An analogy to explain reforming Social Security

Issue 2 of The Economists’ Voice is out. As would be expected, most of the articles address issues central to the election. George Akerlof, brilliant man that he is, offers this nice analogy to explain the Social Security crisis and the problems of privatizing the fund.

Sixty percent of seniors get almost all their income from their social security check. For the next thirty percent it is most of the income they receive.

The administration plans to take care of the problem by privatization. But once again we see a magic wand. Privatization won’t work. It won’t work because it can’t work.

Privatization begins with the necessity of paying the social security for a whole missing generation.

Consider an analogy.

Consider a family with 12 children. These children pass their clothes down as they grow out of them.

That’s exactly like how we pay for social security. Social security is on a pay-go system. In our current system each generation pays for the social security and medicare support of the next.

Let’s return to the analogy. If the 12-child family decides to privatize its clothes — if each child is allowed to keep her own when they grow out of them— then the kids will have nothing to wear.

Useful for explaining the dilemma to those who don’t get it.