Social Security isn’t welfare. It’s insurance.
There have been many letters and columns recently addressing the shortfall Social Security will be facing, but the simplistic solution many have — advocating removing the cap on income to be taxed for Social Security — reflects a misunderstanding of the intended funding for this federally mandated insurance program.
Social Security, implemented by President Franklin Roosevelt and Congress in 1935, was conceived primarily as “old age” insurance, federally mandated, because it was apparent many folks were not saving for retirement. In this forced federal government insurance program, as in all insurance programs, the amount of benefits received was related to the amount of premiums paid in.
Again, Social Security is not and never was a welfare scheme, nor was it ever meant to cover total retirement expenses, but rather to be a supplement to personal savings and possible company pension.
The government established a cap on maximum Social Security benefits received, so naturally and properly, there was a cap set on income taxed for Social Security.
Crucial in understanding is that Roosevelt’s concept of helping to provide for economic security for the elderly was to create a work-related “contributory system in which workers would provide for their own future, economic security through taxes paid while employed.“
There is no inconsistency between a “progressive“income tax system, for general governmental revenues, and having what is essentially a forced government-run insurance program, Social Security, which should be just that: where there is a direct relationship between amount of payments made and benefits received.
Contributing to the impending insolvency of Social Security is not only progressively increasing life expectancy but much “Christmas treeing” over many decades. Adding additional safety net benefits, albeit very desirable ones, onto the Social Security system, such as disability and survivor benefits, comes at an increased cost. As with everything in life — governmental as well as personal — if we desire something, we must be willing to pay for it.
Also problematically, Social Security funding has been based on an intergenerational transfer of wealth. That is, each succeeding generation would earn more money and pay in higher premiums during their working years, which would then be used to pay benefits to the currently retired generation.
But this is not indefinitely sustainable, and just as private insurance companies’ insurance tables must be actuarily sound, the government run Social Security system should be same.
In 1935, life expectancy was 61 years, and with the Social Security retirement age then set at 65, obviously there was far less relative monetary payout than today, when life expectancy is almost 80, far outstripping the present receipts of Social Security taxes.
Simple arithmetic says that in order for Social Security to be actuarily sound, either premiums need to be increased, retirement age be made higher, or amount of payout reduced, or any combination thereof. There is no magic involved!
And if an individual, for whatever reason, has inadequate savings and/or inadequate or no pension, then those needs should be met under a completely separate program, but should not be conflated into Social Security, the mandatory insurance program.
If Americans wish to have the government be responsible in full for our retirement, disability and survivor benefits, there are indeed “in full“government systems. In Singapore, right from earliest employment, approximately 20% of employees’ income goes into a retirement account, matched by a government contribution, so that when retirement age is reached, this is indeed a fully funded retirement system. Under this government system, there are limitations and constraints, and most Americans seem to prefer to have more control over their own lives.
I hope this clarifies confusion, whereby many people think of Social Security as a welfare program that should be funded by general taxes, which is what it would be were there to be no cap on contributions, but cap on benefits. That’s welfare, not insurance!