Towards A Good Samaritan World

Friday, September 02, 2005

HURRICANE SOCIAL SECURITY

With the hurricane disaster, Bush and Congress have a big new task to deal with, and yet another pretext for abandoning the Social Security reform project that Bush embarked on earlier this year. Yet ironically, Hurricane Katrina and New Orleans provides a good metaphor for the state of the Social Security system.

In New Orleans, the experts knew long in advance that there was a disaster in the offing. New Orleans was six feet below sea level, like a bowl, and could easily be flooded by a storm surge. Likewise, experts know perfectly well that the US has a huge problem of unfunded liabilities: we've promised trillions of dollars more to future retirees than we will collect in taxes. Yet in each case, most people have ignored the issue, while some who should be in the know and concerned have adopted a sort of blithe assumption that we'll muddle through some how. After all, five or six feet of water doesn't sound that bad, does it? A lot of us are tall enough to stand in that! Likewise, the 27% automatic budget cut that will occur in 2042-- that's not so bad, is it? The reality is that a sudden, forced 27% cut in Social Security benefits because of the system going broke would be as disastrous as five or six feet of water in New Orleans.

But then, the date "2042" is actually a red herring. Since Congress can change benefits at any time, promised benefits are of little relevance: what matters is where the state of public opinion is such that the incentives of the political center on balance favor reducing funding. If the program is deligimitized in the eyes of rising generations, as no doubt will happen since young people have already largely written off the benefits they will supposedly receive, then when these generations come of age, they'll tip the majority of the electorate against the program. Politicians will then be ready to abandon it. This could all be accelerated by some future recession or financial crisis, or any crisis that would affect the government debt.

And, like Hurricane Katrina, the victims of the future collapse of Social Security will be disproportionately poor and members of minorities. The white middle classes already save, and they'll have better information about the magnitude of the future crisis. Like the better-off New Orleanians who drove their cars out of the city well ahead of the storm, these people will own valuable homes, as well as stocks and private annuities, and they'll escape the Social Security crisis relatively unscathed. But poorer people, and maybe blacks, will have placed greater reliance on the system, and they'll expect the federal government to come through for them. Moreover, they'll have little room to cut spending. So when the Social Security system runs out of money and large across-the-board benefit cuts occur, they'll have fewer other options.

As in Hurricane Katrina, the stakes may ultimately be life and death. People in nursing homes will be unable to pay the bills. The homes will go broke. Maybe cities or state governments will take them over; a few crooked bosses (the nursing home industry is not always attractive to honest people even now) will take the money and run to Brazil or Switzerland; the homes will get tied up in bureaucracy as their residents die.

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