In the news today, the Democrats have announced that they’ve formed an Expand Social Security caucus to promote bills such as the one introduced as “Social Security 2100 Act” earlier this year.
As I wrote back in April, the bill
applies Social Security taxes to income over $400,000 (with no apparent inflation adjustment) with trivial benefit accruals. . . . The proposal also includes other changes including setting a minimum benefit at 125% of the single individual poverty line, that is, $18,825, for a 30-year working lifetime with average-wage increases afterwards, increasing employer and employee contributions by 1.2 percentage points in a graded fashion, and merging the Old Age and Disability Trust Funds into a single Trust Fund.
Now, for years and years, the talking point in favor of keeping Social Security benefits unchanged had always been that those benefits had been earned, fair and square, by the contributions workers paid in over their working years. But now people generally understand that’s not the case. The system is more-or-less pay-as-you-go, with a reserve built up from excess contributions paid in by Baby Boomers, which is now being spent down until it’s gone entirely.
So Social Security expansion supporters have changed their talking points. The announcement of the new caucus at Common Dreams quotes Rep. John Larson (D-Conn.):
Social Security is not an entitlement. It’s the insurance that American workers have paid for.
To be sure, it is true enough that Social Security is an important safety net for Americans too old to work, and my personal preference is for a flat benefit that’s sufficient to keep all Americans out of poverty, but with other solutions for helping middle-class Americans preserve their middle-class-ness.
I’m an actuary. I know what insurance is. Property-casualty insurance companies (and actuaries in particular), to take one example, develop premium rates based on individual circumstances, such as, for homeowner’s insurance, the relative risk a home has of fire or theft or other kinds of damage, and the replacement cost in case of damage, with insurers staying in business by insuring enough people to be able to pay out the claims for policyholders who file them. If I have a more expensive house, I pay higher premiums. If I have an anti-theft system at my home, I have lower premiums. And so on.
Social Security is not insurance. We do not pay premiums based on our individual risk. We do not pay “premiums” at all; we pay taxes, and some people pay disproportionately more taxes than their benefit accruals would call for, and subsidize the others — singles subsidize couples, the childless subsidize families, and those paying at rates near the earnings cap subsidize low earners. The Expand Social Security caucus seeks, in part, to increase everyone’s tax rates, but also to increase the degree to which the wealthy subsidize the poor and the middle class. This is not insurance.
To be fair, Social Security is social insurance. But social insurance is not insurance. To be fair, Social Security is social insurance. But social insurance is not insurance.Social insurance is simply the name given, fairly commonly outside the United States, to government social welfare programs meant to cover the bulk of the population as opposed to the needy, and generally paid for out of payroll taxes which may or may not be given a name like “social charges” or “social contributions.” Like insurance, social insurance protects against the vicissitudes of life, as they say, such as disablement or the need for health care, but other social insurance benefits don’t “insure” against some misfortune at all, but are simply benefits available to all citizens, in the form of old age state pensions or children’s benefits.
Why does this matter?
In my preferred “flat benefit” Social Security reform, there would be no payroll taxes at all; it’d just come out of general tax revenues. I’ve also stated that I tend to think, when I’m cynical, anyway, that, in the end, there’s a high likelihood that the end result of the Trust Fund emptying-out will be that amounts will be made up by general tax revenues. So my complaint isn’t really that it’s unfair that there are subsidies in the system and that the rich pay disproportionately more relative to the benefits they earn, because my proposal would have exactly that result, given the progressivity of our income tax system.
My complaint, rather, is with the dishonestly of telling Americans that they have “earned” their benefits, that they have a “right” to them, that it would be just as unjust for the system to change as it would be for an insurance company to deny a claim based on a fully paid-up policy, especially while at the same time calling for an increase in the degree to which the benefits not just of the poor but also the middle class are subsidized.
So, yes, let’s reform the retirement system, to decrease the degree to which Americans fall through the cracks. And employer-provided traditional pensions are no longer a real part of our retirement system, so let’s find a consensus about the best path forward for income replacement. But let’s do so honestly.
Elizabeth Bauer has an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as “Jane the Actuary” since 2013, she enjoys reading and writing about retirement issues, including retirement income adequacy, reform proposals and international comparisons.
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