Social insurance is the difference between assistance and, well, insurance. In the case of Social Security, it is designed to keep people leaving the workforce from falling into poverty. More generally, there are four basic, widespread insurance programs--Workers' compensation, Social Security, Unemployment, and Medicare.

Social Security, the biggest program, created originally in 1935, cost over $670 billion in 2009 (that amount varies--why?). It is technically OASDI (old age, survivors, and disability insurance). So it is actually three programs rolled into one: Retirement pension, survivors' insurance (for survivors and dependents up to age 18), and disability insurance.

Some details:

Benefits:

How is it paid for?

• It's a pay as you go system, so the workers of today pay for the retirees of today.
• Employees and employers each pay 6.2% payroll tax (self-employed pay the full 12.4%, but can deduct half on taxes). State government employees generally have a different plan.
• Any money not paid out is invested, so investments earn returns;
• Payroll tax is capped at $106,800 (i.e., any income over $106,800 isn't taxed)
• In 2003, $535 billion was collected
• In 1939, a trust fund was set up. In 1983, Congress passed a law to shore up the trust fund for baby boomers (e.g., 2003--$632 b collected; $479 paid out), in anticipation of high retirement rates and fewer workers to pay for them. However, tax cuts in 2001, and wars in Afghanistan and Iraq still ongoing in 2011, have led to a draining of the trust fund, and estimates are that payouts will exceed available funds by 2040.

Some SS funds are taxed (about $12 billion collected in 2003).

So, Social security is financed by payroll taxes, but our contributions pay others-this is a straight income transfer, pay as you go--an intergenerational transfer, because retirees are getting the money we're paying in now. The FICA (Federal Insurance contribution act) tax on payrolls comes from both employers and employees. Employees' contributions don't go into their own accounts, they pay to those currently receiving Social Security. Our contributions, employment history determine our eligibility and benefits, though.

Now, even though the income replacement mechanism is progressive (that is, poor people have their incomes replaced at higher rates than wealthy individuals), FICA is a regressive tax, similar to a sales tax--people who make less pay proportionately more. When you hear about the "lucky duckies" who don't pay taxes because they're poor, if they work they are paying FICA tax (the promoters of this position hide this by focusing solely in income tax). In addition, the earned income tax credit (EITC) was partially designed to address the regressive nature of the FICA tax by giving back some of the money to the working poor in the form of tax credits.

In addition, most SS payments go to people who are not poor. Remember, it is designed to prevent people from experiencing poverty, not necessarily to assist those in poverty (though it does that for elderly poor). Everyone gets what's coming to him/her, regardless of need, keeping in mind it is based partly on how much you've put into it during your working life. The percent of elderly income dervied from SS increases from 65 (about 27%, according to Schiller), to 80 (about 52%). So most people have other sources of income. The average benefit in year 2000 was $1,000/month.

Social Security is administered by the SSA (Social Security Administration).

top of page

---

SS in trouble?

You don't have to be a demographer to figure out why social security is may be threatened in the future. The age structure of the population has changed over time, since the Social Security Act of 1935 (Medicare and Medicaid were added in 1965). The baby boom began in 1945 in the U.S., when soldiers returned from WWII. Fertility rates increased dramatically. The first baby boomers will begin to retire, or at least be eligible to draw social security, in 2010. The following three population pyramids tell the story of demographic change--one for 1950, one for 2010, and the other projected for 2025--they show how there will be less workers supporting more retirees (careful as you read them--notice the scales are different, so don't make specific visual comparisons without accounting for those differences). Also, note in the 2010 pyramid that women tend to outlive men, as the 80+ category shows. The total number of retirees will almost double from about 48 million today to about 89 million in 2035. Because social security is an intergenerational transfer of funds, this is critical, and something that its creators likely didn't think about 76 years ago--that the age structure of the population is dynamic.

The 'problem' is that fertility rates have since declined. If you consider that current workers are funding current retirees, and that there are more retirees than workers (even if mortality rates increase with age), you can see the problem.

Now, surprisingly, even though there has been a fair amount of fear mongering from people like Alan Greenspan (Chairman of the Federal Reserve Board) suggesting the need to reduce payments or increase retirement age, social security would be in decent shape if we left the trust fund alone. There is a trust fund, created by Congress in 1983 in anticipation of demographic changes, but that money has in the past been used to pay down the national debt, which has increased under the Bush Administration, with additional contributions from the Obama Administration's stimulus package. The national debt is over $14 trillion, and the government is several hundred billion in deficit spending per year. Yet even with all this bad news, Social Security should be pretty sound fiscally through 2040 or so, thanks to Congress' foresight in the 1980s. But at some point, the discrepancy between the working and retired populations will come home to roost. And those wanting to dismantle Social Security resort to scare tactics and misleading arguments, such as columnist Charles Krauthammer calling SS a 'ponzi scheme' (note: Charles won't be one of the millions of Americans actually needing montly Social Security checks when he retires from writing incendiary op-eds).

