THE NINE GUIDING PRINCIPLES OF SOCIAL SECURITY: WHERE THEY CAME FROM, WHAT THEY ACCOMPLISH

By Robert M. Ball

Reprinted in Nancy J. Altman, The Truth About Social Security: The Founders’ Words Refute Revisionist History, Zombie Lies (Strong Arm Press, 2018), and Common Misunderstandings with the generous permission of The Century Foundation, from Robert M. Ball, Straight Talk about Social Security: An Analysis of the Issues in the Current Debate. Copyright © 1998 by The Century Foundation, Inc.

In the midst of the Great Depression, the founders of today’s Social Security system took the bold step of establishing a new institution that they expected to be slow-growing but permanent. They wanted to make a decent retirement attainable for millions of Americans who would otherwise become dependent on their families or on public assistance when they grew too old to work or could no longer find employment. They wanted to protect workers’ dependents by providing insurance to make the death of a breadwinner financially manageable. They wanted to put an end to the poorhouse by distributing program income so as to provide at least a minimally adequate benefit for everyone regularly contributing. And, foreseeing the inevitability of change – including the eventual need to insure against other major risks, such as disability and illness – they sought to design an institution based on sustainable principles.

Accordingly, they took the long view. They gave major emphasis to estimating program income and expenses over a much longer period than was customarily done in other countries, and this is still true today. The time frame of 75 years that is now used for Social Security is much longer than that used in almost all other contexts, from foreign social insurance programs to federal budgeting. The point, then and now, was not to try to pretend that anyone could really know precisely what would be happening in 75 or even 25 years; the point was that the planners of Social Security, in making exceptionally long-term commitments, wanted always to be looking far enough ahead to anticipate necessary improvements and make needed changes in ample time to preserve the integrity of the program.

That approach has served well. The legislation of 1935 and 1939 created the basic design of Social Security, and all major legislation since then can be seen as building on that design: extending coverage to more and more workers, improving the level of protection, adding protection against loss of income from long-term and total disability, providing protection for the elderly and disabled against the increasingly unmanageable cost of medical care, protecting against the erosion of income by inflation, and abolishing all statutory differences in the treatment of men and women.

These and many other accomplishments and adjustments have taken place within a framework consisting of nine major principles. Social Security is universal; an earned right; wage-related; contributory and self-financed; redistributive; not means-tested; wage-indexed; inflation-protected; and compulsory. As with any framework, the stability of the entire structure depends on the contribution made by each part, so it is useful to review these principles and how they work together.

1. Universal: Social Security coverage has been gradually extended over the years to the point where 96 out of 100 jobs in paid employment are now covered, with more than 142 million working Americans making contributions in 1997. The goal of complete universality can be reached by gradually covering those remaining state and local government positions that are not now covered.

2. Earned right: Social Security is more than a statutory right; it is an earned right, with eligibility for benefits and the benefit rate based on an individual’s past earnings. This principal sharply distinguishes Social Security from welfare and links the program, appropriately, to other earned rights such as wages, fringe benefits, and private pensions.

3. Wage-related: Social Security benefits are related to earnings, thus reinforcing the concept of benefits as an earned right and recognizing that there is a relationship between one’s standard of living while working and the benefit level needed to achieve income security in retirement. Under Social Security, higher-paid earners get higher benefits; the lower-paid get more for what they pay in.

4. Contributory and self-financed: The fact that workers pay earmarked contributions from their wages into the system also reinforces the concept of an earned right and gives contributors a moral claim on future benefits above and beyond statutory obligations. And, unlike many foreign plans, Social Security is entirely financed by dedicated taxes, principally those deducted from workers’ earnings matched by employers, with the self-employed paying comparable amounts. The entire cost of benefits plus administrative expenses (less than one percent of income) is met without support from general government revenues. This self-financing approach has several advantages. It helps protect the program against having to compete against other programs in the annual general federal budget—which is appropriate, because this is a uniquely long-term program. It imposes fiscal discipline, because the total earmarked income for Social Security must be sufficient to cover the entire cost of the program. And it guards against excessive liberalization: contributors oppose major benefit cuts because they have a right to benefits and are paying for them, but they also oppose excessive increases in benefits because they understand that every increase must be paid for by increased contributions. Thus a semi-automatic balance is achieved between wanting more protection versus not wanting to pay more for it.

