Few Americans have escaped news that the pending retirement of the baby boom generation represents a threat to the nation’s economic well-being. This news is delivered by pundits and politicians, in stern tones similar to those applied to global warming. Indeed, we are led to believe there is a “tipping point,” with both of these phenomena. If we don’t solve the “Social Security crisis” soon – and if we don’t cut our carbon emissions soon – the consequences will be dire.

Last week, like millions of other Americans, I received my Social Security statement. Under the heading “What Social Security Means to You” the statement offers reassurance that if I become disabled my monthly income will not be zero; if I die my family will receive payments; and if, on the other hand, I live to my full retirement age (66 years and 2 months) I will receive a monthly income amounting to 187% of poverty. No surprises here. But this year’s mailing did bring a surprise. I quote (in bold):

Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2040, the payroll taxes collected will be enough to pay only about 74 percent of scheduled benefits.

Yikes! Who’s messing with my Social Security? Or more to the point, who’s messing with “What Social Security Means to Me?” I hope to answer this question and more, in the coming pages, which will offer: a brief review of Social Security, followed by a consideration of today’s crisis and an introduction to possible solutions. For greater detail and depth relating to these issues please see Barusch (2006).

Social Security: A Review

Most licensing exams ask students to demonstrate their knowledge that social security was established first in Europe. In Germany, it took the authoritarian regime of the Kaiser to impose social insurance on the nation, and he did so only under the threat of a communist revolution. In England, naked capitalism had already shown its ugly underbelly and the nation’s poor law machinery led some (ancestors of modern social workers) to argue that social insurance was unnecessary. In France the implementation of social insurance was delayed by the petite bourgeoisie. These small businessmen worried about removing large amounts of money from the private capital market; that, and they weren’t wild about paying taxes.

America came slowly to the notion of social insurance for workers. Some say this is because none of us intended to remain workers. We, or our children or grandchildren would be capitalists. We expected to be rich. After all, we were good people and we worked hard. Others argue that our delay in establishing social insurance resulted from Americans’ deep distrust of national government. We’d seen the dangers of centralized power, and designed our country for minimalist government.  In Europe, social insurance schemes became a great excuse for big government. Money had to be collected, benefits computed, paper distributed.  Furthermore, after they’d paid into their systems for a while European workers became part-owners of government. As such, they started demanding rights -- all quite un-American.

So it was not until the upheaval of our Great Depression (1929-1941) that Americans would seriously consider a social insurance scheme for workers. (Of course, a few wild-eyed radicals like Abraham Epstein and I.M. Rubinow had been promoting the concept for decades.) Still, it was not until 1935 that President Roosevelt gave Congress his ambitious proposal.

Upon passage of the legislation a bunch of capitalists took their complaints about the new Social Security tax all the way to the Supreme Court (Chas. C. Steward Machine Co. v. Davis and Helvering et al. v. Davis). The court rejected their arguments, noting that “The hope behind this statute is to save men and women from the rigors of the poorhouse as well as from the haunting fear that such a lot awaits them when journey’s end is near.” (Supreme Court, 1937, p. 640).  

We have all heard of Miss Ida Fuller, a woman of great timing. She received the first Social Security benefit ever paid - $22 per month, in 1940. When she retired from her secretarial post, Miss Fuller had paid less than $100 in Social Security taxes. She collected about $21,000 in benefits.

My generation of women is less fortunate. First, we have to listen to esteem-shattering rhetoric about how we are ruining the nation’s economy. Second, because of the OASI benefit structure, those who are married to men with better wage histories than ours will not see one thin dime in increased benefits from the tens of thousands of dollars we pay in FICA taxes. This hasn’t been discussed publicly in years. Why tweak with gender equity when you have a golden opportunity to dismantle the whole kit and caboodle? (for more discussion of Social Security and women see Barusch, 2001).   

Social Security: The Crisis

Our students know that Social Security is in crisis. This crisis was cooked up before most of them were born. It began with a now-defunct organization funded by Senator Dave Durenberger (R-Minnesota) in 1984 (shortly after Ronald Reagan solved the system’s 1982 crisis). Called “Americans for Generational Equity” (AGE), the group had the financial backing of banks, insurance companies, defense contractors, and other corporations. AGE set out to “promote the concept of generational equity.” That is, to persuade the nation that we could not afford to offer social security to seniors and educate our children at the same time. The AGE campaign was well-planned and remarkably effective. Today the notion of greedy geezers is entrenched in the American imagination, along with the fear that Social Security will bankrupt the nation. All of which is not to say the crisis is not “real”; only that it has been manipulated and exaggerated by those with a long-standing beef against social insurance.

On their face, social insurance and capitalism are incompatible. Social insurance interferes with the free flow of money and labor that is essential to the efficient operation of private markets. It deprives private investors of access to huge amounts of money; and it does unspeakable things to work incentive. Money that could be loaned out to start-up ventures and consumers instead is rotting in public coffers (aka funding military ventures and building roads).  What 65 year old is going to stay on the assembly line when she can retire in comfort and security? And the mere presence of disability insurance is a clarion call to shirkers – “Claim back pain and kick back for life!”

This tension was held in check as long as American memory of Great Depression was fresh. Our deep suffering at the hands of unfettered capitalism suggested that, perhaps, there was a role for government and that, perhaps, the private market wasn’t the answer to every question. In other venues I have argued that social insurance proved Marx wrong by buffering workers from the more obscene consequences of naked capitalism.

