Social Security And Its Enemies

The Case For America's Most Efficient Insurance Program

Max J. Skidmore

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9780367287641
• eBook ISBN: 9781000311877
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This book explains the history and principles of the social security system. It explains why social security is sound and documents the covert war against social insurance that dates back to the passage of the Social Security Act in 1935, explaining how the opposition emerged with a vengeance.

1
Myth Versus Reality in Social Security

It Ain't What People Don't Know

What if you up and die on me?" Tammy Whitebread was thirty-one, but Ron Taylor was fifty-five. Her question to Ron brought them to the altar. Most of their associates assumed Tammy and Ron, with two children, were already married. "Like many couples," said the Kansas City Star's feature on civil weddings, "they chose the courthouse in an attempt to keep the ceremony small, low-key, even a bit of a secret." After ten years as a family, the couple had as their "biggest reason for a quick courthouse connection: 'Social Security,'" Tammy said.¹

She wanted assurance that she and the children would be fully eligible for benefits if Ron were to die. Fortunately, she was aware of Social Security's value. She might not have made so sound a judgment if she had relied on television, magazine, and newspaper coverage for her information—including the lurid and alarming reports about Social Security that surface regularly in the Star itself.

What Can Americans Really Expect from Social Security?

What is it that Americans can expect from Social Security? The realities are sharply—and fortunately—different from what the headlines suggest.

Many people, especially the young, fear that it "won't be there" when they need it. This fear is the natural result of a coherent and well-financed campaign by Social Security's enemies to kill the system. To understand what is happening, it is necessary to examine the criticisms thoroughly, to study the nature of Social Security, and to brush aside propaganda and look at the real situation.

The late humorist Will Rogers is supposed to have remarked, "it ain't what people don't know that's so dangerous—it's what people know that just ain't so." That certainly is true about Social Security. Looking at the real situation, as this brief book makes clear, reveals some unexpected things. Among them:

• Despite the projections and the virtually universal assumptions of journalists and television commentators, it is highly unlikely that the trust funds where the money that runs the system accumulates will be depleted in 2029, 2032, or anytime. For that depletion to happen, the American economy would have to perform much more poorly than it normally does, and it would have to keep up that poor performance over an unusually long period.
• Despite allegations from opponents, the trust funds do contain real value, not "worthless IOUs." The government bonds that the trust funds hold have value as secure as the dollar bills that every citizen holds—and they are secure for the same reasons.
• Despite criticism of governmental borrowing from the trust funds, those funds could not just sit uninvested. Simply to invest them in the private market not only would introduce risk that government bonds do not carry, but also—because of their huge amounts—could give government control of private markets. President Clinton did suggest in his 1999 State of the Union address that a portion of the funds be privately invested. If the portion remains small, the risk would be acceptable, he believes, in order to obtain the probability of greater return from the stock market. He argues that an independent body could administer the investments without the danger of government control.
  Nevertheless, the potential dangers outweigh any possible benefits, and in any case such investment is unnecessary. Many people misunderstand the true nature of the trust funds' use of government bonds. The bonds in the trust funds do mature and do pay interest back into the funds. It is important to recognize that the trust funds did not create government borrowing. If they had not been available, the government still would have had to borrow, but the borrowing would have been from private investors. At the time when government borrowing was skyrocketing—in the 1980s—much of it would have been from Arab oil sheiks and Japanese industrialists. It all still would have to be paid back, but in that case, the funds would have been flowing abroad instead of into the Social Security system.
• Despite the frightening use of demographic statistics, the number of workers supporting each beneficiary will decline only slightly over the next three decades, and at its low point will still be greater than it was in the 1960s. Why? Because of the huge influx of women into the workforce.
• Despite the attempt to convince citizens that Social Security offers poor value, any objective study demonstrates that it offers exceptionally good value and will continue to do so.
• Despite the arguments of the critics, it is not wrong or unfair to pay benefits to those who are wealthy, who do not "need" them, any more than it is wrong or unfair for a company pension plan to do so. Building in "need" as a criterion for benefits would require the majority to contribute for a lifetime to a program that would not benefit them. It would also require a person seeking benefits to go through the humiliating process of checking with a welfare office and proving poverty. Social Security's universal coverage is its greatest strength.
• Despite the rosy promises of its advocates, "privatization" does not guarantee a better return, a good return, or even any return. It does guarantee widely varied results, including the possibility of loss of investment. Most proposals also guarantee the loss or drastic reduction of Social Security's life insurance and disability insurance protections. Duplicating these protections would require private policies exceeding a half million dollars. Additionally, most proposals would mean the loss of Medicare protection.
• Despite the glowing propaganda about the success of privatization in other countries, the results of foreign attempts to privatize range from doubtful to catastrophic. For example, the propagandists loudly praised Great Britain's partially privatized system as a model until the Wall Street Journal embarrassed them with its page-one report on 10 August 1998 under the headline, "Social Security Switch in U.K. Is Disastrous; A Caution to the U.S.?" Sub-headlines read, "Many Britons Suffer Losses on 'Personal Pensions'; Insurers Have to Pay Up" and "Tab May Reach $18 Billion." Did the "privatizers" admit their error? No. Their response was to become strangely silent about the British system, but to continue their campaign—as witnessed by Tom Miller's article, "How to Get Real Social Security," in the mass-circulation Reader's Digest for December 1998.
• Despite the apparent plausibility of the calculations the privatizers make to show that workers will be better off under a privatized system, those calculations are in fact based on false assumptions. They assume, for example, that without Social Security, each worker would have not only the 6.2 percent Social Security taxes to "invest," but the employer's 6.2 percent match as well. (Some have even argued for the full 7.65 percent plus the match, which includes the Medicare tax.) Why? Because "the match is a part of the salary." Anyone who believes that employers would voluntarily add that amount to the employees' take-home pay if Social Security were eliminated forgets the current climate of downsizing, in which employers compete to slash jobs and often to convert as many as possible of those remaining to part-time and temporary positions that do not carry expensive fringe benefits. So the critics' calculations involve doubling the amount of money that actually would be available to invest. They also tend to use as an example a single worker whose average lifetime wage is at or above the maximum for Social Security taxation. Using as an example a worker at the top of the income groups always will produce a less favorable result than using one at the middle or lower, because lower paid workers receive a greater return in relation to their payments than more highly paid workers do. They do so as the result of a policy explicitly designed to reduce poverty. Moreover, most workers are not single and therefore have protection for survivors and can expect a spouse's benefit. Even the single worker has coverage against disability. Privatizers do not figure this coverage, with a value greater than a $200,000 policy, into the calculations. Equally misleading is the privatizers' tendency to ignore the inflation protection built into Social Security benefits. Those benefits are indexed to inflation; returns from fixed investments are not.
• Despite the allegations of the critics, Social Security does not involve "intergenerational inequities"—a notion that is not only suspect but vague and probably impossible to define. Nor does Social Security involve the unjust enrichment of one economic class at the expense of another. Virtually the entire population is covered, deferring consumption in order to receive not only retirement benefits, but also health benefits, coverage against disability, and protection for survivors. Younger workers are not only protecting themselves and their dependents by their Social Security payments, they are also ensuring in most cases that they do not have to care directly for elderly parents and grandparents, as pre-Social Security generations were required to do.

