Commentary Magazine


Does Our Social Security System Make Sense?
Insurance, Relief, or What?

Most Americans believe that our system of Social Security is a form of insurance which is paid for out of employee and employer contributions to a social insurance fund, and that the beneficiary (or his heirs) will eventually get back in benefits as much as he paid in m deductions. That this is not at all the case, however, is the contention of DILLARD STOKES, who warns us that we must take thought now to correct the inequities and haphazard inconsistencies of our Social Security philosophy and system, or else bequeath to future generations problems of dismaying proportions.

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The true nature of Social Security in our country is almost unknown to the taxpayers who maintain and rely on it. After twenty years, “Social Security” is in the language, but these words connote its purpose and assumed benefits rather than the vast politico-economic complex depended upon to realize them. The aims of Social Security are admirable. Most of the results evident to date are good. So, by association, these virtues are imputed to the system itself.

Both Democrats and Republicans extol this sacred cow for the milk it gives, but they do not audit its feed bill or mention the possibility of its going dry. Politicians in both parties trade on colossal outlays for today and munificent promises for tomorrow. Can the promises possibly be honored? What will they really cost? And who, really, is going to pay for them in the long run? These very relevant political considerations languish for want of attention. But they do not die; they only bide their time.

The sole changes seriously being proposed today in Social Security are for the extension of its “coverage” to more people—usually in blocks of several millions—and for the raising of payments to all beneficiaries, either forthrightly or by easing the curbs now in force. That is the substance of the Eisenhower program now before Congress. It was the substance of the program recommended by Presidents Truman and Roosevelt. These programs open the tap a little more—but the situation actually requires a thorough examination of the design and efficiency of the whole system of waterworks.

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What faces us here is a lapse of the political process. Since the founding of the Republic, policy on great matters has been hammered out through conflicts of interest. Hard-money pressure opposed soft-credit pressure. High-tariff pressure opposed cheap-goods pressure. Each faction was a check on every other; its own interest acted as a test of the policy that prevailed, or of the compromise that was reached by balancing the pressures (the latter being the most frequent solution). This process does not function when only one side of an issue finds partisans and attracts general support, as is the case with Social Security today. The only issues taken to the people are which party, and which candidate, can promise most to most people most plausibly.

This is not because politicians are rascals but because they are politicians. It is their normal and proper response to much pressure on one side, and little or none on the other. Here on one side is the interest of six million beneficiaries, and of sixty-six million others who hope to join them. This interest is taken up by the liberal wings of both political parties, prodded by powerful lobbies like those of the AFL, the CIO, the ADA, social workers, fraternal groups, and others. These greatly outnumber and outlobby the normally conservative professional, industrial, and financial interests, many of whom are restrained in their opposition by their hope of finding in Social Security a solution of employer-pension and disability problems.

Hence there was no steam behind the recent proposal of the Chamber of Commerce of the United States to change over to a pay-as-you-go, universal coverage pension plan. It was lost amid the attacks upon and defenses of the Social Security idea on an ideological level. There was little discussion of the merits and faults, as such, of the proposed change.

It is the burden of this article that the unanimity is very superficial and that Social Security presents real issues on which neither present nor prospective beneficiaries would be all of one mind did they know the facts. Until these are clear the political process cannot function.

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A realistic survey of OASI—the Federal Old Age and Survivors’ Insurance plan, the programs called Social Security—must reckon with three propositions. First: the sheer size of OASI, which is the biggest permanent enterprise this government ever has undertaken, or is ever likely to undertake. Second: the public illusions about Social Security, which are clustered in such a semblance of order as to form a complete yet largely mythical system. Third: the bankruptcy of design and policy, both social and financial, that handicaps the actual system, whose function, method, and economic nature have not been clarified. The myth about Social Security veils shortcomings, but they are there, and they must be remedied before Social Security can do its job and merit its reputation.

The factor of size might be taken for granted, but it would be better to put it into perspective first. Since its establishment in 1935, Social Security has collected taxes from 106,800,000 persons. What other enterprise, public or private, ever attracted or compelled the participation of so many Americans? Not the armed forces: there are only about 20 million veterans. Not the income tax: fewer than 60 million returns are made a year. Not even making a living: the 1954 labor force amounts to somewhere around 62½ millions.

