[*PG975]TAKING PUBLIC RIGHTS PRIVATE: THE RHETORIC AND REALITY OF SOCIAL SECURITY PRIVATIZATION
Abstract: This Article explores the foundations of the Social Security privatization debate. What is frequently portrayed as a numbers problem to which a “correct” answer can be found is in fact an ideological and political argument about wealth building versus direct income support and about the reality and security of public entitlement as opposed to private property rights. Efforts to use the idea of private property as the basis of rights in the context of the Social Security system and other non-retirement social welfare programs have proven problematic. This Article suggests that Social Security, far from being a quaint, retrograde souvenir of the New Deal, was ahead of its time in creating economic rights based on effort rather than equity in support of the public institution of broad-based retirement.
Starvation is the characteristic of some people not having enough food to eat. It is not the characteristic of there being not enough food to eat. . . . [S]tarvation statements translate readily into statements of ownership of food by persons. . . . Ownership relations are one kind of entitlement relations. . . . Each link in this chain of entitlement relations “legitimizes” one set of ownership by reference to another, or to some basic entitlement in the form of enjoying the fruits of one’s own labour.
—Amartya Sen1
The problem of economic survival in old age and retirement is usually presented as a sort of modern day version of Aesop’s fable of the grasshopper and the ant: the story of the thrifty and forward-looking ant who stored up grain during the producing season to eat during the barren time ahead, in contrast to the spendthrift grasshopper who merrily consumed all summer without putting aside anything and consequently faced starvation in the winter.2 An onslaught of television and print advertising over the last decade seems designed to persuade younger Americans to follow the ant’s example and save for the winter of unproductive old age.3
This advertising barrage has been accompanied by an equally insistent chorus from policy analysts and political leaders of all persuasions declaring the urgent need for “entitlement reform” to deal with the looming demographic disaster Social Security4 and Medicare5 are said to face when the baby boom generation begins to retire.6 The debate over Social Security reform covers a wide range of proposals, from preserving the existing system to replacing it with a [*PG977]system of private accounts with which individual workers would provide for their retirement and old age.7 Privatization of Social Security has recently surfaced as one of the few areas of sharp distinction between George W. Bush and Al Gore in the 2000 presidential campaign. Governor Bush has proposed a version of privatization as a centerpiece of his platform,8 while Vice President Gore has attacked [*PG978]privatization and made preservation of Social Security a central theme of his campaign.9 Thus, Social Security bids to be a major focus of the new Administration and Congress in 2001.
The almost unspoken underlying goals of all of this concern about economic well-being in retirement are individual autonomy and the rejection of dependency, which in many ways are the hallmark American values that informs all public policy.10 Even those public programs that by definition operate through a dependency relationship—such as unemployment payments and welfare benefits for mothers with children—are touted as tools for ultimately reducing or eliminating dependency through re-integration of the beneficiaries into the work force.11 Aesop’s ant represents the quintessential independent individual who through hard work and thrift provides for [*PG979]herself without assistance and assures herself an unassailable entitlement to consumption when work is no longer possible.
The savings behavior epitomized by Aesop’s ant is the path urged not only by those who would “privatize” the currently public entitlement of Social Security but also by those who support maintaining the program. Many defenders of the existing program assume that public equity in the form of advance funding through the payroll tax—as opposed to the private equity model of the private account proponents—is a possible and desirable basis for retirement as it has been entrenched in American society over the last half-century.12 I propose in this article an alternative way of thinking about the problem of retirement income—one that rejects the assumption that adequate provision for retirement can rely on accumulated equity, either private or public, and that challenges the ideological messages imbedded in the current debate over how best to provide for the elderly who no longer work.
Social Security is a publicly defined, permanent and direct claim on—that is, a public entitlement to—some portion of future productivity, in the form of a stream of income at some point, either at or after the established retirement age, when each individual chooses to stop working. Indeed, the current formulation of the Social Security benefit calculation, based on a wage-indexed earnings record that brings old wages to current dollar levels at the time the calculation is made, guarantees that the retired worker’s share of GNP in retirement will reflect her income position at the point immediately before retirement.13 This is a dynamic, rather than a static measurement. It is the assured permanence of the public entitlement to consumption, the guarantee of lifetime benefits that substantially reflect economic growth both before and after retirement, that enables workers at lower and middle income levels to take the risk of stopping work in early old age. The push to privatize Social Security represents an attempt to take this public claim private—fundamentally changing not [*PG980]the overall size of the problem of support for the elderly generally, but rather, the size and income distribution of individual claims on future productivity.
Social Security also represents a spreading of individual claims across the generation of producing workers and a redistribution of income from high to low-wage workers and from the working to the non-working retired generation.14 In contrast, privatization constitutes a return to individual responsibility and risk and an apparent rejection of redistribution.15 As a result, if the entitlement to retirement income represented by Social Security was the foundation of mass retirement in the twentieth century, privatization very possibly would represent the end of the retirement expectation in the twenty-first century for all but the fortunate and the well-off who have weathered the economic risks that private accounts inevitably entail.16
[*PG981] The problem with basing retirement systems on the equity model is that equity inevitably involves risk of loss or inadequate value, either of which might result in an insufficient future stream of income. These risks are intrinsically incompatible with the modern institution of mass retirement, regardless of individual willingness to undertake risky investment in order to have a chance at immoderate gain. Nonetheless, if the issue were simply a question of each individual’s provision for her own old age, the American cultural imperative of autonomous action in a free market economy might sway the national (if not the global) debate in favor of individual risk-taking in a privatized personal account system.
However, since the onset of industrialization in the nineteenth century, and especially since World War II, retirement has become much more than an individual option available to the well-off minority. The social policy of retirement was actively promoted both by private employers and public support systems. In the post World War II era it became a cultural institution in its own right, satisfying public, private, individual and corporate needs.17 Social Security was designed as the cornerstone of this social policy, not only as insurance for individuals against their own economic need, but more importantly as a solution for the social instability threatened in times of economic crisis by inequality of economic opportunity during a working life.18
The program’s guaranteed income redistributive benefit formula promotes prevention rather than alleviation of poverty in old age and extends the expectation of retirement to all income levels. Thus, the argument over whether to “privatize” Social Security is in reality a debate over the future of mass retirement itself. While no one advocating privatization has so far admitted it publicly, such proposals constitute a step in the direction of eliminating middle class retirement as a labor force management tool, substituting in its place an economic old age lottery in which retirement would once again become a hope rather than an expectation.
The institution of mass retirement, I argue here, can realistically only be supported by a public entitlement to an income stream when full-time paid employment ends.19 Only a public entitlement directly to a share of economic productivity at the time it is necessary to support consumption, as opposed to a private equity investment with [*PG982]variable economic returns, can induce the cessation of work on a mass scale and the continued democratization of retirement as an expectation of workers at all income levels. It is not a question of whether we have sufficient socio-economic resources to support retirement—it is a question of how those resources are to be distributed.
The discussion of Social Security and retirement income security has focused, in many ways, on the concrete results of privatization proposals as if those results were both measurable and predictable. In fact, both the advantages and disadvantages of privatization are a matter of long-term economic and demographic estimates and political opinion, rather than of science. Thus, a principal purpose of this Article is to set aside the essentially uncertain predictions about the consequences of privatization and to refocus the debate on the real political and theoretical disagreements at issue.
The most interesting aspect of this debate may be the enduring power and ultimately limiting impact of the ideology of private property rights for both proponents of privatization and for supporters of redistributive entitlements.20 The expression of all rights as a form of property ultimately leads to a dead end in which individual autonomy “trumps” socially conceived solutions to socially defined problems.21 The terms in which the Social Security debate has been framed disguise the real argument, which is about the supremacy of market ideology, concomitant resistance to redistribution of income, and the transformation of all social rights and values into species of private property.22
Such a framework for legal analysis is the theoretical and ideological expression of the “winner take all” character of early twenty-first century market capitalism. Social Security can be seen as a counterweight to the excesses of “pure” market capitalism. Indeed, I would argue that it is quite necessary to the functioning of the market system not, as privatization advocates appear to believe, antithetical to it.23
The debate over Social Security and privatization is a struggle not just about private investment versus socialized responsibility but about ways of thinking about how the problem of old age income support [*PG983]should be framed and the invasion of all aspects of life by the profit imperative. Encouraging thrift and savings, in the manner of Aesop’s ant, is in itself a relatively benign prescription. In contrast to the current preoccupation of the media and policy analysts, however, I would argue that being and thinking like a money manager—the role constantly urged on the public by advertisers and politicians—should not be a prerequisite for participation in society and security in old age and in fact is likely to be a hindrance to the creation of a more secure and humane society for more than the privileged few.24
This Article will explore the theoretical, rhetorical and ideological foundations of the Social Security privatization debate. It will demonstrate that what is frequently portrayed as a numbers problem to which a “correct” answer can be found is in fact an ideological and political argument about wealth building versus direct income support and about the reality and security of public entitlement as opposed to private property rights.25 First, I explore arguments presented by those who advocate a private account system as a replacement for Social Security, examining both the criticisms of Social Security itself and the suggested advantages of a private system over the public system. This analysis shows that an attachment to the principle of private property as the source of economic rights is the common element in all of the arguments made and that, in the absence of compelling economic evidence supporting privatization, the real argument is a political and ideological one about public versus private rights and income rights versus wealth accumulation.
Next, I discuss the problems inherent in using the idea of private property as the basis of rights in the context of the establishment and explanation of the Social Security system itself and in the context of non-retirement social welfare programs proposed in the work of Charles Reich and others.26 In light of the failure of the courts to expand on Reich’s notion of welfare as property, succeeding analysts have attempted to develop a different justification for redistributive justice—one that sees actual property redistribution as a way to insure access to [*PG984]civic and economic opportunity.27 The failure of these efforts as well as the misleading private pension analogy used to sell the Social Security program from the New Deal forward are directly attributable to the distorting effect of the insistence on individual property rights as the basis for economic rights.28
Finally, I set forth an alternative analysis of economic rights in the retirement context, suggesting that Social Security, far from being a quaint, retrograde souvenir of the New Deal, in fact was ahead of its time in creating economic rights based on effort rather than equity in support of the public institution of broad-based retirement.29 As ideas about the nature of property itself continue to change, particularly in the context of technological developments such as the Internet, property and ownership may give ground to effort and access as the basis of economic rights in the future.30 In any event, I propose that the public entitlement of Social Security is indispensable if the institution of retirement, which fundamentally relies on each individual’s permanent entitlement to income until death as a way to induce that individual to stop working, is to last very far into the twenty-first century.
The debate over “privatizing” Social Security, in one form or another, has been raging for at least thirty years since Martin Feldstein’s theories on the effects of Social Security on the national savings rate first began to garner attention.31 Each side in policy discussions about the future of public retirement programs tends to cast the argument as one about demonstrable truths—numbers of elderly workers, effects of public transfer programs on investment, savings and the economy, etc. The introduction of Social Security into the 2000 presidential campaign in the form of George W. Bush’s partial privatiza[*PG985]tion proposal speaks volumes for the continuing vitality of the debate.32
However demonstrable some of the truths appear to be, the argument is far from settled and economists differ among themselves, as do policy makers generally, as to the economic effects of social insurance and the costs and benefits of private savings as an alternative to social insurance.33 It is the subtext of this debate that is more interesting and illuminating. The ideological, philosophical and cultural underpinnings of both sides of the argument reveal common goals and, more importantly, common conceptions about rights and economic entitlements held both by those who would privatize Social Security and those who would preserve it as it is today. For purposes of mapping this “deep structure” of the privatization argument, I focus first on the basic tenets of the case for privatization, as argued in various representative pieces by political and academic figures, examining both the arguments made and the principles and rhetoric in which those arguments are grounded.34
A number of versions of the privatization case have been made over the last several years, and all are based on the same general proposition: individual accounts invested in equities (principally the stock market) are superior as a retirement income system to the public income transfer entitlement.35 As will be clear in the discussion that follows, there is no conclusive or universally accepted economic argument to settle the issue. Thus, it would be easy to dismiss the entire debate as “political” and to attribute motives of bald self-interest to each side: opposition to redistribution and a “winner takes all” unbridled greed on the part of the privatization advocates and self-interested preservation of government subsidies for the elderly on the part of supporters of Social Security. Clearly such motives are present on each side, but they are not the whole story. It is possible, by peeling back the layers of the most commonly presented arguments in [*PG986]favor of privatization, to see the bones of the debate—core beliefs about property, economic rights and individual autonomy—that both unite and divide the contestants.
The critics’ analyses of the inadequacies of the social insurance system focus both on internal design flaws that make the system inadequate to meet the retirement needs (they argue) of the twenty-first century and on apparent effects of the program on the economy and society as a whole. Most criticisms fall into four general categories. First, there is concern about the coming demographic “disaster” of the baby boom generation’s retirement, with fewer workers to fund more retirees who can be expected to live longer lives.36 Second, there are “rate of return” issues (that is, comparison of taxes paid to benefits paid out to each individual) with concern focused on Social Security’s inefficiency in targeting benefits, the inadequacy of benefits for the low-paid as well as for some of the high-paid, and its combination of “insurance” and “welfare” functions.37 Third, there is concern about the overall expense of paying for Social Security and the share of the federal budget (and national economy) that will be devoted to income maintenance programs for the elderly and the problem of Social Security’s “unfunded liability.”38 Fourth, there is concern that a publicly funded retirement program, financed on a pay-as-you-go basis, discourages private savings for retirement.39
The first and third areas of concern deal with the financing of retirement on a generational basis. The second focuses on “equity versus adequacy,” a long-standing debate about the redistributive Social Security benefit structure. The fourth area of concern, the depression of the national savings rate, deals not with how well Social Security meets the goals of insuring retirement, but rather, with the detrimental effects of public income transfer programs generally.40 These economic and demographic arguments, however, are only the outward manifestations of the same set of assumptions and concerns—an atomistic, individualized approach to problems created by demographic and social phenomena (an aging population in the in[*PG987]dustrialized world coupled with the cultural expectation of retirement at age sixty-five) and a related attachment to individual property rights (and resistance to redistribution of them) as the only sure source of economic growth and security during working life and in old age.
