Paul Krugman and the real problems with Social Security

Robert Wright Contributor

In a recent New York Times op-ed, Paul Krugman attacked the widespread notion that Social Security in its present form is doomed. As usual, he is about half right. With strong productivity growth and slower longevity increase, current Social Security benefits can be kept up a long time without raising taxes. On the other hand, if productivity growth is flat and Americans live ever longer, Social Security may break before it bends. Almost every bean counter agrees, however, that health care liabilities are a far bigger threat to the federal government’s solvency.

So why don’t Americans joyously celebrate Social Security’s 75th anniversary, as Krugman argues they should? I suggest that most people are pretty good at sensing when they are getting screwed even if they can’t always identify the precise nature of the assault. They sense that something is fundamentally amiss with Social Security and they are correct.

Krugman claims that “conservatives hate Social Security” because “its success undermines their claim that government is always the problem, never the solution.” That’s a strange claim because most conservatives don’t consider Social Security a success and many independents don’t either. A successful policy would be one that accomplished its stated goals efficiently and fairly. Social Security does no such thing. Krugman doesn’t see that because, like Social Security’s other proponents, he fails to account for the program’s opportunity costs, specifically the taxes taken from workers’ paychecks that could have been better spent on financial products more closely tailored to their individual security needs.

Were it not strangled by regulations of dubious efficacy, the private sector (a healthy mix of nonprofits, mutuals, and joint stock corporations) would provide Americans with a range of personal security products that currently do not exist or that remain prohibitively expensive for most. Many people, for example, would prefer an “own occupation” disability policy rather than the “any occ” policy offered under Social Security. But because they are forced to buy an “any occ” policy from the government, most forego the much more comprehensive “own occ” variety. The limited market for “own occ” policies, in turn, reduces the incentives of insurers to innovate, which unfortunately typically entails a long and costly fight with regulators. As a result, the disability insurance market is not nearly as fully developed as it would have been in the absence of Social Security.

But the worst thing about Social Security is that it is patently unfair to the poor, especially blacks and Hispanics due to their lower life expectancies. Krugman recognizes this when he admits that “life expectancy at age 65 has risen a lot at the top of the income distribution, but much less for lower-income workers.” But he uses the insight to defend a status quo that forces many of the poorest Americans to pay into the Social Security system for decades only to die before retiring, often without an eligible spouse or minor children. Because their “savings” went into FICA instead of investments, many poor Americans leave no estates to their children. That helps to perpetuate the existence of an underclass, the members of which feel beholden to the government in general and Democratic politicians in particular.

Of course if Social Security were eliminated, many people might chose not to save or might have their savings stolen by unscrupulous financiers. But wouldn’t it be better to educate people to make their own choices, right or wrong, than to force them to invest in suboptimal, one-size-fits-all disability insurance and life annuities? Shouldn’t we celebrate the extension of freedom rather than its abeyance for three quarters of a century?

Robert E. Wright is the author of Fubarnomics: A Lighthearted, Serious Look at America’s Economic Ills (2010).