Wednesday, October 21, 2009

Does Social Security Create Poverty?

I recently came across this piece by Edgar Browning -- the author of my microeconomics textbook -- in which he suggests that Social Security actually increases poverty rates among elderly Americans by crowding out private investment.

It's an interesting contention, though I'm not quite convinced by it.

Putting Browning's argument aside, though, I think there's a pretty obvious problem with a Social Security system that simply collects taxes and disburses benefits without affording Americans the opportunity to make their own financial decisions.

Today, financial literacy in the United States is pretty dismal. I can't help but feel that most Americans would be a bit more savvy if they actually had more personal control over their money . . . and if their retirement really depended on them making good decisions.

(Interestingly, a strong plurality of Baby Boomers may be collecting Social Security income at age 62, rather than the "normal retirement age," due in part to financial necessity.)

Update: Freakonomics's Stephen Dubner points to this study on financial literacy:

[F]ewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy is strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings is about 50 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.

6 comments:

petpluto said...

I can't help but feel that most Americans would be a bit more savvy if they actually had more personal control over their money . . .and if their retirement really depended on them making good decisions.

I can't really back you up on either point. Firstly, the financial system is uber confusing.

But secondly, if you look at what people have actual personal control over, a lot of Americans (and I would say people in general) aren't really savvy about a heck of a lot. Local politics, for one. You want to know about Dancing with the Stars? Then we're savvy.

So maybe the key is to create a "Dancing with Your Retirement"!

The other thing is that social security is generally supplemental; it is a social safety net, but for at least a couple of decades, a pension or an IRA has also been necessary in order to retire.

mikhailbakunin said...

The financial system is certainly confusing, but most retirement accounts are pretty straightforward. As you said, there are already lots of simple collective investment vehicles that people use to save for retirement, like Roth IRAs and 401ks.

I think it's interesting that you say Social Security income is generally supplemental. Many progressives argue the exact opposite -- that we need to keep Social Security intact precisely because it's not supplemental for many seniors.

In regard to the point about local politics, I'm not sure that it's an apt comparison.

But I do think people are more likely to get involved in local government when a) they feel that local government decisions will directly impact their lives, and b) they feel that they have some control over the outcome. Unfortunately, in my experience, many people are cynical about their ability to influence government, even at the local level.

I really do think that, in the aggregate, giving people more control over their lives helps them to become savvier and more worldly.

Maybe I'm in the minority, though . . . .

mikhailbakunin said...

Sorry, a Roth IRA is obviously NOT a collective investment vehicle. *face slap*

MediaMaven said...

I can't help but feel that most Americans would be a bit more savvy if they actually had more personal control over their money . . . and if their retirement really depended on them making good decisions.

I really do think that, in the aggregate, giving people more control over their lives helps them to become savvier and more worldly.


Very true. Tonight, a friend of my father's came to visit--a guy who taught finance for twenty years--and this was one point he made. His philosophy is to be broke when he dies (he has no children), and he calculates how long he can live based on his money. His baseline is 80; this number fluctuates. He is all about smart decisions and control. Once people feel they have control, they will be more likely to be proactive because they know that it will be beneficial. Having no control makes any effort pointless.

I find finance to be a very confusing world, and no matter how much I try to decipher my 401K statements, they elude me. I like very much the idea of financial literacy classes taught in school, but I remember not being very receptive to even the briefest mentions when I was younger, just because it seemed so abstract and a problem very far removed from my life, and I think that's a hurdle to get over as much as logistics.

petpluto said...

Many progressives argue the exact opposite -- that we need to keep Social Security intact precisely because it's not supplemental for many seniors.

Well, I was working primarily from the premise that we were talking about people who could afford to learn how to be savvy about financial retirement instruments. For the people who end up living entirely on social security, a great deal of them didn't have enough money in their working years in order to do anything but live on it.

However, I think even Roseanne Barr and Dan would have had a pension from their working class jobs. And so social security becomes supplemental - but still something that is essential to living out retirement.

Of course, this could all be an issue where "supplemental" doesn't mean what I think it means...

mikhailbakunin said...

Well, if it's true that 2/3 of seniors derive a majority of their income from Social Security, I don't think the program should be considered "supplemental."

In fact, the Social Security Administration actually provides a supplement to Social Security -- called Supplemental Security Income -- based on need.