Government and social insurance: a view from the left

A massive assault on "big government" dominates American politics. It began with Reaganomics in the early 1980s and received a powerful ideological boost from the collapse of Communism in Eastern Europe a decade later. It is gaining momentum in the 1990s as the Republican Party tells "middle-class" Americans that government policies like taxes, welfare, environmental and safety regulations, and affirmative action are to blame for stagnating household incomes and leaner employment prospects. Right-wing myths about excessive government intervention in the economy flood the media, Congress and state legislatures, the typical workplace, and all levels of the education system.

The result has been a shift of the political spectrum far to the right and the virtual elimination of even moderately left-of-center ideas from public debate. The impact on beliefs and attitudes is unmistakable. It conditions the way that people think and react to economic and political issues that have been fought over for decades. Particularly distressing in this respect is that some who consider themselves liberal, progressive, or radical now support policies advocated by an increasingly aggressive and vitriolic right.

Why this is happening is a complex question with several answers, depending on the issue at hand and the individuals involved. Some on the left may succumb to the incessant hammering of the right by unconsciously accepting the terms of the "official" discourse, leaving themselves wide open to specious arguments and phony evidence. Others, often with professional training in economics, may be seeking relevance by adopting market "efficiency" criteria that will allow them to join the game on the new playing field. Many more, perhaps most, may be limited by historical ignorance. They do not understand - or may dismiss as no longer relevant - how programs that aid large numbers of people in a variety of ways grew out of a long struggle for economic security and social justice. They also fail to appreciate how such programs make a mockery of the conservative anthem that, no matter how worthy the intentions, any attempt to substitute government for the free market will hurt the very people who are supposed to be helped without making anyone else better off.

Nowhere are these currents more evident than in the latest round of attacks on federal Old-Age, Survivors, and Disability Insurance (OASDI), more commonly known as Social Security.[1] Now sixty years old, these programs were designed to replace a portion of the earnings a worker or his or her family loses because of retirement, disability, or premature death. Social Security happens to be the only area of the modern welfare state in which this country is not an utter disgrace by international standards. The United States is the only high-income nation that has no national health insurance, no family allocations for children, and no mandatory maternity or paternity leave. It is one of only four countries with no paid statutory vacation time, and the other three (Britain, Italy, Denmark) provide four to six weeks paid vacation through general agreements.

Social Security: More Than a Little Help from Our Friends

The U.S. Social Security system itself is modest by European and Canadian standards. Retirement benefits in 1995 average $8,376 a year for a single person - slightly less than an annualized minimum wage for a full-time worker - and $14,136 for a couple. Nonetheless, Social Security is the major source of income for most of the 33 million Americans over sixty-five years of age. Fifty-five percent of the elderly receive over half their income from Social Security, whereas only 7 percent receive over half their income from pension funds (private and public). For those classified as poor, Social Security provides three-fourths of their income. Without Social Security, according to the Census Bureau, nearly half the elderly population would fall below the official poverty line. Instead, poverty rates for the elderly are now below the rates of the general population, which was not the case until 1982. The poverty rate for seniors in 1993 was 12.2 percent compared to 15.1 percent for all persons.[2]

Lest it be thought that Social Security is making older people rich and greedy, as Social Security bashers often imply, it should be noted that in 1993 the median income for people sixty-five and older was $17,751 (including Social Security), compared to $36,858 for people aged fifteen to sixty-four. Ten percent of the elderly had incomes of $50,000 or more, compared with 32 percent of all others. Affluent retirees - relatively few in number, as these figures show - may receive higher monthly benefits, because these are calculated on the basis of a person's annual preretirement income (up to a limit). But in 1993 Congress effectively reduced benefits for better-off retirees by making up to 85 percent of their benefits subject to federal income taxes. Furthermore, unlike private pensions, the formula used to determine Social Security benefits replaces a larger portion of a low-wage worker's preretirement earnings than a high-wage worker's. The current "replacement ratio" runs from 71 percent for a sixty-five-year-old married person whose income in the year before retirement was $15,000 down to 29 percent for one who earned $75,000 (for single people the range is 47 percent to 19 percent). As a result, while Social Security payroll taxes are regressive because they are capped (at $61,200 in 1995) and take a lower percentage of higher incomes, Social Security benefits redistribute income progressively by giving a much better return to poorer workers. In the 1992 Economic Report of the president, the Bush administration's Council of Economic Advisers acknowledged that "on average, Social Security redistributes resources from higher income households to lower income households."