For many who advocate private accounts as a viable substitute for Social Security, the system’s problems largely originate with the aging of the baby boom generation—the demographic basketball in the python.41 The generation born roughly from 1946 through 1960 in the industrialized world greatly outnumbers the generations born in the 1920s and 1930s and during the war years of the 1940s; as a result, the ratio of workers supporting non-working elderly will drop from the three workers for each retiree during the period from about 1960 to 2010 to two workers or fewer for each retiree by 2030.42
The current Social Security financing structure is commonly described as “pay-as-you-go,” referring to the fact that the system is generally not funded in advance. Almost all of the payroll tax revenues currently being collected from workers and their employers are used to pay benefits in current pay status. Any surpluses, which the system has generated each year since the late 1980s, is accounted for as a reserve in the Social Security trust funds, which are held in the form of U.S. government bond obligations.43
The language used to describe the baby boom retirement phenomenon frequently evokes the feeling of impending doom; in addition to the drop in the reproduction rate of the baby boomers themselves, increases in life expectancy and advances in medicine add up to a demographic tidal wave of elderly retirees.44 Senator Don Nickles [*PG988]focused on this worker-to-retiree ratio problem in a 1999 article advocating private accounts as a substitute for Social Security:
The population of Americans aged sixty-five and over increased eleven fold from 1900 to 1994, compared with only a threefold increase of those under age sixty-five. The population of those eighty-five and older will more than double between 1994 and 2020 to 7 million, and reach 19 million by 2050. . . .
Social Security depends on today’s workers to pay for today’s retirees. The future of the system and the benefits due today’s workers in their retirement depends heavily on the government’s ability to tax future generations. Thus, understanding these changing demographics is key to understanding why the system is in trouble.45
The worker-to-retiree ratio is usually put forward as the first and principal problem with the current Social Security system—that is, too few workers paying in to support projected numbers of retirees. There are many reasons for the projected drop (under the intermediate set of assumptions) from the current 3.4 workers to each retiree down to just over two workers for each retiree by 2030.46 The large baby boom generation is only part of the picture, of course. The substantial drop in fertility rates between 1960 and 1976 coincided with the beginning of widespread use of oral contraceptives and deferral of childbearing by women now entering the paid work force in larger numbers.47 For a short while in the 1980s the baby boom generation was not even replacing itself, although fertility has rebounded in more recent projections.48
These demographic issues are not confined to the United States; Japan currently has the same worker-to-retiree ratio that the United States will experience by 2020.49 Western European countries—which [*PG989]long before the United States established more extensive social welfare and social insurance programs dealing with a wide range of issues—face similar demographics and, in some cases, more severe drop-offs in birth rates than are projected in the United States.50 Many of these countries are beginning to question the resources devoted to their broad social welfare structures and to investigate private market alternatives.51
The demographic issue in the United States is normally presented as a question of simple, common sense math: if there are fewer workers supporting each retiree, then the corresponding tax burden on each worker will have to increase. The critique usually stops there, the implicit corollary being that increasing taxes is per se wrongheaded and economically disastrous, no matter what the reason. The systemic criticism embedded in the demographic disaster narrative is that a pay-as-you-go system, in which each generation of workers pays for the retirement benefits of the then-current generation of retirees, cannot be sustained if the retiree generation constitutes an out-sized burden on a comparatively smaller working generation.52
It is the way in which the demographic problem is framed and explained that is of particular interest here: each worker’s responsibility for supporting the non-working elderly is spelled out as a matter of individual tax burdens that she may or may not choose to undertake. Solomon and Barrow write: “Each generation must finance its parents’ retirement on the faith that its children, in turn, will have the benevolence and capacity to fulfill their social obligation.”53 Solomon and Barrow make this statement as a specific criticism of Social Security’s financing mechanism in the face of what they imply is an impending demographic disaster. The unstated assumption seems to be that providing for elderly parents is a voluntary obligation that is widely and freely rejected by children in both individual and social contexts.
It is unclear, however, whether these demographic issues would in any way be addressed by an equity-based retirement system supported by these same critics as the necessary substitute for the pay-as-you-go [*PG990]social insurance model.54 A private account system must be based on the assumption that a property right, an entitlement to equity sufficient to support an income stream to the end of life, is necessary to assure retirement income security. Privatization advocates are generally highly critical of the lost opportunity for wealth-building represented by FICA taxes used to pay Social Security benefits, money they would rather keep and invest themselves to satisfy their own individual retirement needs.55
Yet there seems to be no question that the nation as a whole will have the capacity to produce sufficient goods and services to satisfy at least the basic needs of all its working and non-working members throughout their lives. Thus, the adequate care of elderly baby boomers in the aggregate should be perfectly possible. The question is how the benefits—that is, the share of consumable goods and services—will be distributed among the elderly. Since in a pay-as-you-go system payroll taxes pay for current consumption of goods and services by the beneficiary population, those taxes would probably have to increase to provide for a larger and longer-lived generation, unless productivity so greatly increased average wages that equivalent additional revenue would be raised by the same tax rate. While the payroll tax is regressive, higher wage workers nonetheless pay higher levels of FICA taxes. Moreover, if additional revenue has to be raised within the payroll tax structure, likely measures would include increasing the taxable wage base without a concomitant increase in benefits or using some portion of general tax revenue raised by the progressive income tax, both of which impose a greater burden on high income than on low income taxpayers.56
[*PG991] It is not simply the prospect of more elderly retirees in itself that necessarily alarms private account advocates. Rather, it is the likely solutions for payroll tax shortfalls in providing benefits for those elderly that create issues of fairness from their perspective. The impact of additional taxes probably would fall more heavily on higher-wage workers, inevitably resulting in a redistribution from the hard-working ants to the less fortunate or (depending on your perspective) more lazy grasshoppers of the human work force.57 The demographic projections of a larger elderly population being supported by a working generation that will be comparatively smaller than in the past create a problem for privatization supporters because they imply higher tax burdens on higher wage workers—a greater degree of redistribution from higher income workers to lower income retirees.58 Such redistribution also contributes to the second general problem cited by privatization supporters: the poor “rate of return” on payroll taxes paid into Social Security as well as helping to diminish the private accumulation of capital.59
Few supporters of Social Security argue with the range of projections contained in the annual Trustees’ Report, which is based on three sets of demographic (and economic) assumptions: the low-cost, or optimistic set; the intermediate set, which are the figures used by most government policymakers to make decisions on Social Security issues; and the high-cost, or pessimistic, set of assumptions.60 For purposes of determining actions affecting the next thirty years, current and past fertility and mortality rates, unlike most of the other issues in the privatization debate, are primarily a matter of calculation, not judgment. The generation that will reach what have traditionally been considered peak earning years at the time the baby boom generation is due to retire has already been born. Therefore, calculating how many workers there will be for each retiree in the 2015–2035 period is a matter more of mortality rates of both generations than of birth rates.61
However, there are many demographic factors and uncertainties that may play a significant role in determining how many workers will be bearing the payroll tax burden for Social Security in the longer [*PG992]term future, and the choice among even minor variations on these assumptions can make all the difference in the projected size of the financial problems of the system. For example, the extent of future immigration into the United States is a critical, yet somewhat unpredictable, factor. While the industrialized Western European, Asian and North American populations are aging, the populations in other parts of Asia, and most of Africa and the Middle East, as well as parts of South and Central America, are experiencing much higher fertility rates and have much younger populations.62 As a result, it can be argued that one approach the industrialized nations can take is to allow immigration of younger workers to make up for any dearth of native born workers and, as a result, shore up the total payroll tax wage base.63 The United States, despite its heritage as a “nation of immigrants,” historically has alternated periods of xenophobia with periods of relaxed immigration standards to meet industrial and agricultural labor needs.64
Even if the conservative immigration assumptions contained in the 2000 Board of Trustees of the Federal Old-Age & Survival Insurance & Federal Disability Income Trust Fund Annual Report (“2000 Trustees’ Report”) are accepted, there are nonetheless several factors that may indicate less than catastrophic consequences of the aging of America.65 First, the math is really not as simple as it appears, as the payroll tax is not a head tax but rather a tax on wages and thus indirectly on productivity. It is clearly a regressive tax, as it applies the same percentage rate to all wage levels and does not tax wages above the taxable wage base at all. However, if productivity increases and wages rise, as most economists would expect to happen when there are fewer workers in the labor force, the impact of any tax increase needed to cover rising outlays in Social Security benefits will be less severe. Such expectations are part of the low-cost or optimistic set of the 2000 Trustees’ Report assumptions, under which Social Security [*PG993]incurs no significant financial problems throughout the 75-year projection period.66
Of course, the payroll tax has for the last several years raised far more revenue than necessary to pay for current benefits, and the surplus amounts have been recorded as accumulated in the Social Security trust funds.67 The extended debate over the existence or unreality of these trust funds is outside the focus of this Article, but clearly the federal budget has been “balanced” in recent years through the use of payroll tax revenues to offset the deficit in general income and excise tax revenues.68 Once the payroll tax ceases to be sufficient to pay for current outlays—depending on economic assumptions, that may begin to occur as early as 2015—these accumulated surpluses will have to be “drawn down” to pay for benefits.69 In effect, in order to keep the overall federal budget balanced, income and other tax revenues will have to be used to pay off the bonds in which the trust fund surpluses are held and which will have to be liquidated to pay current benefits.70
But these issues are clearly a question of political choices, not of demographics. The solutions to almost all of the problems potentially arising from an increasing elderly population, in fact, are political and philosophical since the demographics are simply phenomena with which our political and social systems must cope. The increase in payroll tax rates that may be necessary to sustain the current Social Security system past 2030, essentially until the baby boom generation passes from the scene, seems inherently distasteful to many critics, even apart from any ancillary economic effects such increased taxes might create. Yet, under the intermediate assumptions in the 2000 Trustees’ Report, a tax increase today of slightly more than one percentage point on employers and employees alike would cover the system’s shortfalls for the remainder of the seventy-five-year projection [*PG994]period—a distasteful option, perhaps, but hardly cataclysmic.71 A perhaps more likely scenario would involve a combination of measures including raising the taxable wage base, using some general tax revenues, and increasing coverage, which together would reduce the size of any payroll tax increase necessary to cover shortfalls.72 The point is that the demographic picture in itself is not a prediction of doom.
A second point that complicates the demographic picture is the question of the overall dependency ratio—that is, the comparison of numbers of workers to all non-workers, not just the elderly.73 The dependency ratio takes into account non-working children (generally those under eighteen) as well as non-working retirees in determining what percentage of the gross national product (GNP) must be shared with the non-producing sector of the population. The overall dependency ratio in 1960 was higher than it will be at any point in the seventy-five-year forecast period for Social Security; once again, the baby boom generation was the cause—this time in childhood rather than in old age.74 While payroll tax rates in 1960 were relatively modest by current standards, the income tax rate structure was much more sharply progressive, with the highest marginal rates standing at 90%.75 Although the total dependency ratio may rise again to the levels it reached in the 1960s, the total tax burden will probably look quite different if today’s much higher payroll tax rates and much lower marginal income tax rates remain in place. Adjustments in the way Social Security benefits are financed may indeed be in order to reduce the effect of the regressive payroll tax. However, whatever ad[*PG995]justments might ultimately be made, the more general point is that demographics alone need not impel fiscal collapse, either public or private.
In addition, the conclusion that the demographics spell disaster for Social Security is based on the unstated assumption that retirement, like aging, is an inevitable stage of human life; hence, larger numbers of elderly necessarily means larger numbers of retirees drawing benefits from the program. Yet as lifespans increase, and the period of healthy capacity for work increases, it seems unreasonable to assume that most older Americans will continue to want to retire as young as the current retirement pattern of sixty-two to sixty-five, even if they have the financial resources to do so.76 The age at which full Social Security benefits will be available is now increasing, in small annual increments, to age sixty-seven by the year 2022, and improvements in mortality and health in old age, as well as potential labor shortages, may further encourage older people to stay in the work force longer.77
Finally, and probably most importantly, it is unclear exactly what a private account system in place of Social Security would do to solve the demographic issue. If the issue is presented as a question of too many retirees for too few workers, eliminating the burden-sharing system of social insurance and placing responsibility for retirement savings on each individual would change the distribution of the burden, but not its overall size. Privatization of Social Security cannot be presented as a solution to the issue of too many retirees; that problem can only be addressed directly by encouraging the baby boom generation to work longer, perhaps through elimination or severe reductions of benefits at age sixty-eight or seventy.78 Why, then, do privatization advocates stress the problems posed for the Social Security system by the increasing numbers of elderly expected over the next fifty years?
While privatization cannot directly resolve the issue of too many retirees (and certainly its advocates do not use that as a selling point), a system of private accounts may indirectly discourage retirement by eliminating income security and redistribution. The uncertainty of having sufficient assets to insure lifelong income—an uncertainty that is inherent in an equity-based retirement system—is very likely to result in longer working lives, as was the case before the enactment of [*PG996]Social Security. Moreover, without even the modest redistribution of income provided through the Social Security benefit formula, the risk of insufficient retirement income will almost certainly be borne by low and average wage workers.
In summary, demography may not be destiny, but fertility and longevity patterns will clearly affect retirement patterns and how twenty-first century societies will support their elderly. Nonetheless, upon closer examination, the disasters privatization advocates fear seem to be less demographic and more political in nature. In both historic and economic terms, the working generation must always bear the burden of providing goods and services to satisfy the claims—expressed either as private savings or public entitlements—of the non-working, both the elderly and the young. Private account proposals, as well as less extreme proposals to invest part of the Social Security trust funds in stock market equities, in many ways hold out a false hope that the burdens of aging can somehow be paid for in advance and shifted away from the generation who will be working at the time the baby boom retires.
