Speed Gibson

Eric Black published part two of his series on Social Security today. I reviewed part one's "Deciphering the 'Crisis' Code" when it appeared on Sunday, March 6.

Today, we have "Social Security: Pension? Welfare?" which begins:

If you're going to figure out whether (and how) you want to change Social Security, it might be useful to start by understanding what it is now.

Is it an investment program, an insurance policy, a welfare program, a government pension or, as some critics assert, a giant Ponzi scheme?

This is a great compound question and this article provides good answers, starting with:

Is it an investment? No.

Your payroll taxes aren't saved to pay your benefits later.

Absolutely right. Continuing:

Is it insurance? Partly.

One-third of Social Security checks -- the disability and survivor benefits -- closely resemble insurance. But the biggest and best-known portion of Social Security -- the retirement benefits -- fits the insurance metaphor awkwardly.

A very exact and accurate answer to this somewhat subjective point. Next:

Is it welfare? Barely.

If Social Security did pay benefits only to seniors who would be poor without them, it would be a lot less expensive, but its political status would change from that of a "middle-class entitlement" to that of a welfare program.

Welfare programs redistribute money from the upper and middle classes to the poor. Social Security redistributes funds from workers to retirees, but many of those who pay FICA taxes are poorer than many of those who receive benefits.

Three in a row! Again, Mr. Black is correct, with excellent reasoning and composition.

Is it a pension? Pretty close.

In terms of how it fits into the life cycle of a typical American, the pension metaphor may be the strongest.

A typical pension, the old-fashioned "defined benefit" kind that was more common in the days before 401(k)s, provides a stream of monthly income when you retire.

The amount is based on how long you worked for the company and how much you made, but is not related to investment performance.

Right again. Finally,

Is it a Ponzi scheme? No, but those who choose to embrace that rather alarming metaphor can point to two similarities.

...

Like Ponzi, Social Security doesn't invest the money it takes in; it passes along new contributions to those who paid in earlier. Like Ponzi, Social Security works best when the group paying in is larger than those getting benefits.

...

But the government has options for keeping Social Security going that Ponzi lacked. Social Security can remain solvent by raising taxes, cutting future benefits or possibly by capturing investment-type returns.

That makes it five for five in my book, a solid, well-reasoned article sure to annoy the extremists on all sides. The only point I might take issue with is this:

And, they argue, since most payroll tax collections are already spoken for, you can't divert them into investment accounts unless you come up with trillions of dollars to maintain benefits to current retirees. If you take the cost of borrowing those trillions into account, the transition to a new system becomes less attractive, even if you score it as an investment.

But I'm sure that transition costs will be the subject of a later installment in this series, so I'll wait until then to comment. By the way, I heard a guest on Air America say, without contradiction or even a question, that the transition costs were over five trillion dollars. The largest estimate I had heard to date was two trillion.

Last time, I gave Eric Black a B, mostly because he had a little trouble with the "trust fund" concept. Today he gets an A.