Social Security is the most important nonmarket mechanism for allocating income in the United States. Since its inception it has never missed a payment and is generally rated high in terms of both customer service and efficiency. OASDI benefits of $317 billion were paid to 43 million people in 1994, at an administrative cost of only 0.8 percent.[3] This successful performance stands as an ongoing challenge to the "superiority" of free market institutions, which have consistently failed to provide satisfactory pension and disability insurance. This is why Social Security sets a "bad example" for the phalanxes of the right: it provides a dramatic illustration of private market failure and shows that government can be reasonably effective in coping with it, if given adequate resources and popular support. That the right should try to destroy this bad example through misinformation, distortions, and outright lies is not surprising. That some on the left should be taken in by this campaign is another matter.

Magical Mystery Tours on the Left

Paul Krugman, professor of economics at MIT, is rated "one of the economic world's superstars" by the New York Times and in 1991 won the American Economic Association's award for the best economist under forty years of age. Krugman is no radical, but he is a prominent liberal who has challenged several aspects of free trade theory, as well as right-wing claims that the surge in income inequality in the United States during the Reagan-Bush years is a statistical figment.[4] In Peddling Prosperity, Krugman refers to work by Martin Feldstein, Harvard economist and former Council of Economic Advisers chairman under President Ronald Reagan.[5] According to Krugman, Feldstein "pointed out that the existence of the Social Security system reduced the incentives for people to save" for their old age. So, writes Krugman, "if Social Security was really taking the place of private pensions or private saving, it could be having a major effect in discouraging the formation of capital."

One genuflection to the right here is the acceptance of the classical economics doctrine that saving automatically generates real investment, a myth exploded by John Maynard Keynes - whom Krugman vigorously defends elsewhere in his book! Much more disturbing is Krugman's silence on what is widely referred to as "Martygate," namely, Feldstein's 1974 article purporting to show that Social Security lowers private saving. Dubious about Feldstein's findings, two Social Security administration economists asked him for his data to test for themselves. It took Feldstein three years to deliver. When his data were rerun, they produced discrepancies that revealed a convenient programming error. Feldstein's model, retested with the error corrected, showed that Social Security was associated with an increase in private saving.[6] Feldstein admitted the mistake, blamed the programming error on a graduate assistant, then claimed (as he has ever since) that new calculations validated his original argument. Most economists remain skeptical, but not Krugman, at least not in public, even though he surely knows all about this sordid episode.

Krugman gives credence to another charge against Social Security: "Each [retiring] worker can expect to receive more in benefits than he could have gotten if his payments into the system had been invested in a private pension plan." He has company to his left. University of Massachusetts economist Nancy Folbre claims that retirees receive "between two and four times as much as they could have if they had placed their tax contributions in a high-yielding private pension" or "more than twice the value of their contributions, plus interest."[7] Social ecologist Mike Males adds that "upper-income elders ... are receiving many times more dollars in benefits than they are paying into the system."[8] If these statements imply that Social Security recipients are getting back "twice the value" of their payroll taxes, or "many times more," they are referring to the actual dollar amounts of the contributions paid into the system years ago, without taking inflation into account. The maximum payroll tax contribution in 1972, for example, was $414 (4.6 percent of incomes up to $9,000), which is worth $1,530 in 1995 dollars. Ccorrecting for inflation thus reduces the ratio of benefits received to prior contributions. If they mean that the same sums off money "invested in a private pension plam" would producea lower rate of return, they overlook the fact that, for all social security systems, this is an early-stage feature that becomes less true as such systems reach a mature stage where newer retirees have made larger contributions for their entire working lives. For the currently retiring generation in the United States, the rate of return on contributions is high, primarily because of the increases in real benefit levels enacted by Congress in the early 1970's, when benefits were "indexed" to inflation. Those increases, however, were curbed by legislation in 1977 and 1983 that raised payroll taxes and reduced the indexing formula, so that the return to future retirees will be lower.

