almost anywhere else would be better than leaving it in government's hands.
Social Security isn’t even all that secure: its trustees project it will be bankrupt within the next 20 or 30 years. It is doomed by the demographics of an aging population. Something has to give. There’s no guarantee that Krugman’s parade of antigovernment boogeymen won’t seize control of Congress when that happens and slash benefits. The only thing that’s guaranteed is that you will go to jail if you refuse to pay your taxes.
There you have it: a pitiful return and a bankrupt program, propped up by threats of violence. If this where government excels, I'd hate to see where it fails.
Rather than expanding an insolvent and immoral program, creating moral hazard and crowding out private savings, we should abolish this coercive system — or at least replace it with a means-tested program. Gradually phasing out existing retirees and letting ordinary people choose how their money is saved or spent would be better for them, better for taxpayers, and better for the economy.