Tuesday, April 19, 2011

Political Risk

It’s often said that, when a politician contemplates reforming Social Security and Medicare in the interest of restoring their fiscal sustainability, he’s touching the “third rail” of American politics. Remember what happened to George Bush when he tried to reform Social Security in 2005. Obama is betting that the same thing will happen to Paul Ryan Republicans for trying to reform Medicare.

What has made Social Security and Medicare so robustly popular? Liberals tend to see those programs through the prism of egalitarian principles of distributive justice. They think that the state should be in the business of redistributing benefits from better- to worse-off people because, ethically speaking, a predominantly capitalist political economy that subsidizes the life-prospects of disadvantaged people is better than one that doesn’t. And liberals would like to think that, in their gut, most Americans agree with them.

That thought probably owes a lot to wishful thinking. At their inception, both Social Security and Medicare were sold to voters on the basis of social insurance principles that promised not so much (re)distributive justice as mutual advantage. Left to their own devices, all but the richest Americans were running a substantial risk of destitution and untreated ill-health in their old age. Even those who had enough money to hedge those risks in the private insurance market enjoyed no guarantee that they’d always be able to pay the premiums when they most needed insurance. So most people were perfectly happy to have government in the business of socializing the risks associated with old age.

Granted, Social Security and Medicare were redistributive programs. But, unlike other transfer payments, they didn’t generate an abiding division between net-contributors and net-beneficiaries because they mainly redistributed benefits and burdens among, rather than within generations. Most Americans thought that was a pretty good deal because they nearly all expected to live long enough to become net-beneficiaries. And, in the meantime, they were happy to be relieved of the burden of providing privately for aged parents (and the anxiety that their children wouldn’t be able or willing to provide for them). No wonder Social Security and Medicare have always been politically untouchable.

Arnold Kling suggests that’s all going to change because the political fight over public provisions for seniors is rapidly changing from a positive-sum to a zero-sum game. He’s not just making the obvious point that Social Security and Medicare are now threatening to crowd out other governmental priorities. Kling’s pointing to the fact that, the closer governments are to insolvency, the more prominently political risk—that is, the chance that the government will enact a policy that imposes new costs on, or withdraws old benefits from, the risk-taker—will figure in our lives. And, going forward, the allocation of political risk with respect to pensions is ever more likely to divide us in two:
“I don't think of the long-term budget fight as being between Democrats and Republicans or between rich and poor. I look at it as a fight between people with funded retirements and unfunded retirements. . . .

“Down the road, someone is going to get the shaft. . . . That is, people who are relying on the unfunded systems--public sector pensions, Social Security, and Medicare--might find their benefits cut. Or people who are relying on personal savings could wind up having those savings taxed away in order to address the shortfalls in the public systems. Or all of us could have our savings eroded by inflation, from which we may not be able to protect ourselves.”
Generally speaking, the impact of such conflicts of interest is mitigated in our political system by a thick undergrowth of cross-cutting cleavages. But if what’s happening in Wisconsin and Ohio and the readiness of Republicans in Washington to get behind the Ryan budget show anything, it’s that the forces of mitigation are getting weaker all the time.

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