Out of a population of 161 million, about 6 million people get OASI benefits, one for each l0½ workers. Here are the OASI high and low-cost forecasts for the year 2000, just 46 years away:

  Low High
  Cost Cost
U. S. population* 248 216
Working force* 96 84
OASI beneficiaries* 21 25.8
As pct. of pop’n 8½% 12%
OASI reserve fund* $128,000 Exhausted
Annual OASI cost* $16,421 $16,437
Per productive worker $171 $195
Productive workers    
per each OASI beneficiary 4.54 3.25
(*in millions)    

Besides old-age pensions to be paid in the future, OASI promises workers in covered jobs protection in the nature of life insurance. After only 15 years of operation, this insurance amounts to nearly $300 billion. All life insurance of all kinds written by all the private insurance companies in the United States adds up to only $276 billion.

Private insurance is backed up by assets—mostly reserves required by law—of about $76 billion. Social Security insurance is backed by a “reserve fund” now hovering around $20 billion. After 46 years this fund will either have grown to $128 billion, or to a lesser total—or else it will have all been spent by 1997. The 1953 report of the Social Security trustees envisioned all three possibilities, there being no way to tell which will come to pass. As far as the expert can see, any one of the three is as likely as any other.

One does not have to be an expert to see that colossal sums of money are involved. Next to these items of $300 billion and $128 billion, let us place others drawn from the American economy. The national debt is less than $275 billion. The total assets of all American corporations are $181 billion. The total of all bank deposits is $189 billion.

An enterprise as big as Social Security, which is going to get still bigger, is sure to be a dominant factor henceforth in the American economy, as dominant as steel output, foreign trade, consumer credit, and the value of the whole wheat crop all put together.

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Most American families are insured by Social Security against the death or retirement in old age of their breadwinners. Workers pay premiums on this insurance through taxes withheld from their wages, and the employers pay equal taxes for their workers’ benefit. Workers in covered employment thereby acquire the right to a monthly income for themselves and their families when they retire at sixty-five, or a monthly income for their wives, children, aged parents, etc., in case of death before retirement The payments vary with the worker’s earnings, and thus with the premiums paid. These OASI benefits do not depend on a “means test,” as relief does, for they are not charity or relief. The workers pay substantially for what they will get, and they, or their survivors, will get substantially what they pay for. The benefits are paid out of a reserve fund built up for the purpose from premiums paid by prospective beneficiaries. Premiums now being paid by tens of millions of workers are building up the reserve fund to pay their benefits when they become entitled to them.

A familiar picture, is it not? Consider it well: it corresponds to the notion of Social Security held by a hundred million Americans. They take it for granted, they lake it for fact—and they are dead wrong. For every statement in the foregoing paragraph is demonstrably false.

As a matter of fact, Social Security does not provide “insurance.” The “contributions” are not “premiums,” they are just taxes. The workers acquire no “rights,” nor do their survivors. Payments to retired workers, or to surviving families—if and when paid—have little relation to the worker’s earnings or to what he paid in to OASI. There is a “means test” for many, and there is an “earnings” test for everyone. Most of the money now being paid out by Social Security is relief: the people getting it did not pay for it, and millions do not get what they did pay for. The benefits do not come out of any “reserve fund.” The trust account maintained under that name is neither a fund nor a reserve.

Insurance is a word known to nearly everybody. And so is the substance of Webster’s definition, that it is “a contract whereby, for a stipulated consideration, called a premium, one party undertakes to indemnify or guarantee another against loss by a certain specified contingency or peril, called a risk, tie contract being set forth in a document called a policy” (New International Dictionary, second edition).

The Social Security program is referred to in the law as “Old Age and Survivors’ Insurance.” Its revenue comes from taxes imposed by the “Federal Insurance Contributions Act.” The government has published over 60 million booklets, leaflets, press releases, and other “educational material,” all chock-full of words like insurance, premium, policy, etc.1 This nomenclature has been taken up by the newspapers, magazines, and public speakers.

For this reason, the American people cannot be blamed for supposing they are buying insurance with the taxes they pay OASI, and that the other party—the government—“undertakes to indemnify or guarantee” them against loss of income due to old age and death, according to the published tables and formulas Hardly can it be called quibbling over words to point out here that the taxes are not buying them insurance or anything else. For under Social Security the company—that is, the government—is bound to no obligations whatever. It can raise the premiums or the benefits, or reduce them, or cut them out, or change the conditions upon which benefits are paid, or do anything else it likes, and the policy-holder—mat is, the taxpayer, the worker—has no remedy. The courts say that what he pays in is an income tax, and if he gets anything back it is a gratuity.