But all such rate of return calculations are based on a fallacy. They reflect the practice, almost intuitive in the United States, of applying free market criteria to nonmarket institutions. The difference between private insurance plans and social insurance is that the former required to build up funds to meet future claims, while for the latter, its "contributions" become part of government's current revenues. In other words, Social Security is a transfer program run on a pay-as-you-go basis: active workers and businesses are taxed to finance current benefits for all those eligible to receive them - and all of us are, in one unforseeable way or another. The essence of social insurance is the group risk we all share, making any rate of return calculations meaningless. Some people get no benefits because they die before retirement, single and childless. Some die after receiving only a few months of benefits. Others benefit more because they live longer or because they have the misfortune to become disabled.

The most frequently heard attack on Social Security - that it is "actuarially unsound" and will run out of funds once large numbers of "baby boomers" start to retire in twenty years - is another example of a false analogy between private insurance and a government system for allocating income. The "soundness" of Social Security depends on the capacity of the federal government to raise the necessary revenues, not on any "fund" accumulated for that purpose. At present, Social Security is running a surplus of $60 billion per year, and annual income will exceed annual payouts until 2015. Subsequent deficits can be accommodated through modest payroll tax and benefit adjustments, as well as growth of the overall economy. Business Week, in a report entitled "The Economics of Aging," concluded that "Social Security's financing problems are manageable," without doing anything "draconian."[9]

For too many people, free market economics obscures the universal and open-ended character of social insurance compared to private insurance contracts. Nowhere in the writings of Krugman and Folbre, for example, is there any recognition of Social Security's disability and survivor benefits. Forty percent of those currently receiving Social Security benefits are not retirees. The reason is that one out of five people working today will die before age 65 and three in ten will be disabled for six months or more. Of total OASDI benefits of $317 billion in 1994, $52 billion went to 7 million survivors of deceased workers and $38 billion more to 5.5 million disabled people and their families.

The importance of these benefits needs no elaboration, yet critics of Social Security seem to be unaware of their existence. Of course, enemies of "big government" will ignore the assistance that Social Security gives to people of all ages, including children. They can also be expected to accuse the elderly, who strongly defend Social Security, of fomenting "intergenerational warfare." But how can anyone on the left uncritically accept this gross misrepresentation of the temper of American politics today? Folbre accepts it; she advises the left to "challenge the structure of a Social Security system that pits the elderly against the young by guaranteeing the welfare of one but not the other.... Are huge transfers to the affluent really the price we have to pay for modest assistance for the poor?"[10] Sylvia Hewlett, another specialist in the economics of child poverty, asserts that "there are more urgent priorities than subsidizing the life-style of an elderly person who already has a substantial income. A case in point are those millions of American toddlers shut out of Head Start due to a shortfall in public funds."[11]

This is an economist's "trade-off" game, and a badly flawed one at that. First, its terms are inaccurate: Social Security transfers to the affluent are not "huge." In 1990, Social Security disbursements totalled $249 billion; of that amount, retirees with incomes of $1 00,000 or more received $8 billion, or 3.2 percent, a share now shrinking because of the 1993 taxes on Social Security benefits.[12] Second, this analysis begs the question of whether we treat our elderly population too generously or our children too shabbily. What if both are inadequately supported? Should one be improved only at the expense of the other because "a shortfall in public funds" appears to rule out any other solution? Folbre's answer - that Social Security "reinforces inequalities based on gender and age and discourages elderly participation in class-based politics" - is irrelevant. At its birth Social Security did discriminate against single women and divorced mothers, and it still does. But changes in benefit formulas over the past twenty years have reduced these biases, and they could be eliminated by strengthening Social Security and expanding its coverage, not by helping the right wing demolish it.

Perhaps the most deceptively attractive idea being peddled by Social Security critics is to reduce benefits for higher income retirees and eliminate them for the affluent. Mike Males has bought into this one: "Anyone who is serious about redistributing income in America must be willing to subject all public benefit programs - whether universal or targeted - to means-testing."[13]

Such a policy would help finish the job that the right has begun - undermining the political consensus for Social Security so that someday it can be abolished altogether. In 1935, the idea of accepting support from the government was still an anathema to most people; the Social Security payroll tax was a device to establish the system's respectability and appeal to the American ethic of productive work and individual responsibility. People came to view Social Security benefits as an entitlement they paid for, not a "handout." This is the source of the system's widespread political support, which allows for some redistribution of income as well as income security for millions of households. Imposing a means-test to reduce benefits for the well-off would be seen as turning Social Security into a program for the poor. Given the historical antipathy toward "welfare" in this country, this perception could weaken Social Security over time, lead to lower benefits, and give conservatives another "welfare mess" to decry. Means-testing Social Security would also end its universal nature and make its financing system obsolete. It would be unreasonable to expect anyone to pay an employee or employer payroll tax if Social Security benefited only low-income Americans. And it should be recalled that a form of means-testing already exists, since recipients with incomes above specific thresholds must pay income tax on as much as 85 percent of their benefits.