The only way to reduce the financial burden of supporting non-working members of society on each producing generation as a matter of demographics is to reduce the numbers of the non-working by either having fewer children (the baby boomers’ solution) or delaying retirement (perhaps the baby boomers’ fate). If neither of these steps is taken, then the issue becomes one of distribution of the burdens and the benefits across the working generation. A private account system would resolve the distributional issue in favor of the highly paid and at the expense of the low wage worker who currently benefits from the redistributive Social Security benefit formula.79
For many critics, the most intractable problem inherent in the design of Social Security, and the one for which establishment of private accounts is generally offered as a direct solution, is the “rate of return” issue.80 Social Security’s benefit and financing structure has [*PG997]frequently been compared to that of a defined benefit employer pension with required employee contributions.81 The usual way of describing this structure is as follows: each worker in employment covered by Social Security and her employer pay each year, in equal shares, a fixed percentage of the first $72,000 or so of her wages—6.2% each, or a total of 12.4%—in exchange for the payment of a lifetime annuity to the worker beginning at age 65 (later for those retiring in 2000 and beyond).82 While the Social Security program also provides for spousal and survivor benefits in the event of the worker’s death and for disability insurance coverage until the worker reaches retirement age, most workers, as well as the commentators criticizing the system’s rate of return, generally assess the system’s value to them as a retirement system.83
Social Security is funded by a dedicated payroll tax, and the government is required under the Social Security Act to publish an assessment each year of the system’s short, medium and long-term financial status, as a comparison of projected payroll tax revenues against program outlays.84 As a result, the program is now embedded in public consciousness and in the thinking of policy analysts as a self-contained fiscal entity for which separate funding and expenditure comparisons are appropriately made each year. These annual assessments have consistently shown long term shortfalls in revenues based on the current tax rates and conservative to moderate economic assumptions.85 It is these assessments, combined with the short-term financing problems of the late 1970s and early 1980s, that provided much of the impetus for calls for private alternatives to Social Security. These arguments for Social Security privatization usually compare [*PG998]the wealth-creation potential of private accounts with a small or even negative “rate of return” under the public program.86
For example, Senator Nickles bases the argument for private accounts on the opportunity for wealth building in the private system in contrast to the low return on investment offered by the public system:
Long-term savings should yield a retirement account larger than the actual amount invested adjusted for inflation, so as to reward saving. There are many investment opportunities that provide a reasonable rate of return. In engineering retirement security for America’s future generation, lawmakers must make sure to give workers the opportunity to earn as much as they can on their investment.87
Other commentators offer similar critiques of Social Security’s low rate of return, contrasting it with returns offered by the stock market, admittedly at a higher risk.88
There are a number of standard ripostes generally offered by supporters of social insurance in answer to the rate of return and adequacy-equity arguments. First, calculating the “rate of return” itself can be problematic, and there is no universally accepted method.89 It is particularly difficult to take into account the certainty of receiving the annuity as a calculable factor. Of course, private accounts invested in stock mutual funds are subject to the risk of losing equity as a result [*PG999]of the vagaries of the stock market. But even private annuities purchased from an insurance company are not necessarily completely secure; insurance companies can always go bankrupt or otherwise become unable to honor their obligations under annuity policies. There is always a risk, therefore, that an annuity policy might not provide income until death. In contrast, social insurance payments underwritten by the taxation power of the federal government run no risk of being unfunded as a result of financial difficulties.
The rate of return calculation depends a great deal on the economic and cost assumptions used to set parameters such as the rate of inflation over the worker’s lifetime, the value attached to cost of living increases in benefits after retirement, the value of survivors, disability, dependents benefits that might or might not be paid, and the steadiness of the worker’s earnings history.90 As a result, different analysts produce different estimates of the actual cost-benefit ratio.91 It is clear that current and future generations of workers will not receive the “bonanza” returns that the first two or three generations of retirees received, since the later generations will have been paying taxes into the system at higher rates over most of their working careers.92 Nonetheless, most workers should receive at least a small positive return when comparing their benefits to the taxes they paid.93
Focusing on the calculation of returns, however, begs the more fundamental questions—why has the debate centered on the comparison between taxes paid and benefits received? And what assumptions about Social Security have produced this tax-benefit comparison in the first place? One reason, of course, is Franklin Roosevelt’s insistence on tying worker contributions to benefits as a matter of political support for the new program.94 History aside, the financing mechanism of the program also invites such a comparison. But even though benefits have always been financed primarily by payroll tax revenues, it does not follow that benefits need have any direct relationship to payroll taxes paid by individual workers, any more than the benefit of defense spending has any direct relationship to income taxes paid. It apparently seems intuitively correct to view the “value” of Social Security as a matter of comparison of “what you get” with “what you paid,” [*PG1000]yet it is difficult to think of any other tax-supported program for which such comparisons are routinely made.
One probable reason the individual cost-benefit standard is applied to Social Security but not, for example, to national defense is that provision for retirement appears, on the surface, to be a function that can be undertaken through private means, without government involvement. As a result, as has been the case for many government functions that have been privatized over the past decade—prison operation or the postal service—the advantages of the private alternative are generally more of a focus than the internal problems of the government program being privatized.95 In general, the case for a private account system rests on the notion that equity and property-based income rights are seen as the best—or the only—source of retirement income security.
The focus on comparing payments made to beneficiaries with the taxes they paid into the system, while intuitively appealing, nonetheless is misguided. There is no compelling reason why the financing mechanism should determine the perceived value of the benefits paid. Payroll taxes are merely a method of financing the system, not the basis for benefits earned and paid out.96 Benefit calculations are made based on earnings recorded in the Social Security system, which is done as a record-keeping matter through withholding tax records filed with the Federal Reserve and forwarded to the Social Security Administration.97 But benefit calculations do not take into account the amount of taxes paid, and benefits cannot be reduced in the event of a failure to pay such taxes by the employer who is responsible for withholding FICA taxes from workers’ paychecks.98 The system could as easily be financed through income tax revenues, like other government expenditures, without any impact on the earnings-based benefit structure.
Yet the tax-benefit comparison is routinely and unquestioningly raised as a disadvantage of Social Security, and proponents of Social Security expend almost as much effort in attempting to prove more [*PG1001]favorable rates of return as a counter-argument.99 This analysis may be properly applied to a private annuity or insurance policy, but it is almost completely irrelevant to a direct transfer program under which the worker will receive benefits based on her earnings record regardless of the amount of taxes actually paid into the system. Nonetheless, the power of the idea of equity-based economic rights is such that both critics and supporters of Social Security have difficulty appraising the program’s value without transforming taxes of general application into individual equity investments, and then mistakenly applying a straightforward investment/return ratio analysis to a benefit structure that is specifically designed to limit benefits for the highly-paid (thus depressing their “rate of return”) and to provide disproportionately higher benefits for the low-paid.100
This weighted benefit formula is itself a target for those criticizing Social Security as a bad “investment” for individual workers.101 The system is charged with economic inefficiency because it attempts to combine, in these critics’ view, social welfare with economic equity functions and as a result fails at both.102 This view of Social Security as combining “adequacy” (just-above-poverty-level benefits for low-income elderly workers) with “equity” (benefits that increase as earnings increase, and that are paid regardless of income level in retirement) has long troubled conservative and liberal critics alike as an inefficient use of scarce public resources.103
Both groups tend to view economic efficiency in the targeting of benefits as a paramount social policy goal that Social Security fails to achieve, as many workers with consistent lifetime earnings above the wage base, or with inherited or other unearned wealth, have more than adequate resources to support a comfortable retirement without any assistance from Social Security.104 This perceived defect results in calls for means-testing Social Security, both from liberals and conser[*PG1002]vatives, as a way to insure that government benefits do not go to relatively wealthy retirees who do not need them.105
Such calls for means-testing of course ignore the theory of Social Security as an earned entitlement that is quite different from charity or welfare.106 This latter perspective is actually the view most Americans have traditionally held about Social Security, and it is a view encouraged by the perception of FICA taxes as the payment for their benefits similar to private annuity purchase.107 The focus on equity and on the purchase of or investment in benefits as the source of future retirement income has probably helped to create broad public support for the program. The unfortunate result is that support for Social Security is based at least in part on a misapprehension about social insurance, one that also has given rise to the rate of return fallacy and debate. The fact that the most accurate description of the Social Security entitlement is “earned,” not “paid for,” has generally escaped public attention and is an oversight that has been encouraged by various political leaders. The question should be reexamined, however, as attention to earnings rather than contributions as the basis for entitlement rights produces a more lasting and sound approach to the retirement income issue.
The flip side of the public’s support for their “annuities” is the perception that the public has been simply fooled into thinking they have an earned right entitlement and that social insurance benefits, like all other government payments, should be directed by policy planners and politicians to those groups who need them the most.108 This policy analysis is the latter-day equivalent of prescriptions for outdoor poor relief that succeeded the English Poor Law. Poor relief, [*PG1003]both in Europe and in the United States, has formed the core of the Western approach to poverty which is based on a hierarchical view of wealth, poverty and moral worth.109 Poor relief, like the charity of Aesop’s ant, allows the well-off to determine who among the poor is worthy of support and acknowledges no right or entitlement belonging to the poor based on any factor—citizenship, past work effort, etc.—other than need. The Social Security entitlement, based on a lifetime of work, is fundamentally the antithesis of the poor relief model.
In summary, the argument that Social Security does not provide a high enough rate of return on the tax “investment” of individual workers relies on the notion that payroll taxes are equivalent to equity investments. Thus, the success of the argument depends on recharacterizing Social Security as a type of private annuity, something the program does not much resemble, and then criticizing it for failing to provide “investment returns” that were never a goal of the program in the first place. Whatever the actual merits of the rate of return argument, what is most interesting is its assumption that an equity interest is necessary to insure future income in old age. As will be discussed below, it is this core assumption that is most in doubt.
The third major criticism of social insurance as a mode of securing retirement income is focused on the overall cost of Social Security, both in terms of public finance (as a question of the cost of the program as a percentage of government resources or of GNP) and in terms of the future financial problems of the program (as benefits begin to outstrip payroll tax revenues).110 The popular version of this concern is “Will Social Security be there when I retire?” an almost theological approach to the public policy question of how best to provide for elderly Americans and continue to allow retirement in the absence of physical or mental incapacity for work.111
There are several common elements in the various critiques relating to the fiscal burden of public retirement programs. First, critics repeatedly cite the dangers of “pay-as-you-go” financing, which results [*PG1004]in benefit obligations being incurred without being funded in advance, as would be required for a private pension program.112 A variety of ills arise from this financing structure according to these critics, including: the unfunded liabilities of future retirement benefits; recurring financial crises as revenues are outstripped by benefit payments; and a false sense of security foisted on the public when surpluses are run since those payroll tax surpluses are merely covering income tax deficits.113
Policy analysts frequently approach this issue by comparing the financing of Social Security with the financing required under federal law and accounting standards for private pension plans, raising the specter of “unfunded liabilities” of the system and charging the current structure with financial instability.114 In a similar vein, critics frequently characterize the continued expansion of the Social Security program, without corresponding tax increases sufficient to fund those expansions in advance, as evidence of “fiscal instability.”115 For these critics, the only answer to this instability would be full advance funding of retirement benefits, on either a public or an individual basis.116
Second, many privatization advocates blame Social Security’s perceived financial problems on what they see as unwarranted legislative expansion of Social Security from what was (again in their view) a limited anti-poverty program for the elderly at its inception in the 1930s.117 Many of the “cost” critiques reveal, in both their rhetoric and substance, an acute discomfort with the major role of government in determining individual retirement income planning that has resulted from the breadth and extent of Social Security benefits and coverage.118
[*PG1005] These criticisms are based on a consistent philosophical view that the appropriate role of government in the economic affairs of individuals is a very limited one, resulting in minimal interference with the operation of the market economy. However, concerns about the over-expansion of Social Security and its intrusiveness in regulating private economic matters, while of major importance to policy makers, are not based on essential structural problems of the retirement system, but rather, are political critiques arising from political and philosophical differences of opinion about the role of government generally. Thus, there can be no “right” answer to the charge of “too big” a program, but only opinion informed by underlying political philosophies about the federal government’s responsibility, its intrusion into individual citizens’ lives, and the like.
The specific application of this vision to Social Security, however, has a couple of interesting twists that are tied to these advocates’ attachment to equity ownership and private property rights as the source of autonomy and individual freedom.119 In particular, criticisms of the expansion of Social Security to provide both higher levels and more types of benefits are rooted in opposition to a permanent earnings-based entitlement that is not subject to periodic re-evaluation of eligibility based on poverty.120 Those who advocate privatizing Social Security appear to see entitlement programs as wresting control over who receives government largesse away from Congress and the political forces influencing legislation, thus diminishing the role of public needs-based welfare programs which traditionally have been far more controlling of the lives of recipients and far less generous in the amounts paid than social insurance programs have been.121
In addition, the critiques of pay-as-you-go financing and the predictions of financial crisis arising from Social Security’s “unfunded liabilities” inevitably are accompanied by calls for advance funding of Social Security (and failing that, for a private system that in effect requires individuals to advance fund their own retirement).122 Advance [*PG1006]funding of Social Security seems to be the public equivalent of equity-based annuities in the private sector. In essence, these critics would require the public entitlement based on past earnings to be tied to a corresponding public capital account, a true equivalent to the private pension fund, from which all benefits, current and future, would be financed based on a private equity interest.123 Once again, privatization arguments, and even moderate prefunding suggestions, that generally appear to be based on economic rationalism and numerical data seem, upon closer examination, to be based just as much on a philosophical devotion to the property right principle.
The overarching complaint that “Social Security costs too much” can be addressed on several different levels. First, in answer to the question of how large a percentage of the federal budget should be devoted to Social Security benefits, the correct percentage is for the most part a matter of political opinion. Those advocating an expansive federal government are not necessarily alarmed by as much as 25–30% of the budget being absorbed by Social Security expenditures, particularly in the post-Cold War era.124 Indeed, it could be argued that devoting government spending to transfer payments which are either spent on goods and services purchased by beneficiaries or saved and invested, have more salutary economic effects than spending on military hardware or other government capital expenditures which may have fewer reverberating economic benefits. Thus, the increases in expenditures necessary to pay for the retirement of the baby boomers over the next 40 years may be problematic only if one thinks that the government should not be large to start with, or that there are better ways to spend those funds.
