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The Social Security program was founded in the 1930s based on a set of principles. Since these principles are rarely talked about, I thought it would be good to summarize them here. Unusually for Nygaard Notes, I didn't write this piece. I didn't think I could do a better job than these excerpts from a 1998 booklet, “Straight Talk about Social Security,” by Robert Ball, perhaps the most knowledgeable and experienced Social Security expert in the country.
I don't necessarily agree with all nine of the principles as laid out by Ball, and I will discuss why in the course of this series on Social Security. But, like them or not, up to this point they have made up the framework for the entire structure of Social Security. So here they are, each one briefly explained by Ball.
1. Universal: 96 out of 100 jobs in paid employment are now covered, with more than 154 million working Americans make contributions to Social Security.
2. Earned right: Social Security is more than a statutory right; it is an earned right, with eligibility for benefits and the benefit rate based on an individual's past earnings. This principle sharply distinguishes Social Security from welfare and links the program to other earned rights such as wages, fringe benefits, and private pensions.
3. Wage related : Social Security benefits are related to earnings, reinforcing the concept of benefits as an earned rights and recognizing that there is a relationship between one's standard of living while working and the benefits level needed to achieve income security in retirement. Under Social Security, higher-paid earners get higher benefits, but the lower-paid get more for what they pay in.
4. Contributory and self-financed : The fact that workers pay earmarked contributions from their wages into the system also reinforces the concept of an earned right and gives contributors a moral claim on future benefits above and beyond statutory obligations. Social Security is entirely financed by dedicated taxes, principally those deducted from workers' earnings matched by employers. The self-financing approach helps protect the program against having to compete against other programs in the annual general federal budget; it imposes fiscal discipline, because the total earmarked income for Social Security must be sufficient to cover the entire cost of the program; and it guards against excessive liberalization: contributors oppose major benefit cuts because the have a right to benefits and are paying for them, but they also oppose excessive increases in benefits because they understand that every increase must be paid for by increased contributions.
5. Redistributive : One of Social Security's most important goals is to pay at least a minimally adequate benefit to workers who are regularly covered and contributing, regardless of how low-paid they may be. This is accomplished through a redistributional formula that pays comparatively higher benefits to lower-paid earners. If the system paid back to low-wage workers only the benefit that they could be expected to pay for from their own wages, millions of retirees would end up impoverished and on welfare even though they had been paying into Social Security throughout their working lives. This would make the years of contributing to Social Security worse than pointless, since the earnings paid into Social Security would have reduced the income available for other needs throughout their working years without providing in retirement any income greater than what would be available from welfare. The redistributional formula solves this dilemma.
6. Not means tested : This key principle means that, in contrast to welfare, eligibility for Social Security is not determined by the beneficiary's current income and assets, nor is the amount of the benefit. It is the absence of a means test that makes it possible for people to add to their savings and to establish private pension plans, secure in the knowledge that they will not then be penalized by having their Social Security benefits cut back as a result of having arranged for additional retirement income.
7. Wage indexed : Social Security is portable, following the worker from job to job, and the protection provided before retirement increases as wages rise in general. Benefits at the time of initial receipt are brought up to date with current wage levels, reflecting improvements in productivity and thus in the general standard of living. Without this principle, Social Security would soon provide benefits that did not reflect previously attained living standards.
8. Inflation protected : Once they begin, Social Security benefits are protected against inflation by periodic cost-of living adjustments (COLAs) linked to the Consumer Price Index. No private pension plan provides guaranteed protection against inflation. Without COLAs, the real value of Social Security benefits would steadily erode over time, as is the case with unadjusted private pension benefits.
9. Compulsory : Social Security compels all of us to contribute to our own future security. A voluntary system simply wouldn't work. Some of us would save scrupulously, some would save sporadically, and some would postpone the day of reckoning forever, leaving the community as a whole to pay through a much less desirable safety-net system. With a compulsory program, the problem of adverse selection—individuals deciding when and to what extent they want to participate, depending on whether their individual circumstances seem favorable—is avoided (as is the problem of obtaining adequate funding for a large safety-net program serving a constituency with limited political influence).
The preceding was condensed considerably by me. To read the full text, go on the web to http://www.socsec.org/feature.asp |
