More Social Security, Please

Krugman suggests expansion of social security as a way to address secular stagnation. [NYT allows a handful of free reads per month, but you can read unlimited Krugman blog posts if you click through from the side panel list of most recent posts on Calculated Risk.]

I think there are a couple big difficulties with this idea.

One is that many people (*) don’t trust that social security will be there for them. To many people, especially younger workers, it’s only a vague notion. Many others seem to buy into the notion that it is “broke” and that benefits simply can’t be paid. There is persistent propaganda that supports both the ignorance and fear.

It seems that “rational expectations” and the permanent income theory are the frameworks for transmission of higher social security benefits into lower current savings. I don’t think that works in low (or incorrect) information conditions.

So it may be difficult to translate higher social security benefits into lower savings.

Furthermore, higher income, high-information voters (and I think there’s a correlation between the two) will understand that a broad expansion of social security will result in higher taxes for them net of their change in social security benefits. So we would expect them to resist expansion, since it forces them to actually save more of disposable income to achieve the same level of consumption.

Aside: I also suspect cultural factors can override modest changes in future income expectations. Relative future orientation can matter as can the historical context of saving among population cohorts. For example, there are European countries with strong welfare states along with quite high household savings rates. Germany comes to mind.

* There are a couple of “I think” assertions in this post that have not been researched. I’ve read stories of polls that suggest low confidence in social security, but articles and polls like that are a dime a dozen and I haven’t done the work. The rest is based on personal experience in conversations with people, a notoriously poor way to form broad population perceptions. Needless to say, when I talk to VSPs, I can elicit stern faces and nodding heads by saying things like “You know, it’s unsustainable and I don’t think it’s going to be there when we retire.”. I even hear “Ponzi scheme!” sometimes.

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