Second, concerns about the absolute level to which payroll taxes would have to rise to support future benefits are based on the assumption that all future benefits should be financed by the payroll tax. However, even the original design of Social Security did not entail sole reliance on the payroll tax as a financing mechanism,125 and it is certainly possible that other sources of revenue within the purview of the federal tax power could be utilized to finance benefits in the fu[*PG1007]ture. Moreover, even if the payroll tax does remain the exclusive financing source, there is no agreement among economists, actuaries, or other experts on how high the tax rate will eventually have to be to cover benefit outlays, or on what effect such increases may have on the national economy.126 Assertions that as much as 25% of payroll (in contrast to the current 12.4%) will be required to cover OASDI benefit obligations in the future are no more authoritative than claims that the payroll tax will not have to rise at all, especially if the age of retirement continues to rise.127 Of course, objections to theoretical payroll tax increases can also be raised against increases in income taxes that might be necessary should the financing mechanism change. The principle underlying this critique, then, is really the same opposition to income redistribution through the tax and benefit structure that has surfaced in connection with the other critiques of Social Security.
Third, critics of the expansion of Social Security to cover ancillary benefit categories and to increase benefits in step with the consumer price index (“CPI”) appear to a great extent to be simply expressing their own opposition to an expansive federal government role in income maintenance. One problem with such criticism of the “expansion” of Social Security to its current scope and size is that it is based on faulty history.128 Social Security was envisioned from the beginning as eventually leading to the abolition of needs-based poverty programs for all but the extremely unfortunate, on the assumption that all adult breadwinners would be part of the covered work force and thus would earn a retirement benefit by the time they reached old age.129 The program was meant to prevent those who had always worked in the paid labor force (and their dependents) from having to [*PG1008]demonstrate need in order to qualify for a benefit upon reaching old age.130
The “unfunded liabilities” critique of pay-as-you-go financing seems on the surface to be based on objective, nonpolitical criteria of actuarial and insurance principles. Application of private annuity criteria to a public transfer program, however, is neither necessary nor appropriate. If Social Security is viewed as a claim on income that is not based on equity but on an earned right to income at the time it is needed to pay for consumption in old age, then pay-as-you-go financing can be seen as an integral element of the structure and a sensible means of providing funding at the time benefits must be paid out. In any event, the concept of “unfunded liabilities” is incongruous in the context of a publicly financed program supported by the government’s power to tax; bankruptcy is an odd analogy to use in connection with a publicly financed program that cannot in fact go bankrupt in fiscal terms.
Finally, the “high cost” of financing the baby boom’s retirement is generally seen as a problem only of the publicly financed retirement program. Private solutions such as mutual funds, insurance annuity policies, employer-provided pensions and the like are marketed vigorously as a source of wealth and opportunity for those with the ability to take advantage of them. On a demographic basis, however, the overall share of the nation’s GNP devoted to providing necessary goods and services to retired baby boomers will increase to the same level whether the source of funding is public or private. The real issue raised by the demographic patterns of aging already in place for this century is how the resources available to purchase those goods and services will be distributed among the elderly at each income level. There is a substantial likelihood that a private account system would result in longer working lives for many older Americans, as the risk of arriving at retirement age with insufficient resources to support retirement will inevitably be higher for lower wage workers in such a system.
Martin Feldstein has argued for the past thirty years that the existence of Social Security has a detrimental effect on the national savings rate and that the current pay-as-you-go financing structure both [*PG1009]discourages individuals from saving for their own retirement and inhibits national accumulation of capital and economic growth.131 Solomon and Barrow further argue that in the absence of either private retirement accounts or a pre-funded public system “an intergenerational transfer occurs from the working young to the retired elderly.”132
There has been substantial controversy over Feldstein’s original work both because of a technical flaw in Feldstein’s calculations133 as well as a lack of consensus over the general theory of the connection between Social Security and the national savings rate. Feldstein recalibrated his calculations and—based on time-series data attempting to connect “social security wealth” (a concept Feldstein defines as the actuarial present value of Social Security benefits for the current adult population when they reach age sixty-five minus the payroll taxes they will have paid by that age) to aggregate private savings and consumption—continues to claim that Social Security must depress the national savings rate.134 Feldstein has been unstinting in advocating elimination of Social Security, a latter-day Cato the Elder declaring “Social Security delenda est.”135
In his later work, Feldstein has emphasized not just the effect of Social Security on individual savings but also the effects of an “unfunded” pay-as-you-go system on overall levels of capital accumulation as the cumulative effect of depressed individual savings reduces the aggregate capital supply.136 He concludes that “existing social security [*PG1010]wealth reduces overall private saving by nearly 60 percent,” as it “causes each generation to reduce its savings substantially and thereby to incur a substantial loss of real investment income.”137
The technical accuracy of Feldstein’s economic analysis aside, what is striking from the perspective of developing a theoretical basis for retirement income security is the importance to his argument of the property metaphor and the economic necessity of capital accumulation. Feldstein’s economic analysis, as well as his political critique, relies on the assumption that individual well-being in old age is dependent on the level of wealth accumulation (public and private) prior to retirement. The concept of “social security wealth” itself seeks to express future access to continued consumption in retirement as the present value of the future income stream, transforming that continued access into a current dollar figure representing accumulated wealth. Thus, the entire debate, in Feldstein’s terms, is about how to accumulate the highest pile of figurative grains of wheat with which to survive old age.
Despite Feldstein’s “rehabilitation” of his original calculations concerning the link between Social Security and private savings, many economists dispute his conclusions about the relationship between personal savings and economic growth, as well as his underlying assumptions about the effect of Social Security on the savings rate. For example, Robert Barro argued in 1978 that the existence of Social Security has affected the transfer of accumulated wealth from the older to the younger generation in a way that offsets the possible dissavings effects of Social Security.138 A number of economists including Alicia Munnell and Henry Aaron and, more recently, a survey of the literature by the Congressional Budget Office have found no conclusive evidence that the drop in the U.S. savings rate is a result of the existence of Social Security rather than other economic and social factors.139
[*PG1011] Moreover, the connection between personal savings and national (or international) capital formation and economic growth and well-being is far from established.140 Economist Arthur Okun argued in 1975—at the same time Feldstein did his original work on Social Security and savings—that there is little evidence that the level of savings in the United States is in any way insufficient to support economic growth and investment: “[T]he specter of depressed saving is not only empirically implausible but logically fake. . . . The nation can have the level of saving and investment it wants with more or less income redistribution, so long as it is willing to twist some other dials.”141 Indeed, given the substantial increase in stock market investments by pension plans, the current U.S. savings rate and its relationship to overall economic growth is difficult to estimate.142
Clearly, then, there is no consensus among economists and actuaries in support of either the technical validity of Feldstein’s savings rate argument or the conclusions about economic growth he draws from his data. The continued reliance of privatization advocates such as Solomon and Barrow on the savings rate depression argument therefore reveals a great deal about the underlying philosophical and political assumptions of the privatization argument, which is built upon a vision of economic rights founded solely and exclusively on private property rights.143
[*PG1012] In the absence of compelling evidence that private capital accumulation in the form of private savings is a necessary precondition for adequate economic growth, this critique of Social Security must be based on a philosophical and political preference for individually controlled savings and investment as what is viewed as the fulfillment of the ideological imperatives of the free market economic system. Indeed, even if Feldstein’s analysis were correct—even if Social Security does depress the national savings rate—the argument against Social Security as a retirement income support system would remain essentially philosophical and ideological in character, since it is grounded in the equity accumulation model. The savings rate critique of Social Security is not about adequate retirement income but rather about increased capital accumulation and investment. Privatization advocates appear to assume that those two goals are synonymous—but that assumption can only be accepted if one assumes that economic rights in old age cannot be secured by any other means.
In summary, it appears that the real differences between publicly financed retirement programs and privately controlled investment funds preserved for retirement are the ancillary consequences of the status of the latter as private equity. Equity can be individually controlled, used as a source of capital accumulation for the economy generally, inherited by the next generation, and, perhaps most importantly, distributed among members of the working and non-working population through the mechanics of the market and the good or bad fortune of each individual. Social Security, on the other hand, as a public entitlement program, is controlled by the public as a whole through elected representatives, directly recycles tax revenues collected by the federal government out to beneficiaries for immediate spending, provides no opportunity for inheritance by heirs, and, most importantly, redistributes income according to public policy decisions. The major complaints about Social Security from those who would take the public’s retirement rights private center on the ways in which Social Security is most unlike private equity. Yet it was private equity that failed to prevent widespread old age poverty in the face of economic depression in the 1930s—a failure that led to the establishment of the program in the first place.144
Proposals to substitute private savings plans for the public entitlement did not begin to gain much popular attention or support until the early 1980s, during the well-publicized series of financing crises and subsequent congressional actions on Social Security.145 However, it was not until the long bull market that began in roughly 1982 was well established, in the midst of the longest peacetime economic expansion in American history,146 that calls for privatization reached beyond the confines of policy salons and congressional hearing rooms.147
Most advocates for a system of private accounts focus on the opportunities for individuals to increase their prospective retirement income through private investment, in contrast to the limited return on the taxes they pay to support the Social Security system.148 This “opportunity cost” analysis, which compares taxes paid in to benefits paid out, is based on the faulty “rate of return” analysis discussed previously.149 But the campaign for private accounts reveals more, in both the substance and the rhetoric of the arguments used, about the roots of opposition to socialized responsibility for income maintenance based on entitlement rather than on individual determinations of need.
Both those who support Social Security and those who would take it private seek to promote individual autonomy. For supporters, Social Security’s status as an earned entitlement gives beneficiaries autonomy in old age by guaranteeing a source of income that will prevent poverty upon retirement.150 Advocates of privatization, on the [*PG1014]other hand, with their faith in the dynamism of the free market, focus on individual autonomy before retirement, viewing individual investment accounts in terms of opportunity rather than risk and consigning those whose gambles fail to pay off to poverty and the care of public charity.151 In the words of the New China motto, “To get rich is glorious.”152 An account system based on risking equity promises the chance of substantial wealth in old age, not merely the security provided by a right limited to a defined future income stream under Social Security.
The substantive arguments made by private account advocates and the rhetoric they employ embody a latter-day Protestant ethic that is at once optimistic and ruthless. The arguments can generally be grouped into three categories. First, supporters argue that an individual account system would provide a vastly improved rate of return from investment in equities, or even from straight interest compounding, for all or almost all participants.153 The implicit—and occasionally explicit—promise is that retirement savings in such a system could provide an opportunity to live better in retirement than while working. Second, each individual would be able to take control of her own retirement planning and tailor savings and investment plans to individual needs and visions of retirement; in the new retirement system, everyone will be his or her own money manager.154 Third, private accounts would reverse the downward trend in the national savings rate and provide a source of capital building for the economy as a whole, leading to increased economic growth and presumably more retirement resources for all.155
Possibly the most important conclusion that can be drawn from looking at these arguments as a whole is that the private account system has a fundamentally different purpose, as well as a different ethos, from that of Social Security. All of the advantages claimed by the private account system over the public system derive from individ[*PG1015]ual risk, trading the surety of at least moderate income that has underwritten the modern institution of retirement for the possibility of greater wealth in retirement (and in inheritance). Adequate retirement income is assumed as a necessary byproduct of the superior capital accumulation of the private account system, and the risk of not having sufficient equity to last until death is deemed worth taking for the sake of greater potential returns.156
The case for privatization is subject to a variety of counterarguments which demonstrate that, once again, there is no conclusive economic or demographic argument which can in any sense “objectively” close the debate for one side or the other. Because the real arguments are political and philosophical, and because the goals of the two sides are similar, the real questions are much more difficult. Both privatizers and supporters of social welfare programs appear to believe in the importance of being entitled. The difference is how the entitlement is created—publicly or privately.
There are several points to be made in connection with private accounts before moving on to the problems with property-based entitlements from the perspective of social welfare advocates. First, the case for private accounts assumes that increased individual capital accumulation will lead to increased investment capital on a national basis and that the latter is necessary for increased economic growth. This is a rather simplistic view of the relationship between individual savings and capital accumulation necessary for national economic investment and growth. Moreover, little if any evidence is presented in any of the privatization literature indicating a national or global capital shortage which private accounts would be necessary to remedy. Second, the “property right” of the private account is presented as a principal advantage of privatization. Some advocates are quite explicit about the advantages of such a property right in terms of estate build[*PG1016]ing.157 While advocates focus on the inheritance advantages of private accounts for low-wage workers, presumably these advantages would be even greater for higher-wage workers who would be less likely than low-wage workers to exhaust accumulated accounts in retirement.
Yet a system of private accounts was essentially in place as what passed for a national retirement system before the enactment of Social Security.158 While most women were not in the paid work force, and most men worked long past age 65, those who did retire had to rely on private resources, at least once the generation entitled to Civil War veterans’ benefits had died out.159 One question to ask, therefore, is whether conditions today are, or the proposed private account system itself is, so different from the purely private voluntary savings and rudimentary pension plans that failed the vast majority of working Americans so profoundly during the 1930s.
Unless one disagrees with Alan Greenspan’s assessment that the cyclical nature of capitalism has not been repealed,160 the same risks of loss and failure of private equity that overwhelmed private resources during the Great Depression will continue to apply to a private account system. Moreover, while the stock market in the aggregate provides positive long-term growth under most scenarios, the real rate of return (that is, increase in stock prices minus increase in consumer prices) is not as easy to predict. In addition, while the stock market can affect the distribution of wealth between winners and losers, it does not, over the long run, itself create real economic wealth. In general the market can be expected to keep pace with national economic growth, just as indexed Social Security benefits do, as they keep pace with wage increases before retirement and price increases after retirement, protecting the workers’ relative income position at [*PG1017]retirement and their consuming power during retirement. Thus, while a system of private accounts is likely to produce some differences in the distribution of wealth between winners and losers, there is no reason to expect a higher level of income for everyone when compared with payments under Social Security.
The point is reinforced when two more technical issues raised by the prospect of privatization are considered: the cost of a transition from the current system to a privatized system and the ongoing administrative costs of a personal account system. The transition to a private account system involves moving from a pay-as-you-go system in which current taxes pay current benefits to an advance funded system in which each individual is responsible for saving enough to finance her own retirement. The problem is that current benefits would still have to be paid; the working generation, at whatever point privatization were to be enacted, would be required to pay for the current benefits of the retired generation while also advance funding its own retirement.