This list could go on, but these points should be enough to cause some rethinking about the dire predictions relating to Social Security. Many of them are worth repeating, and so they will be repeated in the following discussion.

Why Is Social Security Still So Popular?

Remarkably, in spite of the campaign and the skepticism, studies consistently rate Social Security as highly popular. In fact it is arguably the most popular program that the United States government has ever enacted. There are good reasons for its popularity. Before Social Security, poverty was a common condition of the elderly. Now, the aged are financially much better off. In lifting the elderly as a group from destitution to relative comfort, Social Security has done—and is doing—precisely what the country designed it to do: It is enhancing security by providing benefits.

Does this mean that Social Security is enriching the elderly beyond the rest of the population? Are Americans at the mercy of a bunch of "Greedy Geezers," as the New Republic called them a few years back, a charge many others have echoed? Not at all. There is still a greater rate of poverty among the elderly than among other adult Americans.²

It bears repeating that Social Security's benefits are not limited to the elderly. They do provide a floor for retirement income, but they also protect Americans against loss of income resulting from disability, and they protect children and caregivers of those children in the event of a breadwinner's death. According to the Social Security Administration's Office of the Actuary, it would require a policy of $207,000 to duplicate the disability coverage, and one of $307,000 to equal the protection for survivors.³ Social Security also protects the younger generation indirectly by making it likely that its parents and grandparents will be self-sufficient. The system ultimately helps nearly everyone, and its benefits come without the need to demonstrate poverty.

Americans have earned their benefits. They are not charity. That is the major reason why the system remains so popular. Could it remain popular if the American public reacted in outrage (as its enemies hope they will) to the fact "that millionaires receive Social Security"? Since they, too, have paid in, is there any good reason why millionaires should not receive benefits? Wealthy retirees receive private pensions, even when the companies from which they retired complain of low profits, as noted above, and no one argues that private pensions should be means tested.

It Americans ever give in to the plea that the wealthy should not receive benefits, would the strong incentives not to save (because doing so might make it impossible to collect Social Security later on) damage an economy that already suffers from a rate of saving that nearly all economists believe is too low? If it were necessary for everyone to go through the humiliating process of proving poverty in order to receive benefits, could middle-class support for Social Security continue, or would it vanish overnight? If that support vanished, there is no doubt that the system would vanish also.

Does this mean that the critics from both extremes of the political spectrum are correct when they call Social Security a "middle-class program?" It does not. Surely the program helps the middle classes, but it helps the wealthy as well—and it helps the poor most of all. It is far from perfect. The taxes hit the poor harder than the middle class, and hit the middle class harder than the wealthy, but the poor receive considerably more in benefits, in relation to the taxes they pay, than other income groups do. In addition, the earned income tax credit offsets FICA taxes for the working poor.