5. Redistributive: One of Social Security’s most important goals is to pay at least a minimally adequate benefit to workers who are regularly covered and contributing, regardless of how low-paid they may be. This is accomplished through a redistributional formula that pays comparatively higher benefits to lower-paid earners. The formula makes good sense. If the system paid back to low-wage workers only the benefit that they could be expected to pay for from their own wages, millions of retirees would end up on welfare even though they had been paying into Social Security throughout their working lives. This would make the years of contributing to Social Security worse than pointless, since earnings deductions would have reduced their income throughout their working years without providing in retirement any income greater than what would be available from welfare. The redistributional formula solves this dilemma.

6. Not means-tested: In contrast to welfare, eligibility for Social Security is not determined by the beneficiary’s current income and assets, nor is the amount of the benefit. This is a crucial principle. It is the absence of a means test that makes it possible for people to add to their savings and to establish private pension plans, secure in the knowledge that they will not then be penalized by having their Social Security benefits cut back as a result of having arranged for additional retirement income. The absence of a means test makes it possible for Social Security to provide a stable role in anchoring a multitier retirement system in which private pensions and personal savings can be built on top of Social Security’s basic, defined protection.

7. Wage-indexed: Social Security is portable, following the worker from job to job, and the protection provided before retirement increases as wages rise. Benefits at the time of initial receipt are brought up to date with recent wages, reflecting improvements in productivity and thus in the general standard of living. Without this principle, Social Security would soon provide benefits that did not reflect previously attained levels of living.

8. Inflation-protected: Once they begin, Social Security benefits are protected against inflation by periodic Cost-of-Living Adjustments (COLAs) linked to the Consumer Price Index. Inflation protection is one of Social Security’s greatest strengths, and one that distinguishes it from other (except federal) retirement plans: no private pension plan provides guaranteed protection against inflation, and inflation protection under state and local plans, where it exists at all, is capped. Without COLAs, the real value of Social Security benefits would steadily erode over time, as is the case with unadjusted private pension benefits. Although a provision for automatic adjustment was not part of the original legislation, the importance of protecting benefits against inflation was recognized, and over the years the system was financed to allow for periodic adjustment to bring benefits up to date. But this updating was done only after a lag. Provision for automatic adjustment was added in 1972.

9. Compulsory: Social Security compels all of us to contribute to our own future security. A voluntary system simply would not work. Some of us would save scrupulously, some would save sporadically, and some would postpone the day of reckoning forever, leaving the community as a whole to pay through a much less desirable safety-net system. With a compulsory program, the problem of adverse selection—individuals deciding when and to what extent they want to participate, depending on whether their individual circumstances seem favorable—is avoided (as is the problem of obtaining adequate funding for a large safety-net program serving a constituency with limited political influence).

***

In the midst of the Great Depression it took courage to enact a system based on these principles. The Great Depression was a time of enormous and immediate needs, but Social Security was designed to be a slow-growing tree, one that could not provide much shelter in the near term. The point, however, was that, once grown, it would be strong enough to weather bad times as well as good.

A contributory retirement system takes a long time to develop, since by definition those who are already retired are not eligible for benefits. Fifteen years after the program was set up, only 21 percent of the elderly were receiving benefits, and it was not until the 1950s that politicians began to see much advantage in championing improvements in Social Security. And it was only in the 1960s, three decades after enactment, that Social Security began having a major impact, paying benefits that were high enough and universal enough to significantly reduce poverty among the elderly, the disabled, and the survivors of beneficiaries. After the amendments of 1972 further increased benefits substantially and provided for automatic inflation protection, Social Security fully assumed the role planned for it as the all-important base of a multitier retirement system in which private pensions and individual savings are added to Social Security’s defined protection.

The importance of that role would be difficult to exaggerate: today, Social Security is the only organized retirement plan – the only assured source of retirement income – for at least half of the total workforce. And it is the base upon which all who are able to do so can build the supplementary protection of pensions and individual savings.

Social Security has become and continues to be the most popular and successful social program in America’s history because its guiding principles enable it to work exactly as intended: as America’s family protection plan.