The Social Security Guarantee

Democrats like to characterize individual Social Security accounts as a “risky scheme.” Social Security, they assert, is guaranteed, while you could lose all your money in an account at Fidelity.

Hold on a minute, writes Jagadeesh Gokhale. What do you mean “guaranteed?”

Life holds no certainties. But to provide a relatively strong benefit "guarantee," Congress would have to pass a law requiring a super majority vote to alter the current benefit formula.

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In reality, there is no strong Social Security guarantee and future electorates are unlikely to acquiesce to exclusively revenue-side adjustments. Potential future benefit adjustments should not be ignored, but talk of "guaranteed" benefits misleads people into believing their retirements are more secure than is really the case -- a misperception that negatively affects how much they personally save for the future.

The Social Security “guarantee” is really nothing more than the power of Social Security recipients to use the political system to extract resources from other Americans. But in an economic crisis the political system is quite likely to tell the elderly to go fly a kite. It’s happened before.

In fact it is Social Security that is the “risky scheme.” First of all, it discourages savings, which reduces the resources available to pay for pensions. And on a larger scale it also reduces fertility.

[E]conomists and social scientists have begun to suggest that the long-term fertility decline in developed economies may also be the effect of generous pension and health insurance programs. A recent study shows that a significant portion of fertility declines among developed economies during the 20th century can "be explained" by the generosity of retiree pension and health benefits.

The best system is for ordinary people to save for their own retirements and stop working when they can afford it. Once the government steps in and sets an arbitrary level retirement benefits it introduces a systemic risk that endangers everyone’s well-being.