By Jeff Nygaard
Reprinted (with permission) from Nygaard Notes
Recently the Associated Press (AP) published a four-part series of stories examining “the state of Social Security and its long-term health.” The AP said that “Few things affect more Americans than the future of Social Security, and yet it’s an issue mostly invisible during the current campaign.” True, it’s not talked about much, but perhaps more important is the fundamental misunderstanding of the nature of the program that is revealed when people do talk about it.
This misunderstanding was revealed in the very first installment of the AP series, which appeared on August 5th. The headline on this kick-off piece read, “Social Security Not Deal it Once Was for Workers.” Asked the AP, “How can you get a better return on your Social Security taxes?”
A large and growing number of people share the misunderstanding revealed in that headline: They think that Social Security is a program of Individual Investment. It’s not, and was never meant to be. Instead, it is a program of Social Insurance. Understanding the difference between these two types of systems is the key to having even a glimmer of understanding about what is at stake in this huge public debate.
Insurance Versus Investment
When you invest money—for retirement or anything else—it makes sense to evaluate your investment, as the AP did, in terms of what you get out of it, or your “return.” After all, that is why people invest money: to make more money.
When we think of Social Security this way, it makes sense to ask how good a “deal” it is, in terms of what you “get back” on your “investment.” This way of evaluating Social Security is so common that it likely doesn’t seem strange to most readers. Let me point out how strange it is.
Imagine someone telling you your car is a piece of junk because it doesn’t float. You’d laugh, because you know that it wasn’t designed to float. It was designed to function on solid ground. Not only would you laugh, you would think to yourself, “This person doesn’t understand what automobiles are all about.” And you would be skeptical of any future assessments of the quality of automobiles. And so it should be when people say that Social Security is a piece of junk because it doesn’t earn a good “return” for everybody. That’s not what it was designed to do.
As I said above, the program was designed as a system of Social Insurance. Here’s how insurance works: With insurance, you only get something back if you lose something. I hope I never collect anything on my home insurance, for example, since that would mean my house has burned down, or some other horrible thing has happened. Still, I pay my home insurance premium every year and I don’t think I am wasting my money. Why not? Because I know that, if and when I do lose something, I have insurance. If I never “get back what I paid in,” that’s a good thing. And, if I lose something, and DO get back some of what I paid in, what I get back is related to what I lost, not to what I paid in. And that, too, is a good thing. That’s the nature of insurance. That is not the nature of investment.
SOCIAL versus INDIVIDUAL
Insurance, in principle, is based on what we know, as opposed to what we don’t know. What we know are aggregate numbers, or social statistics. To use the example of home insurance, what we do know—based on history and experience—is roughly how many houses are going to burn down in a given year. What we don’t know is which ones they will be. So, we insure the group. Everyone, then, who wants to be in the insured group agrees to pay a premium that amounts to their proportionate share of the costs of replacing all of the homes that will burn down this year, not knowing whether or not one of them will be their own. Insurance, then, even in it’s most commercial form, is a social program.
When you are part of an insurance “pool,” what you get in exchange for your premium is two things: you get to express solidarity with your neighbors and fellow insurees by paying your share of the social costs of property replacement, and you get the security of knowing that, should you have a loss, all of your neighbors will share in the costs of replacing what was lost, and you won’t have to bear the burden yourself.
That, in fact, is the essence of insurance: Everyone chips in to help out those who lose something. If it is standard insurance, we chip in by paying “premiums.” If it is Social Security, we chip in by paying taxes. What is the loss that Social Security is intended to insure us against? It’s the loss of wages, or income, due to old age, death, or disability. (The program is sometimes referred to as “OASDI,” for “Old Age, Survivors, and Disability Insurance.”)
The essence of the social insurance program known as Social Security is that it’s a deal between the generations, where those who are working chip in to help those who are not, knowing that the same giving will come their way when the time comes. It doesn’t deny individual responsibility. Parents are expected to support their children. But, if the parents die before their children can support themselves, Social Security is there.
Now, in the world of commercial insurance, there is also the matter of making a profit for shareholders, who care not about solidarity, but about self-enrichment. For them it is an investment, which introduces the tremendous irony of having people investing in other people’s bad luck—the bad luck of paying more than necessary for their insurance to allow for the “return” to shareholders—which turns out to be a sort of “anti-solidarity.” That’s an important issue, but is not our concern at the moment.
It’s not our concern because making a profit is not part of the Social Security program. Unlike commercial insurance, Social Security enriches no individual, nor is it supposed to. It is a social program, the success of which is based on how well it protects all of its participants against the loss of income. And, for the past 77 years or so, Social Security has delivered all promised benefits, on time, at an overhead cost of less than one percent.
Social Security is and has been a system of Social Insurance in which everyone pays in a proportional share and everyone receives in return the security of knowing that they are protected against poverty and deprivation. But the AP and many others insist on talking about it as if it were a system of Individual Investment which says that some people can get a “good deal” even when some of their neighbors are getting a “bad deal.”
The AP story, to it’s credit, does quote some people who seem to “get it.” But the best the AP reporter can say is that “returns alone don’t fully explain the value of Social Security. . .” True, but still missing the point: It’s not about “returns.” It’s about security. It’s about helping each other. It’s about solidarity.
Years of anti-Social Security (and other) propaganda has made the idea of solidarity into a foreign concept for many young people, as evidenced by the concluding quotation in the Associated Press’s article. They found a 22-year-old recent college graduate, Mackenzie Millan of Los Angeles, and who spoke about Social Security and her future, saying,
“The money that I put aside now, it’s not like that money is going to be waiting for me. That money is going toward someone else. If I wanted Social Security 50 years from now, when I wanted to retire, I would have to hope that someone else is still working and putting money aside in their paychecks to pay for my Social Security at that point.”
What she is “hoping” for is called solidarity. And the idea that future generations will, indeed, be “still working” and putting money aside to pay for those who are not working is a succinct summary of exactly how Social Security is designed. It’s worked that way for more than seven decades and, if people like Mackenzie can be encouraged to act on their hopes instead of their fears, then Social Security will not only be there for them 50 years from now, but it will be stronger and better due to their hopeful activism.
Jeff Nygaard used to manage a project called The Social Security Project of Minnesota. Now he publishes a newsletter called Nygaard Notes, in which he talks about Social Security and much more. www.nygaardnotes.org. A version of this article originally appeared in Nygaard Notes #514