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A Reason to Celebrate Social Security’s Birthday

FDREighty years ago this week — on August 14, 1935 —  President Franklin D. Roosevelt signed the Social Security Act. It created a national old-age retirement program in the United States for the first time. It was an investment that continues to pay dividends even today.

At the time, 30 (of the then 48) US states had developed their own old-age retirement programs. These plans experienced a number of problems. Unlike the Federal government, states must balance their budget annually. In hard economic times, such as the Great Depression, tax revenues fall; states then feel pressure to cut retirement benefits in order to keep their budget balanced. Another problem was that firms can move production facilities to states with lower taxes. This, too, pressures states with generous retirement programs to reduce taxes and benefit levels.

A national program solved these problems.

Over the past 80 years, critics have complained that Social Security is an unfunded entitlement that will bankrupt the country; however, this is not the correct way to view Social Security. It is more appropriate to view it as an insurance program. It protects Americans from financial disaster during a long retirement. Benefits are guaranteed for life and are increased each year to keep up with inflation. Social Security also provides financial support to surviving spouses of deceased workers and to their children until they reach 18 (19 if still in high school).

There are also some macroeconomic benefits from the program. By enabling people to retire, rather than having to work until they die, jobs open up for younger workers. Both retirees and workers receive money to spend and help grow the economy.

Despite all this, undoubtedly the major achievement of Social Security is that it has enabled millions of Americans to retire without becoming poor. For this reason it is the most popular of all government programs.

Yes, there are problems that still need to be addressed. The program is projected to run small deficits in the future due to the retirement of the Baby Boom generation, as well as slow population growth. And the program does need to be modernized to deal with life in the 21st Century, to reflect lots of self-employed individuals and working women.

But given all the good it has done, we should all wish Social Security a happy 80th birthday and many happy returns.

5 Comments Post a comment
  1. Katy Delay #

    1. “Unlike the Federal government, states must balance their budget annually…. A national program solved these problems.” I do not understand how nationalizing a program makes it any more solvent. From what I have read about Social Security, it is going to lead us to tremendous trouble in the relatively near future unless Congress deals with the problem now. And Congress seems incapable of dealing with problems.

    2. “By enabling people to retire, rather than having to work until they die, jobs open up for younger workers. Both retirees and workers receive money to spend and help grow the economy.” These statements seem incorrect. Employment is not a zero-sum game. The greater the number of people who work, the greater our GDP. On the other hand, as Social Security is currently set up, retirees are spending the taxed wages of those still working. Thus this transfer is a zero-sum game. Retirees are spending the discretionary spending of workers. I see no gain here.

    Could you explain?

    Like

    August 10, 2015
  2. Steven Pressman, Visiting Research Fellow #

    Hi Katy,
    Thanks for you comments on my blog. Two quick responses, which I hope will make things clearer as well as reduce your fears about Social Security financing.
    First, nationalizing Social Security did not make it more solvent. It meant that when the economy did badly (e.g., the Great Recession) the government did not have to lower Social Security benefits promised to retirees just because it was required by law to balance its budget every year. This enabled retirees to continue to live (in part) on their Social Security checks and also enabled millions of older Americans who lost their job and could not find another job to retire and collect Social Security.
    Second, regardless of what you hear, Social Security (the retirement and disability parts, at least) are not in grave trouble over the next 75 years. At the worst, benefits will have to be cut a little or taxes increased a little or some combination of the two. And if the economy performs well and inequality does not continue to increase, Social Security will actually run a small surplus over the next 75 years. This is all in the last Trustees Report that was released last month.
    Finally, yes, you are right that employment and GDP growth are positively related. The problem arises when unemployment is very high. In such circumstances, people are not spending for many reasons and so the economy grows slowly. In addition, when unemployment is high and economic conditions precarious, people tend to hold on to their jobs rather than retire (especially if they worry about Social Security). As a result, there is little spending and little economic improvement. Social Security now provides a solution to these problems. As you noted, it taxes wages and gives them to retirees. Some of this money would have been saved rather than spent, and so would not contribute to economic growth or job creation. In addition, if it encourages people to retire, these jobs now open up for the currently unemployed.
    Hope that these comments are clear and helpful.
    Best wishes, Steve

    Like

    August 10, 2015
  3. Katy Delay #

    Thank you for your responses. However, they seem to raise more questions in my mind rather than answer them. For example, you seem to be saying that saved money is not used in the economy. However, a study by the founder of AIER seems to show through statistical analysis that this is not the case. (See “Cause and Control of the Business Cycle” by Edward C. Harwood, last edition 1974; also, see Keynes vs. Harwood.) In sum, if I am not mistaken, he concludes that savings are held mostly in banking institutions, which institutions turn right around and either lend the money or invest it. Therefore, the money is immediately circulated into the economy and is not horded. The study was done with figures from the Great Depression when unemployment was very high.

