I’m not sure exactly what you’re getting at there, but if it’s to suggest that a lifetime annuity only behins to pay out when you run out of money, then no, that is not the case. Variable annuities typically enter the payout phase exactly when Social Security, at 65, or whenever else one decides to retire. Fixed annuities begin payout IMMEDIATELY, and then continue either until a predetermined expiration, or more commonly, until death.

But outliving one’s savings is. Annuities like Social Security do not directly indemnify for losses, but that just means that they are not indemnity plans, not that they are not insurance. Insurance involves the transfer and pooling of risk. To hedge against the risk of dying early and leaving one’s family without support, you purchase (whole/term/universal) life insurance. To hedge against the risk of dying late and either outliving one’s accumulated savings or placing a serious strain upon them, you purchase a (variable/fixed) annuity.

Social Security represents an annuitized form of insurance. Participants pay in with payroll taxes, and they will begin drawing out at some future date, until their death. Some will draw out less than they paid in, or won’t live to see retirement. Others (most) will draw out more than they paid in.

Kinda sounds like Social Security!”

Not really. The cash values of whole life policies are more like what you would accumulate in a private savings account. The insurance product that Social Security most resembles is a fixed annuity. The insurance product that Social Security + personal accounts most resembles is a variable annuity.

In fact, most insurers are invested overwhelmingly in government bonds, and many invested solely in them.

I find the entire line of argument somewhat strange. Like most traditional pension systems, Social Security takes the form of an annuity, which is itself a form of insurance. Risk (in this case, the risk of outliving one’s retirement savings) is transferred to a pool, and like most annuities, payouts then proceed from a given starting date until death.

In terms of long-term solvency, Social Security is not a particularly well-structured annuity plan, since the price is not rated according to the size of risk. If it were, then smokers would pay less than non-smokers, men pay less than women, etc. Although arguably, since payout adjustments are progressive with respect to income even without indexing, and the rich tend to live longer than the poor, that’s at least one risk factor that is partially accounted for.

But that Social Security is a poorly structured annuity program doesn’t mean it is NOT one. Most insurers, including life insurers who offer annuities, hedge against the risk of insolvency by way of reinsurance. The Social Security program’s reinsurance is the American taxpayer.

That said, what the decision to call it insurance or not-insurance has to do with the desirability of changes to the system remains somewhat beyond me.

Private accounts, on the other hand, promote a principle that saving (refraining from consumption now) creates an entitlement for future consumption. This is exactly the excuse bloated capitalists use for living in luxury without work!

So, the status quo of social security would look better than private accounts from the point of view of those liberals who had been most influenced by the socialist critique of capitalism. Or perhaps by real socialists who found it useful to pretend to be liberals.

While real socialism has been discredited with the fall of Communism, it seemed like a more desirable economic model in the first 3/4 of the 20th century. And attitudes can outlast their causes.

If you wish, you can buy an insurance policy on the size of the royal pooches litter.

Birthdays, which are inarguably uncertain events, are therefore insurable.

They’re buying insurance that they’ll have enough to live on until they die.

Mandatory reading for Gareth and MB:

http://www.scrivener.net/2005/01/on-stuff-and-nonsense-about-social.html

Here are some highlights:

[Trust fund] bonds — despite frequent claims along the lines that “they have the same status as U.S. bonds owned by Japanese pension funds and the government of China”, as per Krugman — are in fact very different from Treasury bonds held by the public (including foreigners and foreign governments) in a good number of ways.

One such way is that the trust fund bonds are demand bonds. That is, although they nominally are 15-year bonds for such purposes as setting the interest rate on them, they can be cashed in at the Treasury on demand, before they mature — and if they aren’t cashed in on demand they simply roll over for another term.

You cannot buy US Treasury bonds like this, and neither can Japanese pension funds nor the Chinese government.

…nor can insurance companies. Nor can insurance companies simply spend all their revenues and write IOUs to themselves fund future outlays.

It’s really amazing we’re still having this debate.

I’m not sure whether you are putting forward a serious point or not.

If you are saying people can’t insure against the risk of living longer than average, then you are just wrong. People can (for a price) trade capital for a life annuity.

If you are saying that these contracts have problems of adverse selection, then you’re right, but that’s an argument for compulsory universal insurance.

In a sense, I believe you. I think I can predict how quickly someone will spend their savings after having bought an insurance policy that pays out when your savings run out.

But I don’t think you can insure for “as quickly as possible”.

Socrates: But outliving your savings is a risk. And an actuarially predictible one. So it makes sense to pool that risk. Which is what insurance is.

Libertarian: OK. I can imagine a private company providing that kind of service. But they would have to fund their future liabilities.

Socrates: Dude, Social Security funds its liabilities for years and could do so in perpetuity using slightly more optimistic assumptions. Anyway, if that’s your problem, we can tinker a bit and solve it.

Libertarian: But Social Security can’t have real assets…

Socrates: US Government Bonds aren’t real assets? Would it bother you if the insurance company was 100% invested in US Government Bonds?

Former Libertarina, now anarcho-capitalist crazy: Beer funds! Repudiate the debt and give bondholders a share of Yellowstone!