Monday, January 18, 2016

Priorities: Education and Social Security

In the United States we have made unusual decisions in what we have funded. We do not fund preschool for all, yet we fund planes which don't fly and the Joint Chiefs of Staff don't want. We do not fund free annual check ups, but we do fund us spending money on chapels on military bases, which should be left to the religious organizations to bear the cost. What can and cannot be considered pork is always going to be up for debate (is protecting a local environment for a few hundred thousand dollars pork? Is making easier access to public scientific information bad for America?) even though some like the two I list here are pretty obviously not going to create bigger benefits for America than what they cost tax payers.

However, when it comes to one of the biggest issues in America's budget perhaps no bigger one is who the government gives handouts. The Federal Government redistributed $850 billion ($2700 per person), $705 billion went to the elderly ($2238 per capita), and $144 billion went to disabled people ($457 per capita). This is also one of the most re-distributive programs in America since people get a larger percentage of the amount they put in at lower income levels.

While it is re-distributive the bigger issue is everyone pays in more than the amount of money they get out of social security. Compared to investing in assets this is clearly a worse plan than if people were to invest their money in a diversified index fund. According to Politifact, the average couple will pay in $722,000 in taxes to Social Security and get back $966,000 in benefits, for a return of about 33%. On the other hand, someone who deposited $4000 a year, increasing at 1% a year (even at an income of $40,000, this is reasonable if not on the low side if you have an employer matching Roth 401k program) starting today for the next 40 years and got the average rate of return on capital (which is 8% based on the last 40 years of the S&P 500) would retire with $1.2 million saved on a $201,500 deposit for a 600% return on investment. Here is my work. Even assuming in Compared to an index fund which performs at market rate Social Security does not come close to comparing. If people invested wisely Social Security Old Age Insurance would be completely pointless, even for people near the poverty line.

The bigger issue with this is what we do not fund which is education. Education is the lifeblood of the American economy. If people are not educated it doesn't matter how many computers we have because people won't know how to use them. Education is so important that when it is put into the Solow-Swan growth model it almost completely explains economic differences between countries. If countries are to grow they need both access to capital and education, meaning high quality education is one of the most important issues to economics. Despite this, the gap in educational opportunity in the United States is extremely wide. Schools start with their funding from their local communities which are extremely unequal in terms of resources to start with and the amount which state governments equalize the inequality varies significantly state to state. Students end up at the mercy of their state governments in how much help the state provides to fix the inequality. The Federal government does little to help equalize this inequality in funding available to children (to no fault of the children) despite the amount it would cost would not be a lot. There are currently 50.1 million students in the United States in K-12. If the Federal government were to give an average of $3000 per student to help equalize the inequality between students (which could be used to get extra training for teachers, new computers, whatever they need) this would only cost us $150 billion, which would be only 25% of what we spend on military and 3.8% of the budget. Even $6000 per student would be only half of what we currently spend on military and 7.6% of the budget, assuming that spending comes from other programs. The per capita cost would also be only $476 or $922 per person, which of course would be paid more by the rich than the poor. We can afford this, in fact, we can't afford not to prepare our next generation for the technology of the future. The economic impact of an educated population is far larger than the cost of that education. If I spend $36000 on a student over 12 years and end up boosting her salary from $30000 a year to $60,000 per year it is easy to see what an impact this would have on the economy as a whole.

So, should we get rid of Social Security to pay for better education for young Americans? I'm not sure this is really a choice we have to make. One option we could do is eliminate the cap on Social Security income, fix the system so people at get at least the same amount of money than they put in on average, and use the added revenue to invest in America's education in the form of Treasury Bonds, which is what we already do with Social Security's $2 trillion surplus (and counting). This would guarantee Social Security will essentially never run out of money and provide education to those who desperately need it. Combined with the rest of my tax code this will mean that many people will have credits in Social Security but not end up paying taxes under such a system. This will help protect people, because if your parents don't end up with enough when they retire it will be the children and grandchildren who pay without a program Social Security, and it helps directly redistribute money to the people who need it. Ultimately, the choice between Social Security and education is a false dilemma as long as we are willing to tweak the Social Security program. This is possible, and this is what we must do.

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