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Friday, September 02, 2005

Social Insurance Guaranteed

If you will allow me, I’d like to speculate on lessons to be learned about social insurance from this terrible disaster brought about by Hurricane Katrina.

The discussion concerning Social Security has, in my view, largely underplayed the role the government has to play in guaranteeing the social insurance aspect of the system, particularly from those in favor of private accounts. When all shocks that hit people are individual so that there are winners and losers, but overall the winners and losers balance, then it is possible for people to voluntarily enter into arrangements where the individual risks are shared and thus largely eliminated (abstracting for the moment from market failure problems in social insurance markets). Conversely, if people want to bear the risks individually, they can. This system works fine for time periods when shocks are small and idiosyncratic. But what about large disasters such as a hurricane that floods New Orleans, or a Great Depression that guts an entire economy?

The Social Security program grew out of a time when there was a large aggregate shock, a shock that resulted in the Great Depression. The Great Depression affected people collectively, it wasn’t just a few unlucky individuals balanced somewhere else by winners. It’s been hard for me to see how private accounts would help when stock market values fall, as they did after the crash of 1929, to one sixth their pre-crash values. Without some sort of social support from the government, such as it is, people would be much worse off after such events. How will personal accounts and individual accountability rebuild schools or bridges in New Orleans? How will private accounts or even the private sector rescue the elderly from rooftops or provide security against looters? They won’t. For large collective shocks the government, not the private sector induced purely by profit, must stand ready to act as the "insurer of last resort."

To have a social security system that falls apart when you most need it, when there are large disasters affecting entire regions or economies, is not optimal. Personal accounts would not have withstood the stock market crash associated with the Great Depression. Why do we want to implement a social support system that fails when it is needed the most? I don’t think any of us believes we should leave it to individuals to bear the full cost of the disaster caused by Hurricane Katrina, i.e. that government should not be involved at all. We all know that government has a role to play in this disaster, the cry from all sides is that the government is doing too little, not that it is doing too much. Things may not be perfect with government involved, and there is certainly room for improvement, but things would be even worse if government did not get involved at all. And just as the government has an essential role to play in this disaster, it will also have an essential role to play when the next big shock, whether it’s financial, natural, or human induced, hits us in the future. Social Security systems aren’t just for the next few years, they must survive as long as the country does. Social Security must survive the big shocks, and for that to happen the government must, in the end, provide social insurance. If you think such large shocks cannot happen again, that big shocks such as a Great Depression will never, ever happen again to anyone ever, think about the events in any one hundred year time period. Things happen.

    Posted by on Friday, September 2, 2005 at 01:35 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (10)

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