While privatization plans recognize the problem of transition costs and devise various creative ways to spread the burden of double paying for one generation,161 the only real solution is to use general tax revenue, rather than payroll tax revenue, to finance the transition. There is, however, no way to escape the fact that during the transition to a private system the working generation would bear the responsibility for paying for two generations’ retirement claims, whichever tax system might provide the funds.162 It is remarkable that while privatization advocates believe the baby boomers’ children will not be willing to bear the burden of their parents’ Social Security benefits, they nonetheless assume that the boomers or their children will be willing to pay for two generations’ worth of retirement benefits in a transition to a private plan.163
[*PG1018] The other specific cost hurdle, and one that casts considerable doubt on the “rate of return” argument made by privatization advocates, is the seemingly trivial issue of the administrative costs of maintaining and investing private accounts. Whatever the shortcomings of a large government bureaucracy, the costs of administering the Social Security system are extremely low—about one-half of one percent of the total outlay in benefits each year. This figure covers salaries of Social Security Administration employees, maintenance of hundreds of district offices all over the country, computers, and so on.164 Administrative costs are so low because Social Security is a relatively easy program to run—its status as an entitlement based on past earnings means few face-to-face meetings or judgments are required, and most, if not all, beneficiaries never have occasion to meet with a Social Security Administration staff person.165
In contrast, the administrative costs of personal accounts could amount to as much as 10–25% of the amounts deposited,166 primarily in fees paid to investment advisors, stock brokers, and various types of investment and transaction fees. The experiences of the Chilean and other government pension programs that have gone private confirm that the fees required to operate private accounts greatly reduce the return on individual investments.167
Finally, the involvement and responsibility of individuals in managing their own retirement in an individual account system frequently is presented as a signal advantage in itself.168 The implication of these [*PG1019]encomiums to the widespread use of “capitalist tools,” to paraphrase the Forbes Magazine motto, is that the more individual working Americans are involved in investing and working with stock portfolios, the better. It is unclear, however, that such involvement would in fact be a good thing, from either an economic or social perspective. Clearly, some individuals have a knack for working with financial instruments and investments, while others do not. More significantly, some have the inclination to be money managers whereas others do not. The increased focus of American life on investment returns and stock market performance is assumed by privatization advocates to be an unalloyed social good. Yet the social costs of this preoccupation with the mechanisms of investment and the drive for wealth accumulation, at the expense of other forms of social participation—volunteer activities, community affairs, politics—have not been taken into account.
The current popularity of day trading has led to many reports of lost family savings and homes, as the stock market is in effect used as a substitute for Las Vegas and Atlantic City casinos.169 Moreover, as computer trading makes the stock market more volatile without any corresponding changes in company performance or prospects,170 it becomes clear that individuals’ involvement in managing their stock market portfolios is not an unmixed blessing.171 One prominent economist states:
[*PG1020][It] would be a serious mistake to . . . [replace] the current Social Security system with a defined contribution plan for retirement, investing plan balances in the stock market, or even a plan that would give individuals a choice of investment categories. Such a plan would replace the current societal commitments to the elderly with a hope that financial markets will do as well as in the past. Adopting such a plan at a time when the market is at a record high relative to fundamentals would be a serious error of historic proportions.172
I would add to this analysis the suggestion that the ideological significance of the wider involvement (indeed, close to obsession) of Americans in managing their retirement funds through a private account system may be as important to those supporting a private account system as the economic results. The promotion of private accounts and private property interests as the principal vehicle for retirement security, in opposition to a social insurance model, is not simply a campaign for increased autonomy in controlling funds that would otherwise be redistributed through the public tax and benefit system. The privatization campaign is a part of the ongoing “commodification” of the culture, in which all values and all activities are expressed as simply parts of or factors in the market economy.173
By forcing all workers to become money managers and investment consultants, one major effect (if not purpose) of privatization would be to draw working people, who might otherwise view their stake in corporate well-being as rather remote, into thinking of themselves as capitalists whose fortunes are directly tied to the path of the stock market and the companies whose stock underwrites their hope of retirement. This identification of interests in terms of investment returns could tend to diminish any public focus on issues such as environmental destruction or child labor in developing nations or a host of other problems the solutions to which could affect the stock prices of the companies involved.
The vision of retirement in which the private investment account proposals are generally grounded is that of a naturally occurring stage of life through which individuals must plan to support themselves, as through all other phases of life. In this vision, equality of opportunity and access to the market are all that is necessary to maximize aggregate and individual well-being supported by private property rights accumulated throughout life.174 Private account advocates are thus understandably skeptical of government income entitlements that effectively interfere with the workings of the market and that are backed only by collective will in the form of government action rather than indisputable private ownership.175
Surprisingly, however, supporters of the current Social Security system, as well as those who do not explicitly support social insurance but who do support income or equity redistribution in some form, appear almost as committed to property rights as the basis for individual income security as are supporters of private account systems.176 As a result, Social Security’s supporters have had a difficult time developing a theory of economic rights that reconciles the redistribution of income inherent in social welfare programs with the control and possession ideals at the heart of the general notion of private property rights.177
This section will examine the difficulty of breaking the link between equity and income rights in social welfare programs from the perspective of the advocate of income redistribution, starting with a discussion of the theories of “rights” and “entitlements” in which the arguments for and against social insurance are grounded. The next section discusses some historical aspects of the development of Social Security, including its roots in nineteenth century veterans’ benefits, the program’s enactment in the 1930s in response to the Great De[*PG1022]pression, and its expansion up until the 1980s. The principal question is how the pension analogy, used to explain the program at its inception, was transformed from comparison to equivalence.
Next, I look at attempts, beginning in the 1970s and best represented by Charles Reich’s theory of the “New Property,” to give public income benefits a “rights” based legal status.178 These efforts were principally designed to provide protection for recipients of welfare benefits by redefining them as a “new property” subject to constitutional due process rights, thus preventing loss of benefits without a hearing or appeal process.179 This attempt to recast welfare into property is widely conceded to have failed, even by Reich himself.180 It is nonetheless worth examining, to see that the common element in the approach of Reich and successive theorists of redistribution is the dominance of the property right leitmotif and the limitations that devotion to equity-based economic rights has imposed on their analyses.181
One driving force behind Reich’s efforts seems to have been the phenomenon of public support for Social Security as contrasted with the lack of support for welfare benefits often decried by social welfare advocates and historians.182 I suggest that this distinction may reveal a cultural acceptance of an alternative theory of economic rights linked to the workmanship ideal that provides a more complete explanation for the source of public support for, as well as a substantive right to, Social Security, in contrast to need-based benefit programs.
The least explored aspect of the debate over the future of Social Security is the legal and theoretical basis for the claims presented in the public and private models. The claim represented by Social Security benefits is a statutory claim, created by past work effort of the in[*PG1023]dividual, on a portion of the future productivity of the work force at large and unmediated by any equity interest. The private savings model also constitutes a claim on future productivity, but only on that part of future productivity stemming from the equity or property interest that is owned by the individual. Both public and private claims inevitably must be satisfied out of economic production at the time they are cashed in; the critical difference between the two is how each claim is secured—by private property rights or by the public political process.
The debate over old age security is essentially a philosophical argument over autonomy and the nature of economic rights. It is an argument steeped in the rhetorical and symbolic value each side attaches to private property rights. Proponents of maintaining Social Security as it is currently configured have basic goals that are very similar to those of the privatization advocates—to promote autonomy and prevent demeaning dependence in old age.183 Privatization advocates, however, generally assume that private claims on future income that are based on a property right (some form of equity that will produce a stream of income in retirement) are superior to the public claim represented by Social Security.184 This public claim is dismissed by these analysts as at best “political” or artificial in some way, at worst a shell game, and in any event not anything remotely resembling a “right” on a par with individual property rights.185
It is possible, however, that the public entitlement governed by the public political process may ultimately be a more secure right and a better way to insure income security in retirement than the private claim, even without regard to such normative issues as redistributional equity.186 Over the past thirty years, legal theorists, most notably Charles Reich in his classic essay “The New Property,”187 and later, from different perspectives, Akhil Amar,188 and Bruce Ackerman and Anne Alstott,189 have attempted to legitimize the “rights” status of redistributive benefits by either redefining public entitlements as a type of pri[*PG1024]vate property right, or securing their legal status by linking them to actual redistribution of property.190
I suggest here that, in contrast to the line of thinking promoted by Reich, it is possible, and in fact necessary, to think about economic entitlement in retirement as something other than a property right. If citizenship brings with it the right to civic participation, can a lifetime of work in the market economy produce the right to an income stream in retirement based on past effort without an intervening property right from which that stream of income is derived?191 This proposition requires consideration of the basis of rights generally and economic rights in particular and also some examination of the significance of public expectations about what creates rights.192
I argue that the public belief that a right, in the form of a Social Security benefit, has been created through work and payment of taxes is not simply a charmingly naïve fable. On the contrary, this public perception, which is supported by a broad based political will to maintain Social Security generally, and individual benefits in particular, in fact creates a real right whose existence is necessary to protect the public institution of retirement—an institution which was specifically created and whose growth was encouraged by business and government alike to meet economic needs.193
This suggestion of course raises the question of whether such economic rights are protected, as are property rights, by a Constitutional right to due process. Reich attempted to settle this issue for welfare recipients by redefining welfare payments as property rights that would therefore be governed by constitutional due process requirements, most notably a hearing and review process before such rights could be lost.194 In the retirement context, however, due process issues rarely arise once initial satisfaction of eligibility requirements is established.195
[*PG1025] It seems that due process concerns (and the resulting attempts to base all economic rights on property rights) apply almost solely where the rights in question are taken away.196 Retirement income rights, in contrast, are intended to be permanent—as they must be if they are to fulfill their function in support of the retirement institution and are rarely if ever lost once the initial eligibility requirements are met. Due process is necessary for the orderly deprivation, not preservation, of rights; as a result, due process is not a relevant concern in the retirement income context.
The importance of permanent entitlement specifically in the context of retirement benefits, and as the basis of the retirement decision, is often overlooked but in fact can scarcely be overemphasized. The clear distinction between earnings-based entitlements (Social Security essentially) and poverty-based benefits (Aid to Families with Dependant Children prior to the recent welfare reform legislation, Social Security Insurance currently, and state welfare programs) that social welfare advocates have long deplored is the hallmark of a right to economic security in old age that is founded not on property but on a workmanship ideal of rights and entitlement.197
The real significance of this distinction is that entitlement, based on statutory criteria, and essentially non-reviewable by bureaucratic authority, is inherently democratic, immunized from ad hoc decision-making, and respectful of individual autonomy and dignity. In contrast, public charity in the form of welfare payments made only to the needy through a hierarchical, top-down, evaluative process dependent on personal characteristics (income, assets, family status, drug or alcohol use, etc.) is inherently manipulative, degrading and undemocratic.198 The history of Social Security in America supports the notion [*PG1026]that the work-based retirement entitlement was not simply an accidental result of the New Deal response to the Great Depression.
Lack of historical perspective frequently plagues policy debates, and nowhere has the absence of historical knowledge been more damaging than in the Social Security discussion.199 It is not only instructive to examine the origins of the Social Security system and the institution of retirement in this context, it is essential in order to understand why income rights based on earnings may be more rooted in American tradition than is generally realized and why the property-based pension and annuity system proved so inadequate in the 1930s, prompting enactment of Social Security. Finally, some sense of the historical development of voluntary retirement is critical to understanding the institutional importance of the income entitlement. It is fair to say that retirement did not prompt the development of Social Security but rather the reverse—the enactment of Social Security made middle-class retirement possible.
The origins of the earnings-based entitlement concept substantially pre-date the economic crisis of the Great Depression, although retirement was not the original focus of such entitlements.200 Public income rights, in the form of government benefits for veterans and their families, and thus based on public service rather than on equity, were the immediate and widely experienced precedent for Social Security.201 While government support for needy elderly was well-established both in Great Britain and in the American colonies as a form of “outdoor” poor relief (as opposed to incarceration in poorhouses) provided to elderly poor with local residence or family ties, [*PG1027]regularized government pensions can be said to have originated in benefits awarded to needy veterans of the Revolutionary War in recognition of their service to the new republic.202
The scope of the Revolutionary War pensions was fairly limited, as initial entitlement was based not only on war service but also on demonstrated need.203 The much larger scale and carnage of the Civil War, however, resulted in a Union army veterans’ pension program (with a counterpart for Confederate veterans eventually established by the former Confederate states) that developed by the early twentieth century into the first federal social welfare program, comparable in benefits and numbers of beneficiaries to the general social welfare programs then being established in Europe.204 Moreover, these benefits were paid not only to the veterans themselves but to their widows and orphans; thus, by 1910 about 18% of all Americans aged sixty-five and older were beneficiaries of the program, roughly comparable to the percentage of Europeans then receiving social welfare benefits under government pension programs.205 This was at a time when most men over age sixty-five continued in the paid labor force, and retirement was not yet an expectation of the majority of American workers.206
Members of the generation that reached its forties and fifties in the midst of the Great Depression were thus probably familiar with the concept of government-supplied benefits based on service, as they were likely to have had parents, other relations or acquaintances in the older generation who had received substantial income in old age from the federal government as an entitlement unrelated to need.207 Thus, the notion that the program sprang without precedent from [*PG1028]the minds of the New Deal brain trust, an aberration in the American tradition of self-reliance and rejection of government assistance,208 is simply wrong. The Social Security earnings-based entitlement in fact has substantial nineteenth century historical roots and is consistent with an American tradition of service-based, rather than poverty-based, government benefit programs.
