Social insurance vs. enforced savings

Here's a nonpolemical, nonideological article from a business school prof about what Bush's Social Security proposals really mean:

Social Security was designed to be social insurance, to insure against the risk of poverty in old age. It was never intended to be anything but a supplement to income from personal savings and employer pensions. Any insurance works on the principle of shared risk: all participants pay a premium to hedge individual risk, but because not everyone will qualify for a benefit at the same time, if ever, those premiums can pay off the benefits that need to be paid....

We all pay Social Security taxes, the premiums on our insurance against future poverty, and we do expect to collect. But not everyone collects in the same proportion to his premium payments. Some pay for over 40 years and then die, unluckily, before retirement. Some pay for only a few years, then become disabled, for example, and collect many more benefits than they ever "paid for." But that is how insurance works: the level of benefit is determined by the payment of premiums, but only if you are unlucky enough, or in the case of Social Security, if you live long enough, to ever collect.

If the Bush Administration succeeds in its proposed reforms of Social Security, with the diversion of "premiums" into personal retirement accounts, Social Security will change from a program of social insurance to one of mandatory retirement savings. Now, encouraging retirement savings is always a good idea, but the diversion of funds will undermine the insurance pool that we have, perhaps to the point of crippling it.

If we really wish to promote more retirement savings — and not just differently invested retirement savings — we could use the mechanisms to encourage "ownership" that we already have in place and leave the Social Security insurance pool alone. We could do what we usually do when we want to encourage some economic behavior: make its cost tax deductible. For example, mortgage interest is tax deductible, because we want to encourage home ownership. Why not make the cost of retirement savings tax deductible to encourage "ownership" of retirement?...

It is good to encourage individual retirement savings, and individual financial responsibility. It is also good to insure all of us against poverty in old age, and in order to do so, we have to share risk; we all have to keep contributing to the pool. There's no real reason why we have to sacrifice one good idea for the other. Why not do both?

Of course, the rhetorical question answers itself: the point is not (merely) to create an "ownership society"; rather, it is to destroy public sector mechanisms for risk sharing.

And why would anyone want to do such a thing? Is it because they don't believe in sharing risks? Presumably not. Rather, destroying the state's risk-sharing function forces people to turn to other institutions that can perform this function.

What those "other institutions" are depends on who you are. If you're rich, you can pay an insurance company to insure you, and if you're poor, well, you'll always have those thousand points of light....