There are sinister stories about the fine print in insurance policies, but surely no private company was ever able to change the fine print at will, or to default on the policy and keep the premiums.

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Many will say that such a default would violate the moral if not the legal rights of the victims, and surely Congress never would do anything so shocking. Ah, but Congress has done so!

The Social Security Act of 1935 provided that a worker would get back not less than what he put into the system. The act provided lump-sum refunds to those who reached sixty-five without qualifying for pensions, to the estates of those who died before reaching sixty-five, and to the estates of those who began drawing pensions but died before receiving an amount equal to the value of their contributions. Under this law, refunds were made to 178,583 workers and 318,665 estates. The same “right” to get back their money belonged to the other 33 million people who paid Social Security taxes during this period but did not die or retire. Whether their “rights” were moral, legal, or both, Congress wiped them out by the act of 1939. As a result, up to the end of 1952, a total of 6,400,000 persons died without receiving pensions, lump-sum payments, refunds, or anything else. Yet they, and their employers, had paid in $725 million.

The act of 1935 assured the original 33 million OASI taxpayers “permanent” coverage by 1941. Most of these taxpayers had but two years to go when Congress passed the 1939 amendments and moved the date forward to the end of 1946.

During the 1940’s the courts declared Social Security “rights” to belong to upwards of a million persons over whom there was dispute by reason of the nature of their employment. Regulations to cover them were drafted, but never took effect because in 1948 Congress took the “rights” away.

Having bought, paid for, and qualified for their Social Security incomes—as they were led to think—many persons retired to live on them and on what they could earn through non-covered work. These persons opened little shops, set up as repair men, part-time bookkeepers, dressmakers, or the like. In fine, these old people made plans for their old age on the basis of Social Security and its assurances. What they did was perfectly legal—until 1950, when Congress extended OASI coverage to the self-employed, and put a limit on their earnings. As a result, many were stripped of their OASI incomes—23,208 individuals suffered these cuts by the end of 1951. In some cases they were called on to pay back substantial sums. And to rub salt in the wound, these people were required by law to pay OASI taxes on their earnings so they would have Social Security in their “old age.”

These are instances of “rights” taken away by specific act. However, OASI “rights” can vanish simply by the passage of time. There are 25 million persons who paid some taxes to OASI between 1937 and 1951, but at the end of the latter year were “uninsured.” Some never paid over a period long enough to acquire protection. Many others were insured at some time but lost that status, as well as what they paid in. Another 41 million persons are “currently” insured, but may lose that status and find themselves, like the first 25 million, deprived of their right to benefits if they are out of a job too long, or work too long at jobs not under Social Security. There are 25 million who now have “permanent” insurance. They keep their “rights” regardless of where or whether they work (unless Congress takes them away). These “permanently” insured persons, however, are liable to a diminution of their benefits if they stop paying OASI taxes: the longer they have no covered earnings the less the average monthly wage credited to them.

On this average is based the retired worker’s primary benefit. His monthly payment is 55 per cent of the first $100 of the average, plus 15 per cent of the next $200. Secondary benefits are fractions of the primary. The spouse and children of a retired worker each may get a monthly payment of half the primary. The surviving spouse and parents of a deceased worker may each get a monthly payment of three-fourths of the primary. Each surviving child may get between a half and three-fourths. The maximum payable on any worker’s account is 80 per cent of his average monthly wage, but not more than $168.75.

What is the relationship of these benefits to what was paid in? This year a $100-a-month worker pays $4 a month—$2 himself, $2 through his employer—for a monthly primary benefit of $55. A $300-a-month worker pays $12 a month for a benefit of $85. That is 200 per cent more “premium” for only 55 per cent more “insurance.” A self-employed person, for the same “insurance,” pays 25 per cent less premium than one who works for somebody else. This isn’t all: about 10 per cent of the 6 million persons newly covered by the 1950 amendments were able to “buy,” by paying “premiums” for six quarters, the same coverage others had paid premiums on for 14 years.2

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Whether Social Security is administering a relief program is a matter of fact, not of words.3 As distinguished from bought and paid-for benefits widely supposed to come from Social Security, relief is aid given by a public agency to needy persons who have not paid for it. Payments based on a substantial consideration are not relief just because somebody calls them that. A gratuity is no less relief because it is called something else, or because of a token consideration that, in fact, does not pay for it.