    And isn’t “stimulus spending” simply pushing on a string?

    Perhaps it’s not worth your time answering these questions, because they symbolize the long-standing debate between Keynesians and supply-siders. We’re surely not going to resolve that debate here. However, I would at least expect some recognition of the existence of “another side of the debate” on all of these issues.

    Like

    August 11, 2015
  4. Steven Pressman, Visiting Research Fellow #

    The question about savings has occupied economists for nearly a century. Savings is held in various forms– including foreign accounts and safe deposit boxes and gold. Even the money held in banks does not and cannot all get lent out. Banks have to adhere to reserve requirements as well as capital requirements. But most important of all, banks do not have to lend out and generally don’t lend out in bad economic times. I don’t know the Great Depression data, but you can look at the Federal Reserve data online. It clearly shows large increases in bank excess reserves at the start of the Great Recession. Deposits were being held; banks wanted and needed liquidity and they were too scared (with good reason) to lend.

    Like

    August 11, 2015
  5. john b #

    According to AIER it is simply incorrect to view Social Security as a form of insurance as stated in this blog.
    The excerpt that follows is taken from AIER’s publication “What You Need to Know About Social Security.” :

    Social Security Myths and Realities: “Social Security is Insurance”

    Social Security was “sold” to the American people as insurance, prob­ably because it would not have gained the widespread support it did had it not been made to appear like insurance rather than a dole. The payroll tax, widely described as a
    “contribution” or “premium,” created a powerful impression that the taxpayer
    was buying an annuity or old-age insurance. The writing of insurance language
    into the law in 1939, and the creation of the Trust Fund, strengthened the
    analogy.

    The fact is, however, Social Security is not insurance. It lacks the char­acteristics of true insurance. For one thing, as former Social Security Com­missioner Arthur
    Altmeyer admitted in the Social Security hearings held in 1953 by Congressman
    Carl T. Curtis, Social Security has no contract, and a beneficiary’s rights are
    statutory, not contractual, and are subject to revision by Congress.

    Moreover, insurance scholars describe insurance as a method of risk man­agement employing risk pooling and risk transfer. Social Security contains neither. Under
    risk pooling, a large population of persons, each of whom faces the uncertain
    prospect of a large loss, shares the risk by means of each person paying a
    small sum called a premium, which is based on actuarial calculations of the
    probability of that person’s suffering the loss, thereby creating a fund out of
    which members of this population are compensated if the risk being insured
    against eventuates.

    Social Security taxes, however, are not true premiums because they do not reflect any actuarial calculation of risk borne by the taxpaying worker. Therefore the payroll tax is not a means of true risk pooling. Rather, it is set to cover the costs of
    benefits, the size of which is governed by ideological and political, not
    actuarial, considerations.16

    For example, two workers might pay the same amount of OASDI taxes all their working lives, yet one will get a benefit 50 percent higher than the other if he is married and the other is single. This has no actuarial basis; no insurance company offers annuities paying higher incomes merely because the beneficiary is married. Such arbitrary adjustments of benefits make a mockery of the idea that Social
    Security is insurance.

    Risk transfer means that the possibility of financial loss caused by the risk’s eventuating has been shifted from the individual to the insurer. An insurance company sets its premiums based on actuarial calculations of risk, and invests the revenues. If the calculations are inaccurate or the investments turn out badly, the company risks loss or even bankruptcy.

    Under insurance, policyholders buy claims on the insurer, who bears a risk of loss or ruin if its resources do not suffice to meet those claims. Un­der Social Security,
    however, you “buy” a claim not on the “insurer,” but on other taxpayers. And if
    the program’s revenues are inadequate to pay benefits, Congress can, as it has
    in the past, simply raise the OASDI tax or lower benefits. Risk is transferred,
    then, not to the “insurer” but to the taxpayers or beneficiaries. The alleged
    “insurer” assumes no risk at all.

    Furthermore, insurance companies invest premium receipts in stocks, bonds, and other instruments to build up assets to help them meet future obligations to
    policyholders. Social Security, by contrast, does not have this forward
    funding. Indeed, since it is legally barred from buying private financial
    instruments, forward funding for OASDI is impossible.

    The retirement earnings test, which functioned as a means test, neces­sarily exploded the depiction of Social Security as a program of annuities. Payment of a true annuity is not conditional on the income or assets of the beneficiary.

    Finally, Social Security’s financial mechanism is redistribution, not in­surance. Whereas under insurance annuities are paid out of a fund built up from invested premiums, under Social Security money is taxed from one group and transferred immediately to another—just as is done under any other welfare program.

    Like

    August 11, 2015

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