Indeed, the singling out of Social Security benefits for special taxation is not a welcome sign. If a Ross Perot or a Madonna or a Michael Jordan pays in Social Security taxes year after year, they are as entitled to receive Social Security benefits as anyone else. If they do not need those benefits, the remedy is simple: tax all of their other income at a substantially higher rate whatever its sources. This way the twin pillars of the welfare state - social insurance and income redistribution - are preserved and reinforced. Ideally, universal coverage for medical care, child support, unemployment, disability, premature death, and retirement would be financed by progressive income taxes. "Damn it," House Speaker Tip O'Neill complained after passage of the 1977 tax bill that solved the Social Security "crisis" of that year, "we're the only nation in the world that doesn't use general revenue in some way for retirement benefits."

Goals for the Left: Don't Get Fooled Again

Whether the issue is Social Security, health care, or education, the aim of the left should be to pry resources and power from the grip of capital to solve all these problems. The point is not to shift funds from Social Security benefits toward needy children but directly to expand income supplements for poorer households - and public job programs for the parents of these children if need be. It is a sad commentary on the state of the left that some of its members look to "special interest" tradeoffs to address the deteriorating economic conditions of the bottom four-fifths of American households. All of the so-called financing problems of Social Security could be resolved if part of what promises to be an everlastingly bloated military budget were shifted to social purposes. More help could come from cutting "tax expenditures," or deductions and allowances for corporate health insurance, corporate pensions, mortgage interest, and state and local income taxes, all of which accrue disproportionately to affluent households and large corporations.[14] Vastly larger revenues could be generated for Social Security by eliminating the cap on the payroll tax; extending the tax to property income (dividends, interest, and rents) would bring in even more. These are the kinds of goals that should separate the left from conservatives, including Concord Coalition leaders like Peter Peterson, whose attacks on Social Security in Facing Up (1993) have seduced a number of people on the left.[15]

Another goal of the left, with respect to social insurance, should be to keep the spotlight on the record of "market failure" of the private pension system. After twenty years of pension reforms, beginning with the Employee Retirement Income Security Act of 1974 (ERISA), barely a third of all private-sector retirees are receiving private pensions or annuities, and the median benefit is $4,500 a year. An additional 8 percent get lump-sum payments when they retire, but half of these are $5,000 or less. Half of all workers have less than $10,000 in savings at retirement, other than their homes and cars. Fewer than one in five private-sector pensioners has ever received a cost-of-living increase, while their Social Security benefits are fully indexed for inflation.[16]

Worse is in store. Thanks to a 1981 Reagan tax ruling, private businesses are encouraged to shift from employer-paid pensions with guaranteed payout formulas (called defined-benefit programs), to 401 (k) plans funded by workers through voluntary pre-tax wage and salary deductions (defined-contribution programs). The big problem with do-it-yourself retirement is that half of all year-round, full-time workers earn less than $27,000 per year, hardly enough to build a comfortable nest egg. While some employers match part of a worker's contributions to 401 (k)s, most plans deny benefits to workers who are unable to contribute. Those who do contribute are given tax breaks, but they are also assuming most of the management costs and investment risks formerly borne by their employers. According to Fortune magazine, 401 (k)s have become the butt of a joke in business circles: "What begins with F and ends in K and means screw your employees?"