A Social Security report shows $15 billion in annuities will be paid present old-age beneficiaries, their spouses and children. The actual cost of these annuities is not less than $9 or $10 billion, yet these beneficiaries paid only $711,480,000 for them. (We disregard the “insurance” protection enjoyed by the primary beneficiaries for periods up to 13 years, the value of which was several times the $711 million they paid in; here we treat the sum of $711 million as though it were paid for the annuities alone.) These people, then, are going to draw over $14 billion more than they paid in. These $14 billion were clearly not paid for: what does this sum go for then, if not old-age relief? The point is not made to blame the old people’s getting the aid. Many of them need it, and a wise economy will give it to them. But these considerations do not justify pretending the $14 billion came out of a “reserve fund” built up by the beneficiaries. Nor do they justify camouflaging the fact that the money really comes out of “premiums” currently being paid in by workers who are led to believe that their money is being saved up for their benefit.

Granted that this $14 billion ought to be paid out and that, like all wise relief, it promotes the general welfare. Under our theory of government, funds for this purpose ought to come—and otherwise do come—out of the general funds raised by taxes levied according to ability to pay. The fiction that these OASI payments are something other than relief conceals what is going on. That is, this charge for the general welfare is being exacted from one class of taxpayers, the wage earners. And the whole burden falls on the poorest of these, for OASI taxes only the first $3600 of annual earnings.

Public relief and private charity have long been denied to those having other means of subsistence, but Social Security is generally believed to eliminate this supposedly humiliating condition. As an OASI booklet puts it: “This is an insurance program. [Participants] may qualify for benefits without regard to their financial resources, such as savings, property, or other insurance” (italics theirs). Quite so. A millionaire can draw the same OASI income for himself and his family that a janitor can. Neither must pass a “means test.” But if the janitor’s “means” include $76 a month paid him for mowing lawns, he will lose his Social Security payments for that month. So will his wife and children. The payments to 340,508 persons were cut off, under this regulation, at the end of 1952.

Also, widowers, surviving parents, and, in some cases, children, must prove “actual dependency” on the primary beneficiary. In view of all this, the assertion that Social Security does not now use a “means test” rests on some pretty refined hairsplitting.

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There is on the books of the Treasury an OASI trust account of nearly $20 billion which will increase by more than $2 billion this year. The account is part of the public debt, and draws interest at about 2¼ per cent. How then can one say there is no Social Security “reserve fund”?

Suppose there were no account, and from year to year OASI paid its costs out of appropriations voted for the purpose. If a year came when outgo was more than the appropriation, what could be done? There are four answers: (1) a portion of the Social Security benefits for that year would not be paid; (2) the government would borrow the necessary funds and make them available to Social Security; (3) Congress would raise taxes to get the money; or (4) the funds would be diverted from some other use by cutting the budget of some other agency.

The same four courses—and no others—would be open to meet an OASI deficit under the “reserve fund” as it is now constituted.

There is no money in this “reserve fund” either as cash, or as a credit like a bank deposit on which checks could be drawn. There are vast evidences of federal debt, but these are not “bonds” in a familiar or negotiable form. This is not to say that the “reserve” is worthless—it is as good as the credit of the United States—but it does not exist as a “fund” ready and available when needed. When OASI calls on it the Treasury must find the money, if it is able and Congress is willing. To make good on the “reserve fund” would require the same operations as to meet a deficit. As an economic fact there is no “reserve fund” (as the term has been used and understood up to now).

Private insurance companies have put many billions of their reserves (but seldom over 20 per cent of the total) into government bonds. But they are not on the same footing as OASI, which invests in nothing else. First, the reason for drawing on the reserves. Private companies get most of their revenue from premiums. A sharp drop in these would reduce their liabilities. But a drop in OASI revenue would mean no such relief from liability. On the contrary, the same factors that caused the loss probably would bring more claims for benefits. When OASI runs into a deficit it probably will not be due to revenue loss at all, but to increased demands. Second, if the private companies met their needs wholly out of their government bonds, whether these were sold, pledged, or cashed in, there would be no resultant rise in government paper held by the public, or in taxes, and no reduction of federal spending. One or more of these would be sure to follow an OASI deficit, with considerable impact on the nation’s whole economy.

