price_of_citizenship.jpg (9774 bytes) The Price of Citizenship

Chapter Nine

Chapter 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 alternatives:

  1. live on savings
  2. move in with children
  3. subsist on the crumbs of private and public charity
  4. 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 workforce.

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 Insurance

Conservative social insurance ideology: risk selection, contribution, and unequal benefits.

  1. Risk selection = insurance covers only certain targeted contingencies (old age, unemployment, and disability, for instance), not the economic needs of all.
  2. Contribution = individuals should contribute to their own support.
  3. Unequal Benefits = benefits should reflect wage-based contributions.

Social Security has two other goals, not part of the conservative social insurance model:

  1. Modest Redistribution = Social Security replaces a higher proportion of the income of lower-paid workers.
  2. Adequacy = benefits should keep people out of poverty.

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 critics are:

  • 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 increases.

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 early retirement.

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 private investments.

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
  • inflation
  • political support

Two other problems with privatization:

  1. administrative costs
  2. 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 workers.

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.

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