March 31, 2017

Social Insurance Is Not The Same Thing As Charity

Writing at Forbes, Adam Ozimek has a useful post on the topic of libertarians and charity.

When asked what will replace the welfare state once it’s been abolished, the most common libertarian line is to argue that a combination of private charity and voluntary clubs will fill the gap. Moreover, charities, churches, and mutual aid societies would all be doing that work already, were government spending not crowding them out. Ozimek gut-checks this argument by considering an area where virtually everyone agrees that the United States is falling short: K-12 education.

If private charity is willing and able to step in and do a better job than K-12 then what is it waiting for? The same private dollars that would allegedly jump in when we shut down government schools could jump in today. Existing property taxes are hardly a budget constraint for the kinds of rich households, charities, and foundations that we’d expect to fund something like this.

I can already begin imagining some plausible libertarian responses to this (again, of the “but for regulation and crowd-out” variety), but his point stands. The conventional libertarian argument has always been a bit hand-wavey, pointing to eras in history where, yes, government was smaller and mutual aid societies were bigger, but where poverty was nonetheless widespread and abject.

Consider Jonathan Gruber and Daniel Hungerman’s well known paper that estimates the extent to which the New Deal crowded out faith-based charity. Their central finding suggests that church spending fell 30% in response to the New Deal, “and that government relief spending can explain virtually all of the decline in charitable church activity observed between 1933 and 1939.”

Sounds dramatic, right? And it may have been, for the churches. But in absolute terms, “church benevolent spending” fell a mere 2.9 cents for every dollar that federal transfers increased. As Gruber and Hungerman write, “from 1929 to 1932, the last year before the New Deal, annual church benevolent spending in the U.S. averaged about $180 million. This is a little less than 10% as large as the average annual New Deal transfer spending over the 1933-1939 period of $2 billion.”

My naive interpretation of this result is that, were the entire post-New Deal/Great Society welfare state eliminated tomorrow, we should expect civil society to leave somewhere between 90-97% of social insurance spending unreplaced. And that is probably being generous, since the cultural and institutional capital needed to coordinate a private safety net does not emerge instantaneously, if it emerges at all.

Charity Is a Bad Metaphor

Does that mean people would be starving in the streets? Maybe on the margin. But on average, there should still be adequate resources within that 3-10% for private charities (not to mention families and friends) to provide the deeply needy with subsistence. After all, the United States is a very wealthy country. But that still doesn’t make it a worthwhile trade, since social insurance isn’t really about charity in the first place.

Indeed, the metaphor of social insurance as a public form of charity is a deeply misleading one. We should stop spreading it. It leads down normative rabbit holes about the “deserving and undeserving” poor, and it fosters an under-appreciation of the scale and scope of the public good that social insurance provides.

Insurance is not philanthropy. Insurance is a tool for pooling risk in a way that is, ex ante, mutually beneficial. Social Security, for example, has done much to ameliorate elder poverty. But as a collectively purchased annuity, it is more precise to think of it as a form of insurance against the risk of outliving one’s savings given the uncertainty (i.e. variation) regarding one’s expected life expectancy (also known as longevity risk). This is why Social Security is most likely modestly regressive in its ex post redistributive effects (wealthier people tend to live longer) while still creating large welfare gains. (NB: Gary Burtless has astutely pointed out to me that Social Security includes survivors and disability insurance, which no doubts makes the program on the whole progressive).

Thus, the reason all modern economies have some sort of pension system is not because private charity comes up short, or to steal from the rich to give to the poor. That’s a category mistake. Rather, it’s because there is endemic market failure in the private annuities market caused by adverse selection and information asymmetry (among other things, you have a much better idea of how long you’re likely to live than an insurer). Meanwhile, nation-states have the advantage of economies of scale and taxation powers, and administrations that happen to be quite efficient at cutting checks according to actuarial tables.

That doesn’t mean we have to simply accept the crowd-out of civil society as a kind of collateral damage. Many European countries maintain high levels of social capital despite more generous social insurance systems. The key is that they deliver their spending at the local level, through NGOs and local jurisdictions, instead of through byzantine federal bureaucracies.

Or as I’ve put it elsewhere, “Don’t abolish the welfare state—Decentralize it.