Tuesday, June 14, 2005

Is Social Security Insurance?

Arnold Kling asks if Social Security is insurance.
The insurance aspect of Social Security is that, like any annuity, it protects you against the risk of outliving your assets. If you were buying Social Security as insurance, then the premiums would be lower the later the age at which you chose to collect it. And if what people valued were the insurance aspect, then most people would prefer low premiums and benefits that kick in when they get really old. That would be better than high premiums and benefits that kick in when you are 60.

From the resistance to raising the retirement age, I conclude that what people value about Social Security has little or nothing to do with insurance or risk aversion.

One of my earlier posts on Social Security was also interested in whether the social security program we have at this time is like insurance. As structured, Social Security seems like an intergenerational transfer program that transfers income from current workers to retired workers. Yet, I suspect that if the program were sold in that way, there would be far fewer people who would support the program. If the program is called "insurance," far more people will believe it is worth supporting. I also suspect that many people of my parents' and grandparents' generation thought that social security was structured more like insurance or more like a retirement annuity than like an intergenerational transfer program.

I asked earlier what a social security program would look like if it was an insurance program? I would like to ask that question again. It seems to me that one of the attributes of social security as insurance would be that not every person who had "paid into the system" would receive a monthly income check. A person would receive a monthly check only if he or she had suffered the adverse event which was being insured against, i.e., the person had exhausted his or her assets while still alive. What do you think? What other attributes would characterize a social security insurance program?

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