1. Lower benefits to future retirees
   1. As cost of living increases? Would this help prevent people from going into poverty after their working years have ended? This isn't the social contract working Americans signed on to.
   2. Equity (fairness) issues--people pay into the system, and there may be great resistance to paying in (at current, taxed up to $106,800 in personal income) and receiving nothing (even though this is often what happens with insurance, if we're lucky)
   3. Tax benefits--a cost recovery program of sorts, essentially using the payroll tax to fund the benefits, and then putting a percentage back into the system through income taxes. Wouldn't be popular, but some benefits are currently taxed (a small fraction at the moment)
   4. Cost of living increase changes--change in how they're calculated could reduce costs by .3%, which would amount to a very large sum of money.
2. Add revenue to the system
   1. Increase FICA rate (regressive?). Right now it's 15.3%. Of that, 12.4% is for Social Security (6.2% paid by employee), 2.9% for Medicare (1.45% paid by employee)
   2. Remember--employer and employee pay this (one could increase only employers' contributions. What sorts of drawbacks to that?)
   3. Increase maximum cap, at $106,800 in 2011 (political issues?). How to handle benefit differences? Equity issues here again. On the one hand, someone making $107K pays about the same as someone making $25 million into Social Security. And perhaps neither will need it when he/she retires. Employers would not like this, not one little bit. If FICA caps were increased to, say, $200K, those making $200K (with more political clout than you and I) would protest that it's unfair. One could 'skip' and have the FICA tax kick in at $500K or more. But opponents of this point out that people would pay in to the system at full levels, more than they would receive out of it.
   4. Tax only those with low levels of need for SS. But what does that do to political support for Social Security, among people with the clout to have their opinions heard, and possibly acted upon?
3. raise retirement age (people live longer, can work longer)
   1. competition with younger workforce
   2. health care costs related to work?
   3. This is happening, slowly (e.g., I was born in 1960, and 67 is my retirement age--I hope not to see any of you around unless you're working and paying into my SS by then)
4. privatize accounts
   1. e.g., invest in stocks--let people control more of their own retirement, instead of the current 'pay as you go' system
   2. This would mean diverting some or all of the payroll tax into private accounts
   3. Conservatives like this option, as do, I imagine, stock brokers, who would stand to make millions in fees on these accounts
   4. Risk?? What happens if the economy and stock market tank? Which they will, at some point. What safety net will exist for those who might have chosen unwisely in their private accounts? This option socializes the risk of what is now a guaranteed program. The senior lobby, American Association of Retired Persons (AARP) is against this option, even when 'privatize' is replaced with 'personalize.'
5. convert to means-tested program
   1. reduce or eliminate benefits for those who don't need them
   2. We know by this point what the difference is, in terms of widespread public acceptance, between social insurance and means-tested programs, don't we?? Political support would wane, at least from younger current workers paying for current or impending retirees.

---

What sorts of things might we consider, and what might be the political costs/risks associated with them?

Medicare is essentially medical coverage, federally administered (in some cases, subcontracted through private providers), for inpatient hospital, nursing, home health, and hospice care. Part A covers hospitalization costs, and Part B covers supplemental health care costs. As the article we read states, there are many many qualifiers and restrictions on the types of procedures or treatments that are covered under Medicare (enough that there is also a 'Medigap' private program to cover the gaps). It is combined with supplemental medical insurance to cover other health care costs. But only about 1/10 of what is paid out comes from these premiums. It is financed largely out of the FICA tax. There will also be a prescription drug benefit to be included (this was Part D, passed in 2003), which enormously increased the cost of the program because there was no mechanism for funding it. In 1999, about $215 billion went into Medicare payments, by 2010, $516 billion was paid out.

Unemployment/ workers' compensation

Unemployment insurance (UI)is for those who lost their jobs through no fault of their own. People entering the job market, people who quit, or were terminated with sufficient cause, are not eligible. Eligibility varies by state, as do benefit amounts. Generally federal legislation allows for a 26-week eligibility period, but this has been extended, especially since the Recession began in 2008. If state unemployment rates exceed certain thresholds, the benefit period can be extended 13 weeks. Again, this is an insurance program, and in many cases those who experience unemployment are not poor--often there are other workers in the household, too. Unemployment generally leads to poverty only when it is chronic and long-term (more likely among what portions of the population?). Traditionally, only a small percentage of UI recipients end up on welfare. But this could change, as our ever faithful public servants in Congress failed to extend unemployment benefits, and three days after Christmas some 800,000 will lose their benefits (see Seattle Times article). Employers pay into the system--state and regular benefits are financed by a payroll tax of 0.8% on the first $7,000 of annual wages (a cap, as with social security). The Federal Government also paid in $119 billion in 2009.