Of course, during the last half of the nineteenth century, at the time the Civil War pension system was being expanded to cover all veterans and their widows, most older Americans still worked on family farms—a setting in which formal retirement was not common even as the transition to industrialization and urbanization was beginning.209 All members of the farm family would typically work at whatever tasks they were capable of undertaking, from youngest to oldest, so that a gradual diminution of responsibilities would result eventually in de facto retirement.210 Nonetheless, even in this setting, the older generation might seek to guarantee support from the younger generation through control of ownership and the conditioning of inheritance on maintenance of the elder until death.211
Industrialization, however, brought the need for employers to find a way to ease aging workers out of the factory or firm through the use of industrial pensions.212 Even though the majority of men over age sixty-five continued to work in paid employment until after World War II, company pensions began to be used more extensively as the pace of industrialization accelerated.213 At the time of the stock market crash in 1929, however, only a small minority of American workers were covered by private pension plans and an even smaller [*PG1029]percentage could ever expect to draw benefits because of long vesting periods and eligibility terms that often required the worker to be employed by the firm at the time of retirement in order to receive benefits.214 Moreover, most pension plans were not funded in advance, or were inadequately funded, as no legal funding requirement was imposed on employers until much later.215
The minority of workers who did stop working in old age—most much later than sixty-five—were supported, once the Civil War veterans had died out, by private equity-based retirement plans: either informal (family farm income maintenance arrangements or personal savings) or formal (private annuities purchased with accumulated savings or, probably less commonly, employer provided pensions).216 Elderly Americans dependent on these private arrangements were completely vulnerable to the collapse in equity values generally that followed in the wake of the 1929 crash and the ensuing world-wide economic depression.217 As banks failed taking savings accounts with them and a downward price spiral ensued taking down all sorts of [*PG1030]property values, unemployment mounted and wages fell, depleting the ability of working age children to support their elderly relatives.218
The impact on sources of retirement and old age income was stark: funded pension plans went bankrupt along with the banks their funds were held in; unfunded plans stopped paying benefits as employers closed their doors; and savings accounts disappeared.219 Since most men over age sixty-five were still in the labor force, the high rates of unemployment probably affected them as much as the loss of pensions. Nonetheless, it is fair to say that the rudimentary pension arrangements in place at the time of the Depression, primarily based on private ownership equity principles, were overwhelmed by the drop in values that resulted from the economic downward spiral.
It is important to fully appreciate that there was no widespread retirement system or expectation in place prior to the enactment of Social Security. As a result, no precedent existed for mass retirement, in which almost all of the population over the retirement age stops working and is adequately supported by a fully private savings or pension system. Moreover, when the private pension system was revitalized in the 1930s in conjunction with the development of social insurance programs, including unemployment insurance as well as Social Security retirement and survivors insurance, it was a result as much of the efforts of industry to control labor force exits in an orderly fashion as of pressure from workers seeking more generous retirement income support.220
The genesis of Social Security as the cornerstone of New Deal social welfare programs need not be described in great detail here.221 However, a brief examination of the historical roots of the current program explains why the private pension metaphor was so consis[*PG1031]tently employed to describe both the benefits and the financing of a public social entitlement that differs significantly from the private model in critical respects. The New Deal policy designers who engineered the enactment of Social Security, especially President Roosevelt himself, apparently had as much difficulty envisioning an income right without a basis in property as more recent analysts have had. As a result, the financing mechanism of the program was tied so closely to the benefit entitlement structure that benefits were advertised as being paid for by the workers who were earning them and paying FICA taxes along with their employers. This perilous metaphor leads, as discussed above, to confused and misleading “money’s worth” arguments about Social Security.
The first “original intent” issue is how the Social Security system both resembles and differs from the private pension design; the differences help to explain why the financing analogy is so faulty. When looked at together, the 1935 and 1939 Social Security Acts essentially put in place all the basic features of the Social Security retirement and survivors’ insurance programs as they exist today: entitlement based on earnings reflecting a long term attachment to the paid work force; pay-as-you-go financing; and a benefit formula weighted in favor of low income workers.222
The entire point of combining entitlement based on earnings with redistributive benefits was to prevent working people from falling into poverty in old age, while avoiding targeting and means testing.223 It was assumed that all able-bodied workers (men, primarily, and women without small children) would be in the paid labor force (once the economy recovered) and thus would earn a right to benefits to insure against poverty caused by the specific anticipated eventuality of inability to work in old age, just as unemployment insurance was put in place for the eventuality of unemployment.224 Benefit payments were accelerated in 1939 to begin before any worker could have paid in FICA taxes any amount approximating the cost of a lifetime monthly annuity; this was a change which reflected, along with the redistributive benefit formula, the substantial anti-poverty purpose of the program.225 The immediate goal of fighting poverty [*PG1032]during the Depression, however, was intended to be achieved with the needs-based Old Age Assistance program, not Social Security, which was designed primarily with a view toward the future, not the present financial emergency.226
Far from assuming that most workers would not live long enough to retire and collect substantial benefits, the Committee on Economic Security, appointed by President Roosevelt to make the recommendations that led to the 1935 Social Security Act, based its report on data showing a life expectancy at age sixty-five of ten to fifteen more years.227 While retirement was not the expectation or the practice of the majority of American workers over sixty-five at the time, business interests in the United States and the rest of the industrialized world had already begun to appreciate the value of regular retirement as a labor force management tool.228 At a time of 50% unemployment, institutionalizing retirement through Social Security was one way to ease older workers out of the labor force in an orderly fashion, freeing up employment opportunities for younger workers.229 Although job creation was hardly the primary reason for establishment of Social Security, the program’s role as an enduring institution providing retirement income to almost all American workers was an anticipated consequence of the basic design of the program.230
However, the features of the program most likely to make retirement possible for lower and middle wage workers—family benefits without reduction in the basic worker’s benefit amount and redistribution in the benefit formula in favor of low-wage workers—are foreign to the purposes and design of private pensions, precisely because the concern for adequate benefits available to all workers is a public interest, not a private one. The risks against which social insurance protects should be viewed as broader than simple unemployment and poverty because of old age. The range of risks against which the social insurance entitlement guards include the risk of underemployment throughout a working life, periods out of the work force that lower total retirement savings, and inadequate education and training that lead to low lifetime wages—in short, the risks of poverty during life [*PG1033]despite a substantial and regular work history that would make an adequate retirement income in the absence of a public entitlement unlikely if not impossible.
Yet the financing mechanism of the payroll tax was seen by President Roosevelt as the necessary equivalent of private pension financing—a product of his fiscal conservatism and revulsion against the repeated increases in the last public pension system (veterans benefits) brought about by insistent lobbying without any regard for fiscal restraint.231 President Roosevelt remarked some years after the original acts were passed that he understood the regressive results of financing Social Security with payroll tax “contributions” but that there were strong reasons for using them rather than the income tax:
I guess you’re right on the economics, but those taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.232
President Roosevelt’s intention to create a property right rather than a civil right was part of an overall political strategy framed by a fundamental philosophy of fiscal restraint and aversion to poverty-based government aid.233 The functional result was the protection of a vulnerable social program with the veneer of the private pension; a right that has been paid for seemed less likely to be taken away than one granted by the grace of the body politic. This insistence on modeling the social insurance program as closely as possible on private insurance reveals, according to some commentators, an adherence to the principles of private law jurisprudence.234 From this perspective, [*PG1034]the linkage between payroll tax financing and benefit payments was not only a politically astute cover, it was a logical necessity in the minds of President Roosevelt and those of his advisors who resisted the addition of any redistributive features to the social insurance program.235 The goals of autonomy in old age and insulation of the elderly from the manipulative and degrading requirements of needs-based programs seemed to be inevitably paired with the trappings of a private purchased contract right: the dedicated tax; a trust fund for the collection of revenues; and an accounting mechanism designed to mimic the private pension model to the greatest extent possible.
But the internal design of the program belies the appearance of a purchased annuity, not only because benefits are based on earnings rather than contributions, but more importantly because the overall benefit design satisfies socially determined goals of poverty prevention and induced exit from the labor force, not simply the individual need to insure income in old age. The most important distinction between Social Security and welfare programs derives from its distinctly different purpose and time-frame, not the lack of means-testing. Social Security was designed to meet socially determined needs with a future orientation, that is, to enable and encourage the working population to retire based on a permanent and guaranteed entitlement to lifetime benefits, a predicate for retirement itself. Welfare programs, on the other hand, are designed to meet immediate individual needs caused by poverty or unemployment resulting from politically acceptable causes such as motherhood in the pre-welfare reform AFDC program, needs that are assumed (and hoped) to be temporary.
Moreover, despite President Roosevelt’s misgivings about incurring large “unfunded liabilities” by accelerating benefit payments before a pool of payroll tax revenue had built up, the public retirement entitlement cannot by its nature be advance funded. As discussed above, the Social Security trust fund books show surplus FICA tax revenues, but what do those surpluses really represent? Since consumption can only occur, and benefits can only be paid, in the present, current surpluses mean little in actual financial terms. The trust [*PG1035]funds actually signify the political will and commitment to pay benefits as they come due—the enforcement of a public right—whether through FICA tax or general income tax revenues.
The private plan, in contrast, must be funded with a genuine trust precisely because it is a private contractual obligation. The pensioner’s claim on goods and services in retirement must be supported by benefits paid by the employer who has accumulated sufficient resources, in the form of a trust, to satisfy each participant’s claim. Moreover, the size of the obligation is determined by individual contractual relationship, that is, the terms of the pension plan which set the benefit formula and other conditions in order to satisfy strictly personal and individual needs for retirement income that will support the desired (or allowed, for most employees) standard of living in retirement.
The public retirement entitlement is a public obligation designed to protect the public interest in social stability and orderly labor force exit by the elderly. The public entitlement is backed by the public taxing power and meets the public need for assurance of old age income security for all workers through redistribution of tax revenues. The notion of public advance “funding,” and indeed the emphasis of the original designers of Social Security on payroll tax financing as the equivalent of private pension contributions, is an example of a useful analogy taking over the analysis and distorting the comparison beyond meaningful limits.
The pervasiveness and persistence of the “property equals rights” paradigm is thus essentially common ground between those who would eliminate Social Security and the New Deal authors of the program. Moreover, the property metaphor has proved equally powerful and limiting for those advocating recognition of the concept of entitlement in provisions for the poor in the years following the New Deal.236 Thirty years after the New Deal designers of Social Security insisted on the property right equation as political security for the program, the social welfare law advocates of the 1960s and 1970s were faced with an uncomfortable (in their view) divide in the perception of social insurance entitlements based on earnings and means-tested welfare benefits. From their perspective, the earnings-based entitle[*PG1036]ment programs essentially preempted all poverty-based social welfare programs from achieving the same level of public acceptance and support.237
All of the federal programs, both means-tested and earnings-based, originated in the same legislative efforts during the New Deal, and while the system was viewed as a whole by many of the designers of what President Roosevelt himself characterized as a “cradle to grave” structure,238 the distinction between earnings-based and means-tested programs was clear in their minds.239 This distinction has been criticized by numerous analysts who see the differential in political and public acceptance of social insurance and welfare programs as an example of hostility to redistribution of income generally, and contempt for the poor in particular.240 Many recent analyses refuse to draw the distinction, referring to all federal benefits payments as “income transfers” or “welfare.”241
Despite the professional policymakers’ resistance, the public and political leaders continued to support expansion of the social insur[*PG1037]ance model throughout the post-war period and to hold fast to the stigma attached to means-tested benefits. In this setting, some advocates attempted to develop a theoretical basis for welfare benefits that would provide them with the status of legal rights beyond the earnings-based, private property metaphor that defined Social Security in the public mind. The most prominent of these efforts was Charles Reich’s 1964 essay The New Property, which asserted a property status for welfare benefits in an attempt to provide a new protection against arbitrary removal of subsistence rights.242
Reich argued that because industrialization had stripped from individuals their “economic citizenship”—that is, the means to provide for themselves through land available for the taking as had been the prevailing model at the time of the Revolution and the writing of the Constitution—the political rights spelled out in the Constitution had become meaningless for a large segment of the population by the time of the Great Depression.243 The New Deal, according to Reich, was a bargained-for surrendering of power to the new regulatory state in exchange for economic protections for those whose access to economic citizenship had shriveled:
The New Property argued that, if the new social contract was to be respected, welfare state protections and benefits for the middle class and the poor must be treated as entitlements—a substitute for old forms of property....Only if the new forms of wealth were protected by both substantive and procedural due process would the New Deal prove to be not merely a one-way transfer of power to the state, but a two-way bargain, with the people receiving a quid pro quo of economic rights in return. 244
Thus, Reich’s vision of securing the welfare entitlement was based on characterizing it as a form of property which would then be governed by due process rights—substantive and procedural.245 In the years following the publication of The New Property, as part of the same optimism about the possibilities of redefining and expanding constitutional protections to the poor, poverty lawyers and academics attempted to extend Reich’s theory from the law reviews into public policy via the federal courts. They aimed to establish a constitutional [*PG1038]right under the due process clause to a hearing before benefits could be terminated, as a logical consequence of treating welfare benefits as property.246 After a few initial victories, however, the effort largely failed.247
Completely separate from the battle waged in the courts to increase the level of procedural protections afforded welfare recipients, the whole structure of federal welfare came under sustained political attack. After two decades of criticism, much of it based in political calculation and racial and class stereotypes,248 political support for the concept of welfare was virtually nonexistent. Welfare reform, enacted late in the first Clinton administration, eliminated much of the federal role in setting the terms for benefit payments and transformed AFDC into a block grant to the states, setting up state legislatures and courts as the new poverty battleground.249 Sixty years after the New [*PG1039]Deal social welfare advocates battled to achieve federal administration and objective statutory criteria that would protect welfare recipients from arbitrary local government decisions, provision for the poor had come full circle.250
Even before Reich’s articulation of the “New Property,” the Supreme Court had rejected the notion that OASDI benefits, earnings-based or not, could be viewed as property in 1960 in Flemming v. Nestor.251 In that case, the Court determined that Congress could amend the Social Security Act to deny Social Security benefits to a non-citizen who had been deported because he was a member of the Communist Party, based on a finding that such a change was not a taking of property protected by the Constitution.252 William Simon has pointed out that Flemming is a rare case, in that Social Security benefits “were consistently regarded as rights by all three branches, were afforded elaborate procedural protections, and were more secure against substantive impairment than most forms of private law property.”253 Nonetheless, the political protection afforded Social Security benefits by the Congress and the political process seemed inherently inferior to the constitutional due process rights with which Reich and his successors in poverty jurisprudence attempted to endow welfare benefits.254 It is clear, however, that the legal status of property has not been necessary to protect the benefits paid under the Social Security program. The concept of government welfare benefits as property trapped the development of welfare law in a conceptual box in which the right to a hearing was substituted for a substantive right to income maintenance. The lessons of welfare jurisprudence are instructive in demonstrating the limits of constitutional protections, in contrast to the seemingly unreliable protections of the political process.