Conservatives and others will reply that "government failure" must also be expected in cases like Social Security, poverty programs, and regulations of various kinds. No one will deny the element of truth in this, but the comparison with private market failure is lopsided to a fault. In most instances, government intervention comes as a reaction to disastrous private market failure - akin to shutting the barn door after the horse bolts. All income security programs, from Social Security to Aid for Families with Dependent Children to food stamps, were established in the 1930s and 1960s in response to the demonstrated inability of the free market to deal with economic breakdown and persistent poverty. In the current political climate, the fact that these programs help stabilize the macroeconomy and protect it against a replay of 1929-1933 drops out of sight. What counts now for the crusaders of the right is that any nonmarket institution created outside the sphere of private production and exchange relations is potentially troublesome: its operations may defy the rules of market efficiency and the just income distribution that it supposedly creates. Through Social Security, millions of people have income claims that are no longer determined by the market and controlled by private capital. This is why rightists are seizing the opportunity to lash out against Social Security, after years of uneasy coexistence with it. By contrast, the ideal "public policy" for the right is one that is an extension of market logic: it targets a specific part of the population which can be identified and treated as an exception. Welfare programs are one example, means-tested Social Security benefits could soon be another. Recipients can be officially categorized as inferior by the standards of the competitive labor market. Only their low productivity, and commensurately low earnings, qualify them for a monthly stipend that will barely pay for life's necessities, and maybe much less.

For the left, Social Security is an encroachment on the capitalist domain and must be defended as such. It should serve as a model for medical care, minimum housing allowances, and much more. These, of course, are unthinkable for the moment, but if Social Security is dismantled or substantially cut back, they will be beyond the reach of generations to follow.

NOTES

[1.] On the earliest stages of this attack, see the two articles on Social Security by Jacob Morris and die Editors in Monthly Review, February 1983. [2.] For the data in this and the next paragraph, see U.S. (House) Committee on Ways and Means, 1994 Green Book, pp. 864-65,1155,1158; U.S. Bureau of the Census CD-ROM, Income and Poverty: 1993. The official poverty threshold in 1993 was $8,740 for a two-person household whose head was 65 or older. With a household head under 65, the threshold was $9,728 ($14,763 for a four-person household). [3.] 1995 Annual Re" of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, p. 3. [4.] See Paul Burkett's review of Krugman's The Age of Diminished Expectations (1990), in Monthly Review, October 1992. [5.] Paul Krugman, Peddling Prosperity (New York: Norton, 1994), p. 73 [6.]"`Superstar' Feldstein and His Little Mistake," Dollars & Sense, December 1980; "A Spectacular Debunking of Social Security Critics," Business Week, 22 September 1980. The 1985 Economic Report of the President, the first one following Feldstein's departure from the Reagan Council of Economic Advisers, stated that -the net effect [of Social Security] on private saving is uncertain" (pp. 175-76). [7.] Nancy Folbre, Who Pays for the Kids? Gender and the Structures of Constraint (New York: Routledge, 1994), p. 200; Nancy Folbre and the Center for Popular Economics, The New Field Guide to the U.S. Economy (New York: New Press, 1995),5.16 [8.] In These Times, 20 February 1995, p. 5. [9.] Business Week, 12 September 1994. On the financing of Social Security, see Robert Eisner, The misunderstood Economy (Boston: Harvard Business School Press, 1994), ch. 6 and Left Business Observer, no. 67, December 1994. [10.] In These Times, 7 February 1994, p. 33; In These Times, 7 March 1994, p. 5. [11.] Sylvia Ann Hewlett, When the Bough Breaks: The Cost of Neglecting Our Children (New York: Basic Books, 1991), p. 141. "Market research surveys show," Hewlett indignantly adds, "that 37 percent of the elderly population regularly take foreign vacations." "Regularly" turns out to mean. "within the last three years" (pp. 141 and 310). This kind of libertine behavior by people who may be enjoying their first opportunity to travel abroad after years of work (and minimal vacation time) might finally provide Feldstein with proof that Social Security undermines private saving. [12.] U.S. Congressional Budget Office, Reducing Entitlement Spending (1994), p. 8. [13.] In These Times, 20 February 1995, p. 5. [14.] Christopher Howard, "The Hidden Side of the American Welfare State," Political Science Quarterly, Fall 1993. [15.] On this widely touted and highly manipulative book, see the reviews by R. B. Du Boff in Z Magazine June 1994, and Robert McIntyre in The American Prospect, Summer 1994. [16.] See Karen Ferguson and Kate Blackwell, Pensions in Crisis (New York: Arcade Publishing, 1995).

Richard Du Boff is professor of economics at Bryn Mawr College.

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