Nine: New Models for Social Security
A rhetoric of crisis distorts the past and probable
future of Social Security. Contrary to popular opinion, the program
does not face an imminent catastrophe that demands fundamental
structural change. Nor is the debate over Social Security's future
strictly a technical matter. In truth, the technical details are
mind-numbingly complex. The issue is the model. A
determined and powerful coalition wants to move Social Security away
from social insurance and toward a market-based model. At stake is not
just Social Security, but the design of all programs that protect
Americans against risk and disaster. Just as workers' compensation and
unemployment insurance are key sites of the new class war, Social
Security is the site for the struggle over the core of the welfare
state, and, even, the nature of political community in America.
The Origins of Social Security
In 19th century America, elderly people faced four
- live on savings
- move in with children
- subsist on the crumbs of private and public
- keep on working - the alternative many chose
before retirement became a common expectation.
The demise of Civil War pensions pushed support for
the elderly to the top of the public policy agenda in the
early-twentieth century. Increases in population over sixty and fewer
old people living with their children.
The transformation of poorhouses into old-age homes
represented one response to this demographic and family change; another
was a burst of new private institutions for the aged.
The elderly also found themselves increasingly
unwanted in the work-place. Public and private pensions developed in
part as a response to the drive to push older employees out of the
Social Security, along with other important programs,
originated with the Economic Security Act of
1935. Initially, Social Security covered only about 53 percent of the
workforce. A major benefit increase and extension of coverage occurred
in 1950; and the indexing of benefits in 1972.
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Social Security and Social
Conservative social insurance ideology: risk
selection, contribution, and unequal benefits.
- Risk selection = insurance covers only certain
targeted contingencies (old age, unemployment, and disability, for
instance), not the economic needs of all.
- Contribution = individuals should contribute to
their own support.
- Unequal Benefits = benefits should reflect
Social Security has two other goals, not part of the
conservative social insurance model:
- Modest Redistribution = Social Security replaces
a higher proportion of the income of lower-paid workers.
- Adequacy = benefits should keep people out of
Social Security is a social
insurance program, which is to say that it differs in important ways
from both private insurance and public assistance. It is compulsory,
sponsored and regulated by government, financed through earnings-based
contributions, redistributive - and its benefits prescribed by law.
Public assistance shares none of these features, except redistribution,
which it accomplishes with tax money, however, not with earnings-based
contributions. Private insurance, meanwhile, must earn a profit.
Social Security forms only one pillar, although it is
the largest one, of America's retirement policy. The others are
employer-sponsored pensions, private savings, and a safety-net program
(SSI) for the most impoverished elderly, blind, and disabled persons.
Three of ten elderly Americans derive 90% or more of their income from
Social Security, and two of three receive more than half. Social
Security is now nearly universal.
Social Security has been self-supporting; it has not
added one cent to the deficit. No program has ever done more to prevent
and alleviate poverty or to protect income against erosion. none has
done more to protect children against impoverishment when a
wage-earning parent dies or becomes disabled. And no social program has
ever enjoyed greater public support.
The problems with Social Security according to its
- its benefits are unfair and inadequate.
- it reflects out-moded models that violate the
logic and ignore the potential of the market.
- historic and current gender bias.
Social Security's financing is the most contentious
issue. Social Security Trust Fund moneys do not sit like cash in a bank
teller's drawer. They are invested in federal government securities and
counted as income in the federal budget. The Trust Fund holds
government IOU's. The government bonds that the trust funds hold have
value as secure as the dollar bills that every citizen holds.
Social Security's current fiscal troubles date from
the early 1970s. The economic downturn following the 1973 oil crisis
fueled inflation, and prices rose faster than wages. As a result, the
cost of Social Security increased more than the wage-based taxes that
paid for it.
Alarmists prophesying bankruptcy exaggerated the
threat to Social Security's future. Images of fiscal crisis,
instability, unaffordability, waste, and political deadlock began to
spoil the sense of security the system was intended to provide.
Generational equity suddenly surfaced as a major
public issue in the 1980s. "greedy geezers" became the analogue of the
undeserving poor in public assistance, the malingerer in workers'
compensation, or the shirker in unemployment insurance. With the
transmutation of a public policy issue into a crisis and the
identification of an enemy, the master narrative of social policy
reform began to unfold in Social Security.