While the attempt to provide a federal constitutional grounding for welfare rights seemed to reach a dead end in the 1970s, with the coup de grace delivered in the 1996 welfare reform legislation, the [*PG1040]search for a constitutional basis for redistribution of wealth generally continues in other guises. Two recent pieces of scholarship which attempt to develop a theoretical framework for redistribution of income to insure a more equal society reveal a continuing and apparently unshakeable conviction that economic rights must be based on property ownership.
The goal of Akhil Amar, in his provocative speech on property and the Constitution made to a Federalist Society meeting in the late 1980s,255 and co-authors Bruce Ackerman and Anne Alstott, in their 1999 book, The Stakeholder Society,256 seems to be to address the widening gap between rich and poor—between the powerful and the effectively (if not formally) disenfranchised. Amar is concerned with demonstrating the constitutional basis (indeed, imperative) for redistribution of property.257 Ackerman and Alstott simply propose a new public welfare expenditure financed by a new dedicated tax, a sort of mirror image of Social Security.258
[*PG1041] In many ways President Roosevelt would have been quite comfortable with these theories of economic citizenship based as they are on the notion that the state has an appropriate and necessary role to play in giving individuals the tools of autonomy and self-support. On the other hand, redistribution of actual equity, implied by Amar’s “stake in society” birthright for every citizen and Alstott and Ackerman’s economic stake to be granted in young adulthood, seems to take the implicit redistribution accepted by Roosevelt as part of Social Security well beyond the realm of political reality, if not theoretical desirability.259
It is the perceived need for each individual to have a “stake in society” that ties these analysts’ concepts of economic citizenship to property ownership. The “stakeholder” theories blend with nineteenth century agrarian imagery in relying on remarkably concrete notions of equity ownership as the necessary basis for full participation in democratic society.260 To be sure, both Amar’s “forty acres” and Ackerman and Alstott’s “stakeholder” notions of economic citizenship are consistent with support for public education and job training—both of which are long-standing public services regularly viewed by local governments as at least a basic obligation. If the idea of a “stake” were simply embodied in better public services, there would be little need to invoke the abolition of slavery, the Thirteenth Amendment and Thaddeus Stevens.261 The really new suggestion, therefore, is direct redistribution of property: a tangible economic stake not simply permitted by the Constitution according to Amar but required by the Thirteenth Amendment’s abolition of property in the form of slavery.262
I would suggest that any vision of economic justice based principally on equity ownership—however reliant that ownership might be [*PG1042]on redistribution originally—is inescapably based on the assumption that the market will operate to advance the interests of autonomous individuals. The presumption is of a neutral market working to the benefit of autonomous individuals engaged on a more or less level playing field—made level by the redistribution of property—and leading to the maximum aggregate welfare for the largest number of players. This is the same implicit free market cosmology with which the arguments for privatization of Social Security are imbued, under which equity ownership controlled by individuals is a sufficient guarantee of income security in old age.
The problem with this equity-based vision of retirement security is once again essentially temporal: if retirement is voluntary, it must be based on an assurance of an income stream sufficient to take care of all needs, including unexpected needs that could emerge down the road (such as long-term care or catastrophic medical expenses). Equity, whether purchased, received in a redistributive entitlement program, or inherited, is only as valuable in the long run as—and can only be relied upon to the extent of—its exchange value at the time need arises. If the initial stake proves to have insufficient value at the time it is needed in old age retirement, when opportunities to acquire additional equity are likely to be greatly diminished or even non-existent, there would seem to be little difference from the perspective of old age between Amar’s birthright entitlement under the Thirteenth Amendment and the free market economic system in place at the time of the Great Depression. In many ways, the notion of a birthright entitlement is the completion of President Roosevelt’s vision of a society where retirement, unemployment and other entitlements based on earnings rather than need would replace “the dole,” on the assumption that all Americans would have access to employment and the tools with which to build a good life.263
[*PG1043] Regrettably, however, capitalist market economies undergo periodic, and occasionally catastrophic, crashes in overall economic values.264 The point of retirement entitlements is to encourage both work throughout life, and cessation of work in old age with the promise of a secure income stream to prevent dependence and degradation of living standards after work has stopped, even in the event of a catastrophic crash in the value of equity acquired during working life. A redistribution of property that insures a more equal starting point in life still cannot prevent the consequences of changes in value of that property over time—the risk still lies with the individual.
Both of these proposals subscribe, as do those who would privatize Social Security, to the premise that the free market is an essentially benign mechanism (once the redistributive stake has been handed out to individuals). Both proposals assume that the distributive power of the market will sort participants out according to some natural order once the starting point has been made more equal with the initial economic stake. In this liberal, Lockean vision, the key to democracy is to insure the autonomy and independence of individual members of society through decentralization of property ownership. Individual rights are to be founded on ownership of property, while social equity and economic access are assumed to follow naturally.
The overall thrust of these stakeholder notions is of redistribution by command on the basis of citizenship without any other eligibility criteria. The main weakness of plans to grant such an entitlement without regard to need, however, is the lack of justification for these grants apart from a socially determined goal of improving economic opportunity. Without a link to either earnings or need, there is little cultural precedent or context for an unconditional grant based on citizenship.
Neither stakeholder proposal directly addresses the issue of retirement income (although Ackerman and Alstott’s funding proposal might affect the budget surplus widely advertised as being “saved” for Social Security).265 Yet the same difficulties would attend a society of stakeholders who reach retirement age having spent their stake on some activity or equity that provides no basis for retirement income as plagued the generation of savers who lost their personal stakes in the bank failures of the Great Depression. The economic rights that flow [*PG1044]from an equity stake, whatever its size or timing, can always be lost, even through no fault of the holder.
Perhaps an extended catastrophic collapse of values worldwide is now impossible given the market safeguards of the regulatory state for which Ackerman and Alstott apparently have so little use.266 Nonetheless, the inherent risks of equity cannot be cancelled out by equalizing incomes or access to property ownership at the beginning of a working life. Moreover, even if individuals are willing to assume the risks of a crash in the hopes of being a wealthy winner in the future, the institution of retirement demands certainty, not possibilities—at least for all but those who have equity to burn.
The preceding discussion demonstrates that while the Social Security “problem” has been repeatedly characterized as either an economic or a demographic crisis, it is neither. Instead, it is a philosophical and ideological debate over proprietary individualism versus socially defined entitlement, over the primacy of the property right principle operating in the free market versus economic rights and redistribution based on effort rather than ownership. Moreover, as the examination of the ideas of Reich, Amar, Ackerman and Alstott reveals, the ideological power of the property right imperative is such that even those who advocate redistribution to further economic justice can apparently do so only in the context of a property-based concept of economic rights.267
My focus here is on retirement and the prevention of economic dependency and poverty in old age. This is a long-standing social goal and not the product either of modernity or even of the establishment of Social Security. The question is how best to accomplish this? Is it possible to guarantee economic security in old age without violating basic principles of market capitalism and of a democratic ideal? Privatization advocates argue that it is not—that the very existence of a public guarantee in the form of transfer payments distorts the workings of the market and cannot, in the end, be sustained without harmful levels of taxation.268 Redistribution, in this view, is inherently in [*PG1045]opposition to the competitive principles, incentives, and individual property rights upon which the market is based.269
In this final section, I suggest an alternate way of viewing the choices we face as a society in dealing with an increasingly older population. In many ways, this is a discussion about a trade-off between security and opportunity. Who benefits from this trade? Which principle provides greater likelihood of autonomy and at what point? Notwithstanding the centrality of the right to private property in American democracy, a tradition of rights based on labor and earning also has deep cultural roots and provides an alternative democratic tradition that can serve as the basis for an earnings-based entitlement that encompasses redistribution without contradiction.
The first element that must be recognized is the need for asserted rights to be grounded in historical cultural assumptions and accepted patterns of behavior. Governmental responsibility (at the town, village, city or state level) for caring for the poor has been acknowledged from the earliest colonial times as the heritage of the English Poor Law and later approaches to dealing with the poor.270 However, it is important not to lump together poverty programs in general with programs for the elderly or for veterans. Older persons who were known to have been productive members of the community were generally held to have a higher claim on community assistance than vagrant persons whose prior contributions to society were unknown.271 Veterans, first in the Revolutionary War period and more broadly in the Civil War era, were presumed worthy of assistance, eventually without any demonstration of need.272
A major strength of earnings-based benefit programs is this cultural base of acceptance for assistance based on previous work. Indeed, the notion that labor brings rights with it is a pre-industrial human assumption, articulated as a natural right by Locke in his attempt to locate the creation of property rights in the act of adding labor to nature.273 This “workmanship ideal” is a strain of Western thought [*PG1046]that supports widely divergent philosophic views, from Marx to Nozick to Sen.274
In the context of American social welfare programs, it is clear that some notion of workmanship provides a basis for popular acceptance of a right to assistance that is not based on need. In contrast, there is very little cultural basis for redistribution based solely on social justice. Even during Reconstruction, in the aftermath of the largest government “taking” of “property” in the history of the republic in the form of emancipation of slaves and abolition of the condition of slavery, wholesale redistribution of Southern property other than human beings was not widely demanded. Thaddeus Stevens’ call for forty acres and a mule is less remarkable for its constitutional basis than for its failure to appeal to Northern voters who might have pressured Congress to take action to make sure newly freed slaves had the economic wherewithal to take control of their lives.275
As for programs for the poor, public attitudes have been quite consistent from pre-Revolutionary America forward—only those poor of demonstrated good character who have some reason acceptable to the majority for being poor are worthy of even grudging public assistance.276 Contempt for “the dole” did not originate with President Roosevelt, but rather is a persistent theme of American social welfare history.277 Public responsibility for the poor is accepted, but control of [*PG1047]the circumstances of their receipt of assistance has been maintained via requirements such as good moral character and demonstrated inability to work so that public assistance is protected only by the goodwill of the government and the electorate.
Constitutional guarantees of due process are scant protection for poor people in the absence of broad-based public acceptance of the premises of assistance, as was clearly demonstrated by the 1996 welfare reform legislation.278 Thus, in the absence of clear need, or of past work history justifying assistance, it is difficult to see how any direct redistribution of property based solely on a goal of achieving economic equality could be accepted as having anything like the status of rights.
The workmanship ideal can be seen as an alternative to the property right imperative driving proposals for privatization of Social Security. But the idea that an economic entitlement must be based on a property right to be recognized as a right in itself is clearly not confined to those who oppose redistribution. As demonstrated above, even legal analysts sympathetic to the principle of redistribution, who attempt to develop a theoretical and legal structure in which redistribution is a necessary and inevitable right, seem compelled to base their theories of rights protected by the Constitution, or of entitlements to be enacted by Congress, on property ownership.
In the old age income security context, basing entitlement on the connection between property and rights to future income is a trap which no theory can spring. The choice between certainty of private ownership combined with risk that may produce either poverty or wealth in old age is appealing to the individual but disastrous as social policy given the consequences for society at large if the gamble fails. Two factors make the old age income context different from the poverty program context: the possibility of work before retirement and the impossibility of predicting the future. The first factor provides a way to base a right on effort rather than property, to socialize the risk of poverty in old age for those who can be generally conceded to be worthy members of society—those who have worked. The second factor requires a basis for income promises other than property, whose value cannot be known until it is too late to acquire more through [*PG1048]work, in the event the particular property proves not valuable enough to support living until death.
In the case of Social Security, simply because the payment of benefits in retirement after a lifetime of work looks very much like a private pension paid for by taxes does not mean that the payments are in any way based on equity. As discussed above, the most direct precedent for Social Security, other than the European social welfare programs, was the Civil War pension system, which was based not on property at all but on service.279 The direct right to a stream of income, a share of national productivity, is really the only way to fulfill the retirement promise, and Social Security is the embodiment of the retirement promise.
The alternative—a claim to future income based on accumulated property rights—cannot escape the fact that the security of the claim rests on the value of the property at the point the claim must be satisfied. Such a claim is inherently insecure, and if only the individual’s well-being were at stake, the value of autonomy might demand that she be allowed to take that risk. This, indeed, is the premise and the vision of supporters of Social Security privatization: autonomy in deciding how to provide for one’s old age and in bearing the risk of bad choices in exchange for the opportunity to gamble that private property values will pay out in one’s favor in the future.
The fundamental risk associated with retirement is how to insure that one has enough income to provide for necessities until the end of life. The presumption in that phrasing of the risk is that the goal is self-sufficiency—autonomy at all stages of life upon reaching adulthood seems to be the fundamental value to be insured through our political and legal system. Moreover, this value is held in common both by those advocating continuation of the current Social Security system and those advocating privatization. The difference is that the fundamental result of public entitlement not based on private property is autonomy in old age, whereas the fundamental result of privatization is autonomous decision-making and risk taking before old age, including the risk of insufficient income at a time when the individual has little opportunity or ability to make up for bad luck or bad choices.
The debate has tended to focus on “investment” risk, contrasting the risk that the benefits individuals have earned under Social Security might not be there when they retire because of political decisions [*PG1049]beyond the individual’s control against the risk that an individual will invest unwisely or have bad luck with the result that money put aside will not be there at retirement. Again, these are the two sides of autonomy at different points in time. But this formulation of the risk is focused on individual investment results, rather than social results. What do we find if we look at social risk, in addition to individual risk?
The possibility of insuring against social risk is at the heart of the philosophical and political debate over retirement income security. Social Security is simply the latest vehicle for a fundamental argument: is it possible to formulate and develop strategies to deal with “social risks,” or is it illegitimate to even pose a problem as a “social” problem in a market-based society? In the 1930s, the problem seems to have been formulated this way: there is a social interest in preventing widespread poverty among those who are too old to be employed in industrial society in order to preserve social stability and encourage younger workers not to rebel against market-capitalism.280 The answer was Social Security—a socially mediated retirement income entitlement based on the culturally acceptable eligibility requirement of a lengthy work history and requiring no interference with autonomy in old age because it was not based on demonstrated need.