The public once understood the nature of the Social Security system. Now attacks and misleading rhetoric from opponents—and from some misguided supporters, as well—have obscured this understanding. Social Security is a program not merely for the middle class, but for the whole of American society. The public needs once again to understand this fact.

Many figures in prominent political positions today would be delighted to see the entire system including Medicare vanish, Of course generally they cannot say so because they fear public reaction. They content themselves, therefore, with calling for means tests and benefit cuts. They argue that they intend only to "save the system."

Consider the controversy in 1995 and 1996 over whether the Medicare proposals that President Clinton vetoed would have provided "cuts" in the program as the president said, or merely "reductions in the rate of growth," as supporters of the reductions alleged when they argued that they were attempting to "save the system." The Republicans were correct when they pointed out that their proposals would have resulted in increasing the money being spent on Medicare. Thus they could claim that they proposed merely reductions in the rate of growth, certainly not cuts.

What they attempted to hide, however, was that inflation and growing population require growth to maintain the same level of benefits. Their proposals would have resulted in benefit reductions. Undoubtedly the program would have continued to grow in the sense that the total dollars spent would have been greater, but it would have provided considerably less to each person. Providing less—reducing benefits—is a rather good definition of a "cut," and all parties to the debate were well aware that the proposals would have reduced benefits. It is in this sense that "cut" was an appropriate description of the proposals.

Ine system covers a huge number or Americans. Now, virtually all can look forward to receiving benefits. Remarkably, those benefits are provided at an administrative cost of less than one cent of every tax dollar collected.⁴ That is far more efficient than any private insurance program—so much so that no private insurance program is even in the same league, let alone ballpark.

The very best private insurance companies take many times what Social Security does out of every dollar paid in. Even a well-managed profitmaking HMO returns less than ninety cents of each dollar received in benefits. It's a novel idea for Americans—government being more efficient than private industry. In the case of Social Security, though, that clearly is the case. This observation is true not only in the United States, but generally around the world.

The hidden—and, to Americans, unbelievable—truth is that government in general operates to provide benefits much more efficiently than any private plan can. This includes health benefits. Government provides health care, when it does so, at much less cost than private industry does. The private health care system in the United States costs more for what it delivers than any health care system in the world. The Medicare system delivers vastly more for every dollar paid in than the best managed health plan can accomplish. Even the much maligned Medicaid program (which provides care for the poor) does so.

Yet we hear that government can never do anything right. When we hear this, we are inclined to think, "Yeah, that's right!" We rarely think in detail. We ignore such things as, for example, constructing the Panama Canal, winning two world wars and a cold war, putting a man on the moon, setting up the Internet—and we even ignore the fact that the Social Security system has never failed to provide its benefit checks when due. That is something that the insurance industry certainly cannot say of itself. It would come as a shock, perhaps, to many Americans to discover that most retired people do not receive private retirement benefits at all. Something like 92 percent of American retirees receive Social Security, while only about 31 percent receive anything from private pensions.⁵

In response to propaganda favoring privatization, we hear people say, "Social Security's a great idea, but it's going broke, and won't be there long." As I have said, Social Security remains popular, but it is obviously true that confidence in the stability and future of the system has declined. Is our declining confidence the result of any major troubles in the system that we have overlooked until now, or does it result entirely, or almost entirely, from exaggerating the troubles that the system faces?

What Happened to the Surplus? Or, the Case of the Curious Calculations

In the early 1980s, Social Security faced troubles with cash flow in its OASI Trust Fund, Gleeful politicians may have been happy to exaggerate, but the troubles were real and led to the creation of a 1982-1983 National Commission on Social Security Reform, chaired by Alan Greenspan. The Greenspan Commission's recommendations became the basis for the restructuring of the system in 1983.

Among other things, the revisions led to a gradual increase in the full retirement age from sixty-five to sixty-seven, and mandated a schedule of tax increases that culminated in today's 7.65 percent tax on employees with its employer match. These changes were calculated to bring the system not only into balance, but into surplus. That projection was for an actuarial surplus of .0...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Preface
• Acknowledgments
• 1 Myth Versus Reality in Social Security: It Ain't What People Don't Know
• 2 The Gospel of Wealth Amid Acres of Diamonds
• 3 FDR's Plan and Its Enemies Emerge
• 4 From Mrs. Fuller's First Check
• 5 Frightening Facts? Or Persistent Politics?
• 6 The Enemies Regroup: Rallying 'Round Reagan
• 7 Presidential Attitudes Toward Social Security: Only Desperate Men with Their Backs to the Wall
• 8 The Special Problem of Health Care: The Fortunes to Be Made
• 9 Some Final Words
• Appendix
• Notes
• Suggestions for Further Reading
• Index