The foregoing passages have touched on some but by no means all of the popular illusions about Social Security. Most of these probably grew out of confused policy and lack of basic principles. Both these confusions and lacks are in the Social Security Act itself. The blame belongs to Congress, not the administrators. They err in emphasizing insurance, premiums, “rights,” and so forth, but even here they can plead that the terms came from Congress and they just make the most of them.

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The conditions of eligibility common to all Social Security benefits are (1) filing application; (2) adequate covered employment of the “primary” worker, (3) absence of other OASI benefits of equal or greater value; and (4) that the beneficiary not earn over $75 a month in covered employment. The first requirement calls for no comment, except that it is hard to see why it was written into the very law. The second is certainly natural and reasonable: it goes to the foundation of eligibility. The third belongs in a relief or charity program: what is it doing, therefore, in an “insurance” system? (If one is able to claim two or more benefits it can only be because he, or somebody else, bought and paid for them. So why should he not have them? The answer is that OASI simply is not an “insurance” system except in name.) The fourth condition is the daily instrument of many discriminations.

Besides these there are a host of conditions which vary from one class of beneficiaries to another and out of which it is impossible to make any logical pattern. Some are so whimsical and arbitrary that whether a person gets, or keeps, “current payment status” might as well depend on drawing numbers out of a hat. The inevitable result is more discriminations; some favor the rich over the poor, others the poor over the rich. Each touches only a handful of people, but those affected are wholly affected. And handfuls add up.

Consider the covered-earnings requirement: a wage earner (as well as his wife and children) loses his OASI payment for any month in which he makes over $75. But the limit for a self-employed person is not $75 a month but $900 a year. He can make over $75 in 11 months out of 12 without losing a dime of OASI benefit.4 Those who find employment outside OASI coverage, as in public agencies, tax-exempt institutions, and the like, are freed from this condition altogether. So are 25,000 beneficiaries in foreign countries. Raising the limit will not erase this flaw; the discriminations will still be there.

To survey all the ifs and maybes that harass any one category of secondary beneficiaries would take another article as long as this one. But let us look at one or two of them in practice.

Age: a retired worker must be sixty-five to be paid. What about his wife? She, too, must be sixty-five years old, no matter how long they have been married, no matter whether she ever has worked, or is able to work now. The fact is that most husbands are older than their wives; the average is nearly four years. And that tells why in 1952,1,440,000 persons over sixty-five had a “right” to OASI benefits but were not drawing them. It goes far, too, to explain why the average retirement is not sixty-five, but over sixty-eight.

The OASI rule, however, is different if the wife under sixty-five has a child under eighteen. In that case she and the child can each draw a benefit equal to half that of the retired husband. No widow, however needy, can draw a benefit until she is sixty-five, unless she has a child. If she has, she collects, no matter how well off she is. Yet all these husbands paid taxes to OASI at the same rate for—as they thought—the same security for their wives.

Dependency: this is not a condition for payment of benefits to a child, or to a wife or widow over sixty-five, or to the mother of a child under eighteen, whatever her age But the husband or widower of a woman worker must establish his actual dependency. What is more, in his case it is not enough that the wife be “permanently insured” under OASI. She must, in addition, have worked during half of the three years just before her death or retirement. Moreover, the husband’s dependency must exist at the time of the retirement or death. If a husband suffers a breakdown or loses his job the week after the wife retires or dies, there is no OASI protection for him, no matter how much his wife paid in “premiums.” In such a case, a retired woman might be able to qualify her husband by going back to work. But if she died, Social Security would simply keep what she had paid in and leave the widower to shift for himself.

The point advanced here is not that any of these rules are wrong in and of themselves, but that they are a hodgepodge, and follow no rationale. The earnings of some are limited, of others not; some must be sixty-five, others not; some must be actual dependents of the primary, others not. The “rights” of the beneficiaries depend on time, chance, and statutory caprice to a degree that would provoke just criticism of a charity program and is intolerable in a system of “insurance” the worker buys and pays for.

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The chaos just indicated came about with the shift, in 1939, from paid-for pensions to gratuities, without acknowledgment of the fact either by Congress or by the advocates and apologists of Social Security. The same act of 1939 not only modified the social policy being carried out, but altered the economic nature of the system without the necessary corresponding alteration of its governing principles. From this arises the public illusion that Social Security is guided by concepts that in fact were long ago abandoned. No others having been adopted in their stead, the system today has no basic controlling economic principle.