It was argued that "Social Security will go broke
because of the declining number of workers per retiree". The problem is
that simple dependency ratios do not take into account productivity
Social Security "was not meant to be a get-rich scheme
or a competitor to go-go investment funds. It is social insurance. It
is meant to provide at least a minimum standard of support for all,
regardless of initial station or life's vicissitudes.
The most effective misinformation campaign, however,
has convinced many Americans that Social Security will go bankrupt in
the 21st century. Virtually every past forecast about Social Security's
future has proved wrong because projections rest on predictions about
mortality, retirement age, and economic growth, none of which is
certain. The idea that one can legislate a permanent fix for Social
Security based on a forecast of the future is an illusion. Labor force
participation and productivity growth could almost wipe out the
shortfall anticipated from the decline in the ratio of workers to
retirees. From 1940 to the mid-1990s, the proportion of men ages 50-65
in the labor force plummeted from 77% to 36% as more and more men chose
An increase in wealth, productivity, or output per
worker would reduce the problem of supporting an aging population.
Social Security, by conservative estimates, would be
able to meet 75% of its expenses from current income in 2037. The
shortfall would be 25% or, looked at another way, 2.2% of payroll.
Finding a way to fill this gap does not present an insurmountable
problem or one that threatens major reductions in the benefits of
future retirees. The components of sensible reform are well known;
various plans combine them in different ways. Social Security requires
prompt adjustments; every year of delay increases the expense. But it
is not in danger of collapse, and it is not a system in crisis.
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Models of Social Security's Future
The most radical idea for recasting Social Security -
promoted by the libertarian Cato Institute - proposed to redesign
Social Security on a market model Through privatization. They wanted to
abolish government paternalism, end labor conflict, and facilitate the
hegemony of free market ideas. The Cato Institute though Social
Security should consist of individual retirement accounts funded with a
combination of mandatory and voluntary contributions, instead of taxes
paid to a government fund. The trend, they argue, clearly is away from
pay-as-you-g0 systems toward systems based on individual accounts and
Despite initial successes in Chile "high pressure
sales of individual pensions programs and other financial services" led
to "heavy losses for many people and cast a shadow over the entire
process". In Great Britain, huge numbers of citizens who opted into a
privatized system have been shattered financially. Rather than acting
as a model of success, the British experience raised "warning flags for
the U.S. about the perils of transforming guaranteed government pension
programs into investment-oriented plans that force people to make their
own financial decisions."
The libertarian advocacy of privatization exaggerated
the fiscal crisis facing Social Security, misrepresented the program's
purpose, deployed false analogies to call its integrity into question,
and distorted and underestimated its value.
As a practical plan, it was riddled with flaws:
- transitional costs
- variable investment returns
- political support
Two other problems with privatization:
- administrative costs
- individual ignorance about financial markets
The great winner in a system of privatized individual
accounts would be financial services industry, whose annual revenue
from managing the funds could easily reach $14 billion in 10 years.
As the debate over privatization and other
alternatives for reform heightened in the 1990s, a federal government Advisory
Council on Social Security explored the alternatives. There
was a sharp disagreement about whether the social insurance model on
which Social Security was based should be jettisoned for one designed
to imitate the private market.
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Crisis Resolved: The Magical Surplus
Social Security became a hot political problem for
Clinton, with mine fields along every path. Organized labor opposed
raising the retirement age. Banking interests wanted to move toward
privatization. Organizations representing the elderly resisted
reductions in benefits. Nobody wanted to raise taxes. Yet fear about
Social Security's future remained widespread, especially among young
Just when it seemed as though Social Security reform
had reached a political impasse, the economy came to Clinton's rescue.
Economic recovery turned the deficit into a surplus - a gigantic one
projected far into the future. It even promised to wipe out the
national debt. No longer was the question whether the nation could
afford Social Security. Suddenly it was awash in money. The question
became how to spend it wisely and in a way that secured the future of
Social Security and Medicare.
During the presidential debates, Bush revived one of
the key questions about the future of the American welfare state:
individual risk versus collective risk and responsibility. Subsumed
under the bland and positive concept of "choice" or the more
controversial label "privatization", the resolution of the question
promised to define not only the way the American welfare state
delivered future benefits, but its core principles as well.