Maule [Villanova]: The Social Security Debate

Jim Maule, Villanova Law School:

"...[M]ost, if not all, of the discussion [about Social Security reform] presupposes continuation of the social security system, with changes in the way revenues are gathered to fund it. A few proposals discuss changing benefits, either in amount or by delaying the age at which a retirement payout would begin. There has been almost no discussion that begins at the beginning. What is the social security system designed to do? What SHOULD it be designed to do?

The current social security system is a hodge-podge of benefits. When Medicare was carved out, given its own dedicated portion of the payroll tax, and limited to medical coverage, an excellent first step was taken to untangle the mess that the politicians have made of the Federal INSURANCE Contributions Act. A program of insurance against the economic ravages of pension-less retirement morphed into an entitlement program covering retirement, disability, survivor benefits, and an array of minor miscellaneous benefits. It's easy to figure out how that happened. Members of the Congress knew, and know, that promising something for nothing, or promising more in return than is given, is a sure-fire way to get votes. It did wonders for Claude Pepper. But not for the many children living in poverty while well-to-do retirees gather social security benefits.

No analysis about funding, about trust fund investment and growth, or about benefits eligibility makes any sense until the objectives of "social security" are defined, and then categorized in separate programs, each of which gets funding appropriate to its goals and each of which is managed and invested in ways suitable to its objectives. No private sector insurance or assurance business would set premiums, investment policy, and benefits formulas BEFORE determining the nature of the products it wishes to market. Of course, it is not unusual for a government to do things in reverse order.

The primary and original objective of social security was to provide assistance to retired workers who did not have pensions or whose pensions disappeared when their companies went under during the Great Depression. In those days, funded pensions were not the norm. Instead, companies made unfunded promises to make payments to retirees. If the company went under, so did the pension.

Much has changed since those days. Yes, there are employees whose employers do not offer pensions to them, and who fail to take advantage of the several tax-favored self-funded retirement plans such as IRAs. The failure may be lack of resources or it may be a lack of good planning. A person earning $23,000 and trying to support two children finds it almost impossible to stash several thousand dollars into an IRA. On the other hand, a college graduate pulling down $60,000 or $80,000 ought to think seriously about funding retirement, even if it means cutting back on what otherwise would be a consumer spending spree, but our education system racks up another demerit for ITS failure to teach retirement planning (and budgeting) to its graduates.

With the Pension Benefit Guaranty Corporation (PBGC) standing by to deal with pensions that go under, the role of the Federal INSURANCE Contributions Act can and should be curtailed to focus on retirees whose employers did not offer them pensions or whose self-funded retirement savings are insufficient. To offset the temptation of workers to rely on "Uncle Sam" to pay the retirement bills, funding could be set at a bare bones minimum for those retirees whose earnings and expense history (determinable from tax returns, for example) demonstrate a lifetime of squandering and bad judgment, whereas those who saved as much as possible for retirement (for example, the person earning $23,000 and raising two children who managined to squirrel away $500 a year) would receive "thrift lifestyle" bonuses. The mentality that led to reform of social welfare abuse surely can inspire some methods to deal with retirement abuse, because the "live well and let Uncle Sam support me when I retire" approach is not good for the individual or the nation.

Another goal of social security was to assist survivors of retirees, mostly surviving spouses. Social security was enacted when most surviving spouses had no pensions or retirement savings of their own, because almost all were women and few women held jobs, let alone pension-qualifying jobs, for more than a few years before marriage. Seventy years later, when many surviving spouses have their own pensions or self-funded retirement plans, the idea that a surviving spouse is per se entitled to financial assistance during retirement lacks cultural context. Similarly, penalizing those surviving spouses who DO have their own work history, as does current social security benefits computations, is no less anachronistic.

Social security also provides assistance to survivors of workers who die before reaching retirement age. If, however, the deceased worker's pension benefits are payable to the survivor, or if there are death benefits, life insurance funded by the employer or the family, or other sources of assistance, why is there a need for the social security system to provide a benefit? The response by most defenders of the current system is that the worker paid in money, making the survivors ENTITLED to a return. That, however, is an approach that treats social security as compelled savings rather than as insurance. Is that what the goal should be?

Social security also provides assistance to disabled workers. Should not a government disability program be synchronized with private disability insurance coverage? Some workers have employer-provided disability benefits that in some instances eliminate the need for government assistance. And to the extent the government is operating a fall-back disability plan, ought not that plan be carved out as was Medicare? Are not the funding, investment, and benefits considerations for disability different from those applicable to retirement annuities?

The answers to these questions are required before arguments about funding sources, the level of payroll taxes, the apportionment of the funding burden between employer and employee, retirement age, privatization, and other issues can make any sense. There are sensible arguments to support a compelled savings/entitlement program wrapped around retirement annuities. There also are sensible arguments to restrict the government's role to insurance, similar to its role in providing insurance under other circumstances. And there are sensible arguments that the government ought not be involved in providing insurance unless it uses that role to discourage decisions that have long-term negative effects, much like the arguments that the federal government ought not be insuring homes built by individuals on barrier islands because by doing so it is encouraging a long-term disadvantage.

This is where the debate ought to begin. The Administration, the Congress, and most commentators are not helping us begin the debate at the beginning. Perhaps they don't want to begin at the beginning because they don't like what it would do to the likelihood of success for their particular reform proposal. An informed debate is a useful debate. An uninformed debate generates confusion and bad decisions. I do not need to cite current or past examples. They surround us as does pollen in the spring.

Current technology makes it possible to inform the citizenry and to obtain feedback. Do Americans want to pay higher payroll taxes to fund a compelled savings plan? Would doing so discourage private savings, and if so, what would be the effect on the economy? Do Americans prefer that social security benefits be paid to well-to-do retirees? Should social security be treated as insurance against need, as is homeowners' insurance or automobile insurance? Should disability assistance be provided and, if so, should it be separately programmed as is Medicare? I am sure there are many more questions. My goal is not to generate the ultimate list but to spark some discussion among those responsible for leading the debate (though I doubt members of the Administration or of the Congress are reading this).

So that's the reason I'm not jumping in with arguments for or against this or that reform proposal or for or against the "leave it as it is" position. Nor does it make sense to me to argue about transitional rules. Perhaps if enough people pick up on my approach of first things first, the public debate over "social security" might progress in a useful, sensible way. And it might bring us to some surprising perspectives. And it might, note might, get us to something that works and in which most Americans would have confidence." [February 16, 2004; Mauled Again has the post]

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