Because the picture in the public mind is that of the original system set up in 1935, otherwise sensible people are heard debating whether OASI shall be put on a pay-as-you-go basis—which is about the same as arguing whether we shall have rain yesterday. OASI already is on that basis.

The 1935 act did contemplate a reserve adequate to meet the probable liability. Within four years the political process broke down. Under overwhelming pressures to “give more,” Congress in 1939 greatly increased the benefits without doing anything to amass reserves to pay them. On the contrary, Congress kept down the accumulation originally provided for, by holding OASI taxes at 2 per cent (half from the worker, half from the employer) until 1950. New increases in benefits, both in number and amount, were voted in 1950 and 1952 without corresponding provision for reserves. More are scheduled to be voted this year.

The result is that today the dollar amount of the OASI “reserve fund” is not quite enough to pay benefits due to those already on the rolls. There is nothing—not a dime—to pay the benefits that will become due to the 25 million “permanently” insured persons whose taxes built up the greater part of the present fund. Nor is there any money on hand to pay the benefits that will become due to most of the 41 million persons “currently” insured, or the 10 million to whom the Eisenhower administration proposes to extend coverage. From this, it does not follow that any of these benefits will go unpaid if and when they are due. But it implacably does follow that, if they are paid, the money will come from taxes yet to be collected, on wages yet to be earned, the wages of children still in school, of children yet unborn. What more does it take to make Social Security today a pay-as-you-go system?

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Social Security began with economic and social foundations that inspired reasonable faith in its commitments. Those foundations having been abandoned, tremendous commitments have been and continue to be added pursuant to social policies not declared, or even formulated, and pursuant to no economic theory. There is danger of these uncontrolled commitments mounting to a total of billions beyond the capacity of even this country to honor.

This calls for a survey of Social Security from the ground up. First the facts, to cull the untruths and (make the half-truths whole. Then the social philosophy, to resolve whether current practice actually is carrying out the generally accepted purpose. And finally the economic basis, to assure accomplishment of what is undertaken.

The plight of the needy aged did not grow out of the last depression, but arose during the course of a century and a half at about the same rate as the United States grew away from the land. The new urban and industrial economy produced every year an increasing number of old people upon whom no realist could impose the pioneer tradition of providing for one’s own wants, one’s own family, and one’s own old age. The depression did bring an era of climax. To those who had made no provision for their own old age were added millions who had, but had now lost their means, or their employment, or both. Beyond immediate relief for all, there was great pressure for a permanent program. Much of this opinion was based on the assumption that under modern conditions most people cannot provide for their own future, a premise manifestly too broad, since millions no better off than the others could and did, can and do. The most that is sure is that some cannot and many do not, and they make up the problem of the needy aged.

Congress in 1935 did not go along with this unsound assumption; it did, however, undertake to enforce old-age saving by all, the thrifty as well as the unthrifty. (For the needy who remained, a relief program, Old Age Assistance, was set up, which was supposed to diminish and disappear as Social Security matures.5) The essential social policy of the original plan called for the beneficiaries’ getting, not charity, but only what they paid for. In fact, there was a guarantee that every worker, or his heirs, would get his money back. With a relatively modest reserve maximum of $46 billion, the plan was very near to being soundly self-maintaining. Except for those who were on relief, and who thus were outside the Social Security system, nobody was going to support anybody else.

We have seen that since 1939 this no longer is so, and a basic question arises: does the United States wish to continue a system under which every 3¼ (or perhaps 4½) productive workers will be required by law to maintain one OASI beneficiary—a stranger to them—in addition to their own families? A system that makes from 21 to 26 million persons pensioners of the federal government? Leaving Social Security as it is now would amount to an affirmative answer. If the answer is no, some of the present promises of OASI benefits will have to be withdrawn, and a statement of social purpose drafted on realistic lines. Indeed, this must be done in any case. For the ideal cannot be made fact until it is clear what the ideal is, and this requires more than a passion for giving more to more people.

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Does the nation wish to support all old people? All old people who retire? All old people without other means? And in each of these cases, their dependents? Actual or nominal? With, or without, regard to their means? Does the nation desire to support all widows and orphans? Or only needy ones? Or none at all?

Shall the support be at a flat rate? By some equally arbitrary formula? Or based on previous earnings? Even continuing the present Social Security plan requires answers to these questions if the present mare’s nest of whimsical conditions is to be cleaned up.

Shall the needy be given relief, and others brought into a system in which they pay for what they get, and get what they pay for? In that case, shall the plan be voluntary, or compulsory and universal?