The alternative formulation since the late 1970s rejects any definition of the dilemma of old age income security in “social interest” terms and instead stresses individual interests and autonomous participation in a neutral marketplace prior to retirement. A private, equity-based individual accounts scheme allocates all of the risk of the market onto the individual, allowing the market to determine redistribution of income based essentially on chance. Such an individualized risk eliminates any notion of an entitlement to retirement income—hence the aggressive marketing campaigns cited earlier designed to play upon fear of old age and inadequate resources.
Yet non-investment-based risks also exist for individuals in a free market society: for example, the risk of a lifetime of low earnings in public education, or manual labor, or other poorly paid employment that makes savings for retirement difficult or impossible; the risk of substantial periods of unemployment because of changing technology; the risk of a poor education in underfunded public schools that [*PG1050]leaves the individual with no opportunity to earn enough income to save for retirement. These risks are ignored in the private account system, except to the extent of setting up a minimal “safety net” for the poor whose gambles did not pay off.
A safety net, however, only deals with individual investment risk and does not address the social instability which only social insurance mitigates through its redistributive features. The fact that benefits are based on earnings, but that low earnings are weighted more heavily, means that lifetime low wage earners are given greater benefits than a strictly proportional formula would provide. While privatization advocates see this “combination of equity and adequacy” as a weakness of the program, it is the precise strength of the social insurance concept, because it combines entitlement derived from a widely accepted criterion—work—with redistribution that recognizes the social as well as economic value of work for low pay. It is this recognition that allows Social Security to insure against social risks as well as the individual risks that exist outside of market returns.
Finally, what is the significant advantage of an earnings-based entitlement, as opposed to a private plan supplemented by a publicly funded welfare safety net? Can there be a theoretically defensible basis for entitlement to income security other than private property? Why should a right to future income—represented by Social Security—be a better candidate for entitlement status than, say, a right to a college education to prepare for work, or a right to quality day care to insure a better start in life? The answers lie largely in the particular characteristics of the institution of retirement.
Social Security represents a right to future consumption based on current work effort, unmediated by any property right the value of which could rise or fall over time. Social Security represents a different kind of right—not property, but rather, a right to an income stream without mediation through property. This is essential to the institution of retirement, which is based on the vast majority of Americans making the decision to stop work because they have a secure income right for the rest of their lives. An equity-based right simply cannot provide certainty in value or amount of income.
The concrete results of income rights based on equity for the elderly, who no longer have many choices about engaging in productive activity that is rewarded in the marketplace, were demonstrated in the 1930s—a property right claim on future productivity can wither in [*PG1051]the face of economic devaluation. It is the value of the property, not the property itself, that will satisfy the claim for consumption in retirement. The current emphasis on equity as the basis of economic well-being is essentially a type of resistance to modernity and abstraction of economic value—something like clinging to the gold standard in the face of modern floating currency systems.
Moreover, the income entitlement of Social Security is a right in the pursuit of a specific objective—the social institution of retirement. If retirement is a socially constructed institution that satisfies pressing needs (recycling of workers, social stability) rather than a natural phenomenon, social insurance and redistribution can be seen as a way to support that institution and its objectives. Privatizers, in contrast, look at retirement not as a socially constructed institution in service of specific objectives but as a natural phenomenon arising out of individual choice (consistent with their philosophical framework of autonomous individuals operating in the competitive marketplace). The latter perspective is essentially ahistorical and ignores the fact that there was no broad-based retirement expectation or reality before enactment of the public retirement income entitlement.
There remains the issue of due process and the question of the status of benefits as property or as something else. Reich failed in his effort to have public benefits of all sorts accepted as a form of property, which would have given recipients procedural due process rights—essentially the right to a hearing before benefits could be taken away. Such a right is significant in the context of benefits based on need, which is assumed to be a temporary condition; the fundamental principle of family needs-based assistance has always been that the assistance will only be needed for a finite period of time (until the children are grown, for example, or until work can be found). Retirement benefits, however, are essentially useless if they are not permanent. The whole idea of providing retirement benefits is to assure a permanent income stream until death, and the institution of retirement is built around that assumption. Therefore, due process rights, which guarantee a fair hearing before deprivation of property, are hardly significant where the statutory structure of the retirement benefit assures that benefits, once begun, will continue until death.
But how secure can a public entitlement actually be if it does not have the constitutionally protected status of property and can be changed at any time by Congress? The lessons of welfare reform should not be lost on those who advocate for the poor as well as for the elderly: the minimal procedural due process protections afforded welfare benefits were insufficient to preserve them in the face of pub[*PG1052]lic hostility to “the dole.” In the absence of a widely accepted basis for providing assistance (other than need, which has never been enough for more than an extremely minimal, conditional payment to the poor), welfare benefits were not safe from legislative elimination.
Social Security, on the other hand, has faced several short-term financing crises in the last thirty years—primarily in the late 1970s and early 1980s—and Congress has repeatedly acted quickly to address the shortfalls without any serious question of eliminating or drastically scaling back benefits.281 This political untouchability has led pundits to label Social Security “the third rail of American politics” and critics to lament the inability of politicians to make tough choices and dramatically revise the program’s benefits and financing. Yet there is no particular constitutional protection afforded Social Security any more than there was for public assistance based on need. The “right” status of the public earnings-based entitlement is founded in the public perception that such a right exists—and that perception is enforced through the political legislative process. In other words, citizens have a right to their Social Security benefits because they have accepted the program as their right, based on their years of earnings and contributions in taxes. Moreover, this entitlement right is a right in service and protection of the social institution of retirement and as such can begin to be thought of seriously as a right rather than simply a political claim.282
The entitlement to income represented by Social Security is important not only for instrumental reasons—that it is the best tool for accomplishing the social policy goals of mass retirement and social stability in the face of economic downturns—but because entitlement is essential as the basis of democracy. Needs-based benefits are inevitably cast as a gift, albeit for good policy reasons, and the very act of giving—whether in the context of a government welfare program or a private donation—inescapably creates an unequal relationship. The donor, either the individual or taxpayers in the aggregate, occupies the high ground in every way; control over the timing and amount of the gift and over the identity of the donee automatically confers on the donor the superior role. Entitlement, in contrast, creates no particular relationship between the entitled person and the source of the benefit precisely because it is a right generated from the recipient [*PG1053]herself—through earnings—and thus carries no implication of an unequal power relationship.
The clear consensus of historians is that broad-based retirement, understood as the voluntary cessation of work in spite of continued ability and opportunity to work, is a product of industrialization.283 If the retirement decision must be based on certainty of income to the end of life, privatization with its inherent allocation of risk onto the individual would very likely spell the end of mass retirement as it currently exists. If we assume that retirement is still a necessary part of the economic structure, privatization clearly poses grave institutional dangers as well as dramatic increases in individual risk. The question for the twenty-first century, therefore, should be, at least in part, a re-examination of the necessity and desirability of age-based (as opposed to disability or unemployment-based) retirement.
Aesop’s fable of the grasshopper and the ant, with which this Article began, contains several important themes which pervade the privatization debate. First, Aesop’s story teaches not only the wisdom of saving but also the moral worth of those who save and, by extension, of those who have the ability, luck or endowment (both genetic and financial) to produce more than they can consume and thus to save that excess production for future consumption. Financial investment advisors infuse their advertising with this sense of moral well-being attaching to thrift, savings and investment savvy, usually contrasting the older saving generation with the younger baby boom spender who has nothing to live on in retirement except Social Security and whose future, it is implied, is dubious at best.284
Moreover, the grasshopper only survives at the end of the fable through the charity of the ant who graciously agrees to share her stored up grain (and, one supposes, never ceases to remind the grasshopper of her generosity). The modern debate also echoes this part of the fable as the answer to complaints that a solely private and individualized retirement savings plan, such as those being currently de[*PG1054]bated in Congress and elsewhere,285 would result in many older Americans arriving at retirement age with insufficient funds to support them until death. For the supporter of private accounts, the solution to the potential problem of increased poverty amongst the elderly is public and private charity.286 Charity, of course, whether public welfare or private gratuities, has the dual advantage of reminding the recipient of his profligacy in failing to provide for his old age himself while allowing the giver to congratulate herself on her own moral and intellectual superiority in being a financial winner.
Finally, the fable presents the ant’s solution to winter starvation as wealth building. By restricting her consumption in the present and setting aside those grains of wheat to consume over the winter, the ant has built herself an equity nest-egg, one which, in the event she does not consume it completely over the winter, would be available for her children to inherit (subject, of course, to the vagaries of ant inheritance practices). The grasshopper, in eating and playing over the summer, has in effect not only consumed his own ability to survive but also provided nothing for his family to eat after his own demise. Privatization proposals similarly rely on equity—stock, real estate, other property—as a basis for financial security in retirement and, not incidentally, of wealth to pass on at death to family or other heirs. Supporters of these arrangements assert that private entitlement in the form of private property is superior to public entitlement in the form of Social Security primarily because Social Security does not build individual equity and thus provides no opportunity for wealth transfers at death.
One problem, however, with using the ant-equity analogy as a guide for human retirement planning is the time-frame for retirement. The fallow winter season of unproductive activity, through which the ant’s stored goods are intended to carry her, is of predictable and relatively short duration. In contrast, the human lifespan after age fifty has expanded substantially since 1900 to eighty and beyond at least in the developed world.287 Predictions of genetic breakthroughs that promise regular and healthy active lifespans of [*PG1055]over 100 in the near future mean increased uncertainty about the length of time retirement income will be needed.288
But there is an even more fundamental problem with using the grasshopper-ant fable as a model for contemporary retirement income security policy: provision for one’s old age cannot be based on setting aside actual goods for consumption in the future. Rather, retirement savings in all forms represent a claim on future production of the goods and services that must be consumed in old age after the individual has stopped economically productive activity.289 Financial equity—shares of stock, for example—cannot itself be consumed; it must be liquidated in order to finance the purchase of consumable goods, either all at once, through sale of the equity itself, or gradually through the distribution of dividends representing the earnings underwriting its value.
It is the value of the equity at the time of necessary consumption (paying for long-term health care, for example) that will determine how well the elderly individual will live, and that value will be determined by the state of the economy at the point of consumption in the future. Such a future value is quite difficult to predict forty or even five years in advance, depending on the type of equity involved. Historically, accumulation of enough equity to insure income until death has been rare, as human beings have tended to remain in the productive work force until disability from advancing age forced an exit. Thus, insuring sufficient income until death is a perennial human concern.
However, while aging is a natural stage of life, one that promises to extend further and further as this century progresses, retirement without disability, particularly for the middle and working classes, is a social institution created to meet the needs of the industrial society of the twentieth century. Prior to the enactment of Social Security, retirement was a minority phenomenon available only to those with sufficient equity to insure a stream of income for the relatively brief period of post-work life in old age. For all but the very wealthy in nineteenth and early twentieth century America this was usually the [*PG1056]family farm being worked by adult children under a promise of inheritance.290 The mid-twentieth century development of the institution of voluntary retirement at sixty-five or earlier for almost all workers, regardless of physical or mental capacity for continued work, has been based on the understanding that claims on future goods and services will be satisfied through a permanent entitlement to a lifetime stream of income in retirement in the form of Social Security benefits.291
The Social Security privatization debate has devolved into a dreary recitation of the virtues of saving in order to meet future retirement needs. The rewards of a lifetime of equity investing are presented as the smart alternative to the poor “return on investment” offered by Social Security and the perceived risks of reliance on a future stream of income secured not by a property interest but by political consensus. The real “crisis” in Social Security, however, is usually seen as the challenge of supporting the public retirement program in the face of a demographic shift—too many retirees to be supported by too few workers. The solution most frequently discussed is partial or full “privatization”—that is, transforming the public right represented by entitlement to social security retirement income into private property rights represented by individual accounts.
Yet even in the midst of this fairly high level of public concern about the social resources necessary to support an aging population, retirement at relatively early ages, long before the aging process takes a real toll on productive capacity, is being marketed to the American public in a remarkably golden and optimistic light. The typical advertisement for financial investment firms seeking clients to invest retirement savings pictures an older, but not elderly, couple, enjoying life at the seashore or on the golf course, with no physical or mental impairments. The clear message is that retirement is not only the primary goal of a working life, it is a halcyon period in which Americans can expect a better life than they had while they were working. Retirement has become the goal of working itself—the new secular heaven. This is one reason why privatization’s real focus is wealth-building and risk-taking rather than retirement security.
Clearly, however, the two major problems presented by those who argue for privatization—the need for higher rates of return, and too [*PG1057]few workers supporting too many retirees—cannot be solved by the same measure. Higher investment returns, by their nature, are likely for some, but not all, of those saving for retirement. Those savings have to be cashed in at retirement and ultimately represent a claim on productivity at that moment in time. If there are really too few workers in the twenty-first century to support all retirees when their claims are cashed in, the only solution is to have fewer retirees. While few of those supporting dramatic reductions in public redistributive social insurance would characterize it as a major goal of privatization, reducing the number of retirees might in fact be its most widely-felt result.
It may well be true that retirement as a social mechanism has outlived its usefulness in an era of apparent labor shortages and increasing opportunities for older workers to change careers and continue working well into old age. The debate so far, however, has yet to directly address the end of retirement as a probable or even possible result of privatization, focusing instead on the upside possibilities of market investment and largely ignoring the downside both for individuals and for society as a whole.
Ultimately, the retirement entitlement is meaningless in the context of a system based on risk. The upside possibility of making a killing in the market is unlikely to be an adequate substitute sufficient to sustain mass levels of retirement for the certainty of an income stream in retirement for millions of average and low wage workers. The very taking of the risk, in addition, tends to change the attitude of the average person from that of a critical citizen to that of a self-interested private investor—to the benefit of the companies being invested in but perhaps at the expense of civic participation and identification of public, as opposed to private, interest and needs.
Aesop’s ant has served as the model of thrift, industry and self-denial—indeed as the precursor and embodiment of the Protestant ethic—for over 2000 years. It may, however, be time for the ant herself to retire. In a fluid twenty-first century economy, where the property right itself may no longer have the resonance it has had over the centuries of development of Western common and civil law, the public and legal scholars alike may begin to be more comfortable with the notion of rights to future income unconnected to the property paradigm. Such a shift in perspective seems certain to be the only sound basis for continuation of the institution of old-age retirement very far into the future.
BLANK PAGE