Social Security's Real Meaning

Cynthia Crossen, in her monthly Deja Vu column in the Wall Street Journal (alas, subscription required), offers a look back at the real impact of Social Security. A few extracts:

Getting old is rarely regarded as a happy prospect, but before Social Security, aging in America often meant penury and sometimes even the poorhouse. . . .

And over the hill to the poorhouse many older people went. Financed by local taxes, poorhouses were the shelters for all of a region's indigent, and in the early 20th century, most counties had one. The best of the poorhouses provided a meager standard of living. The worst doubled as insane asylums and orphanages. "I was three miles from town but felt like I was 3,000 miles from friends and country," wrote Ed Sweeney in his 1927 memoir, "Poorhouse Sweeney." "I have ate off trays that looked like they had spent the rainy season laying on a city dump."

Germany, Sweden, France and England, among other countries, already had legislated publicly funded old-age insurance before Americans took up the debate. Proponents in the U.S. wondered why men and women who had been diligent, thrifty workers should suffer hunger and insecurity in their old age. In a letter to an editor, a postal worker pointed out that horses owned by the federal government lived out their old age on full rations. "For the purpose of drawing a pension," he declared, "it would have been better if I had been born a horse than a human being."

Opponents argued that sensible people would provide for themselves, and that universal old-age insurance would set the country on the slippery slope to socialism. Children, not the state, were obliged to care for the old, they said; without that responsibility, family ties would loosen. And if employees were guaranteed lifetime support, wouldn't they feel less incentive to work hard?

Granted, Social Security came on stream during the Great Depression, and some of this reflects the general misery of those times. Still, Crossen points out that the problems faced by the elderly predated the Depression, and that even at the height of the stock market boom before the 1929 collapse, the combination of low incomes and high medical bills meant that "retirement nest eggs, except among the wealthiest Americans, didn't exist."

All of this is worth remembering when we consider Bush's stated desire to create an "ownership society" -- a concept nicely eviscerated by Jonathan Chait, in a recent article in the New Republic (registration required), as just another stalking horse for the Administration's ongoing efforts to redistribute income upward. One plank of Bush's plan, which he's talked about for years, is the "privatization" of Social Security, under which workers would personally manage a chunk of their Social Security nest eggs. That proposal, however, seems to speak of a fundamental ignorance of both the structure of the program and of the problems it's trying to solve. I'll cheat once again and let Chait's article speak for itself:

The second element of Bush's "ownership society" is the privatization of Social Security accounts. Social Security is another form of insurance--insurance against the risk of making bad investments, the risk of outliving your savings, the risk that a disability keeps you from working, or the risk of being widowed. (To some extent, it also treats the possibility of earning a low income as a risk, giving low-earning workers a higher return on their payroll taxes than high-earning workers.) The program is designed to spread those risks among the working population.

But Bush insists that workers "need to own and manage their own pension and retirement systems." He proposes that, instead of giving your payroll taxes to support somebody else's retirement, you should be able to keep some of it for yourself. Unfortunately, there is an arithmetic problem with that idea. Right now, payroll taxes go to fund people who are currently retired. If that money were instead diverted into the individual accounts of those still in the workforce, it would open up a huge financing hole (at least $1 trillion over a decade). And remember, Social Security is already facing a financing hole as it is.

Beyond the shaky math, there's a deeper philosophical principle at stake. If you control your own retirement, you have a better chance of striking it rich in the stock market. But you also have a better chance of losing your money. In other words, privatization concentrates the risks on the individual, making impossible the risk-spreading that's the entire point of Social Security. As former Bush I Treasury official and current Yale Law School tax professor Michael Graetz told National Journal, "ownership of assets does not spread risks in the way that insurance does."

Clearly, Social Security faces some major problems during this century -- problems that we as a society need to grapple with. But at a time when workers are already shouldering an increasing amount of responsibility for their own retirement assets, should we really be loading more risk on their backs?

Take a look at these two articles together.

Moral: Don't let anyone tell you this election isn't important.