These questions are not raised frivolously. The answers established by Congress in 1935 are no longer valid, for they were abandoned in 1939. The answers that took their place are not valid, for they express no policy and form only a permanent program of whimsical give-aways. They were not the product of the normal American governmental process but the response of Congress to the pressures of one bloc of interests. Because of the fiction that Social Security could give a great deal to everybody, at little or no cost to anybody, no adverse interest was evident. So none was spoken for either by the Democrats or the Republicans. Social Security has drifted too long without a course; it is time to chart one and see that it is followed.

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Once the purpose and policy of Social Security are established, they require an economic structure. Here there is room only to notice the courses available if Social Security is kept more or less in its present form: (1) The reserve structure could be restored. (2) As many participants as possible could be brought into a reserve system, with those who could not (that is, all the present and many potential beneficiaries) shifted to another, where the government frankly paid the cost. (3) The present system could be placed on a pay-as-you-go basis, with the reserve theory altogether abandoned.

The first course would require the government to add to the reserves a new bond, and OASI taxes would have to be raised to a rate that would maintain the reserve at an adequate level. The bond would have to be about $125 billion, which would establish the public debt at $400 billion. This amount ought not to horrify anybody who is not horrified right now. It would not be a new debt, but merely posting the books to show a debt Congress already has assumed. At least $125 billion, plus its interest, must be collected in taxes to honor the commitments already made under the Social Security program. The only way to cut the total is to cut OASI payments, or to pay them to fewer people than is promised at present. In short, to withdraw some of these commitments.

Under the second course, if future beneficiaries paid their own way, the government might get off for not much more than the $22 billion committed to those now on the rolls. The saving would be a mirage as far as the whole economy is concerned, for Social Security must withdraw from it, in taxes of some kind, whatever is going to be paid out. But the people who paid the taxes would get the benefits, and vice versa.

Both the foregoing solutions share one serious weakness: the reserves would be built up in dollars, to pay benefits at fixed dollar rates. But let prices go on up, and the benefits would have to go up with them, and against that event the new “adequate” reserve will no more be adequate than the present one.

The third course accepts the cost of Social Security as a year-to-year charge on the economy and proposes to meet it from year to year. It is free of the vice of collecting more in any one year than is needed, as a reserve plan does, including the fictitious one now in effect, which takes an excess of more than $2 billion a year, yet otherwise is a true pay-as-you-go operation. It is open to the criticism that—if benefits continue on the present basis—payments will be much larger a few years from now, with a consequent steep rise in cost. That is true. But the same is true, and perhaps more so, of all reserve plans. In the years to come, if the reserve is not drawn on, it will be because OASI taxes are high enough to carry the cost. If the reserves are drawn upon, the money will have to be raised, as has been noted, just as though there were no reserve. In fine, no matter which scheme is adopted, the present Social Security program is being handed down to our posterity with the memo: “We promise. You pay.”

There are too many of these memos on file for children now growing up and for their children who come after them. Unless the processes of government are used by this generation to bring OASI into line with reality, they are sure to be used by the next generation to repudiate its burdens. There is no necessity to ordain such an outcome. The Americans of this day, of this decade, once having faced the facts, can resolve their purposes, and build a Social Security that is equitable, adequate, and economically viable.

_____________

 


Footnotes

1 Here is a sample statement, from a booklet put out in 1952 (2 million copies printed): “Your account number on your social security card identifies your old age and survivors’ insurance account. Your card is the symbol of your insurance policy under the Federal Social Security law” (italics mine).

2 An OASI booklet in 1951 gave the example of a $20-a-week housekeeper who can get $41 a month for life when she has paid OASI taxes for three years. (For $93.60, she gets an annuity worth about $4000.)

3 The reference, of course, is to OASI alone, not to Old Age Assistance, Aid to Dependent Children, Aid to the Needy Blind, or Aid to the Permanently and Totally Disabled. These federal programs, though handled by Social Security, are set up by Congress as relief, and paid for as such out of separate funds appropriated out of the general funds of the Treasury. In the year ending June 30, 1954, they cost the federal treasury $1,340,000,000, or about $2 per month per taxpayer.

4 The self-employed beneficiary can earn $81 a month for 11 months in a row, and still be within the $900 annual maximum.

5 OAA, however, is still here. The federal cost rose from $244 million in 1937 to $917 million in 1954.

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