Tuesday, March 8, 2011

Analogy of the day -- it's your funeral

Once again, Mark Thoma gives us an elegant counter-argument to a dubious piece of conventional wisdom:
I keep seeing the argument that the way Social Security is funded -- the young provide the funds needed for the retirement of the elderly -- and the fact that tax collections can be viewed as one big pot of money imply that the government is not providing a service (insurance in this case) as you might see in the private sector:
The confounding problem is that many people believe the payroll taxes they pay go to fund the benefits they will receive, which is completely untrue. The payroll taxes go to pay current expenses of the US government. They are just a tax on labor. The government is spending every penny of those payroll taxes to pay for current expenditures. ... the [government] is free to use your premia to buy fighter jets and space shuttles!!

Some go so far as to argue this means it must be welfare. I disagree.

Consider (and apologies for the example) a firm that provides funeral services. This firm sells burial plots to the young, those still working, and it issues a promise. When the time comes, you have a place to be buried, and your payment will cover the following services (which are listed explicitly).

However, the firm does not take your money and put it into savings for the next however many years. Instead, it uses the money to cover the expenses of current funerals. Your money is used to pay for the services of the old, those who have passed away.

So, the money of the young is used to provide services for the old, just like Social Security. Does this mean that the people whose funerals were paid for when they were younger received welfare? Of course not. Does it mean they received no services from the firm? Again, no. It's even possible that when your turn comes (and hopefully it's far away), the funeral will cost more than you paid in advance -- the firm may have not anticipated future costs correctly. In that case, there will be an income transfer from the young to the old (the young will be charged higher prices to reserve a plot in the future), but that still doesn't mean it is welfare. Fundamentally, this is an advance purchase of a service.

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