But memory is fading, and with it goes appreciation for the balance between free market and social insurance solutions to human problems. Consider our recent presidents. Ronald Reagan, born in 1911, was 18 years old at the onset of the Depression. George H.W. Bush, born in 1924, aged from 5 to 16 during the Depression. Bill Clinton was born five years after the end of the depression, in 1946; as was George W. Bush. Like many Americans, Reagan was deeply affected by the economic collapse that marked his young adulthood (Elder, 1984). When Social Security faced a real solvency crisis in 1982 Reagan assembled a bipartisan commission and made technical corrections that led to the enormous surpluses now sitting in the Trust Fund coffers. His successor knew when to leave well enough alone.

Recessions aside, Americans haven’t had a major event to check our enthusiasm for capitalism in the lifetimes of our last two presidents. Bill Clinton, the first president who didn’t live through any part of the Depression, was the first to consider privatizing Social Security, and his age-peer, George W. Bush was the first to believe he had a mandate to privatize the system.

Capitalism enjoyed a major boost with the collapse of the Soviet Union. The Cold War ended, and capitalism won! Victory instilled new confidence in the adherents of capitalist philosophy, along with a near-evangelical faith in the “free” market. In the public sphere this resulted in a privatization frenzy. We privatized prisons, child welfare systems, “public” education, elections, and other government functions. Why not privatize Social Security?

In fairness, there may be a solvency problem with OASI. Whether there is or not will depend on the future of jobs and wages in the United States. Only a few years ago that future looked bright. When Al Gore was running for president he proposed using the budget surplus to wipe out the solvency problem in Social Security. Until Bush had been office for several years, the Trustee’s estimates for the vital “Year of Trust Fund Exhaustion” had been consistently pushed back in each year’s report. Please see OASDI Trustees (2006) for the Trustee’s current estimates (and keep in mind that they are just that, estimates.)

Social Security: Proposed Reforms

Privatization is on everyone’s lips. What does it mean in the context of Social Security? Like “generational equity,” “privatization” was invented before most of our students were born. In 1979, Jose Pinera, then labor minister of Chile, oversaw the privatization of that nation’s pension system. Pinera then immigrated to the U.S. to head a Cato Institute project that would promote privatization in the U.S. His efforts persuaded President Clinton to consider partial privatization of OASI. Clinton’s Social Security Advisory Council advanced three proposals: one involved moving up to 40% of the OASI trust fund reserves into private capital markets; the second involved setting up individual accounts funded by an increased payroll tax; and the third replaced Social Security with a two-tiered system similar to Great Britain’s. President G.W. Bush embraced the notion of individual accounts, and has sporadically promoted it during his administration.

At its most fundamental, privatization would free up significant amounts of money for private investment (hence the enthusiasm of banks and stock brokers). This may be done on a system-wide basis (as in Clinton’s first proposal), or on an individual basis (as Bush prefers). The use of individual accounts would transfer risk from the government to individuals. This is consistent with another broad risk transfer in retirement financing – the movement from defined benefit pensions to defined contribution plans.

During the Clinton administration my students clamored for privatization. The stock market was posting double-digit gains and they thought it was immoral to keep their OASI funds in government securities where they made under 5% a year (5.45% in 2005, see Trust Fund FAQ’s at www.ssa.gov). Then came Bush, and 9/11, and suddenly the US stock market didn’t look quite as attractive. The term “security” took on whole new meaning.

In addition to the insecurities associated with investment risk, we need to be concerned about the cost of administration. The current system is remarkably efficient, with administrative costs for OASI running about $11 per participant (CBO, 2004). The administration of private accounts will inevitably cost more.

Beyond this, establishment of private accounts will remove money from the pay-as-you-go system. Pay as you go means today’s workers are funding the retirement of today’s retirees. So if today’s workers begin funding their own retirements at the same time – something’s got to give – either benefits or taxes.

Other Options

Privatization is not the only solution to the possible solvency problem in OASI. Other proposed solutions include: raising the retirement age (again), raising the wage cap for payroll taxes, and reducing benefits. Each of these has disadvantages. Raising the retirement age seriously disadvantages blue color workers and those who must retire due to disability. Raising the wage cap is appealing, but does not completely solve the problem. Reducing benefits has the obvious disadvantage of increasing the number of retirees living in poverty and reducing the living standards of the baby boom generation. Solutions not on the table include the possibility of using general revenues to fill gaps between revenue and benefits and raising wages. Each of these deserves consideration in the months to come.

At the risk of appearing self-serving, let me suggest that the retirement of the baby boomers is not the most pressing threat to our economy. Rising inequality, the declining dollar, shrinking wages, corporate corruption, the war deficit, and our sick health care system pose greater risk and will do more damage than my generation can possibly inflict by turning 65 (or 66 and 2 months). 

References Cited

Barusch, A.S. (2006). Foundations of Social Policy: Social justice in human perspective. Belmont, CA: Brooks/Cole.

Barusch, A.S. (2001). Social Security is not for babies: Issues and trends affecting older women in the U.S. Families in Society, 81(8),568-575.

Congressional Budget Office (2004).  Administrative costs of private accounts in social security: A CBO report. (accessed at: http://www.cbo.gov/showdoc.cfm?index=5277&sequence=0&from=0#anchor, 7/14/06).

Elder, G.H.  (1984) Children of the Great Depression: Social change in life experience. Chicago: University of Chicago Press.

OASDI Trustees (2006). The 2006 Annual Report of the Board of Trustees of the Federal Old-Age, Survivors and Disability Insurance Trust Funds. (accessed at: http://www.ssa.gov/OACT/TR/TR06/IV_LRest.html 7/15/06).

Supreme Court of the United States (1937. Opinion in Helvering et al. v. Davis. (accessed at: http://www.ssa.gov/history/supreme1.html 7/15/06).