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Social Security Policy Briefing Social Security Policy Briefing Social Security Policy Briefing Amanda Nichols, Spencer Hoffman, Eliza Wicks-Arshack and Tess Boeker February 10, 2009 Political Sociology: Wade Roberts Introduction Social Security in the United States has expanded since its creation in 1935 and has been very resilient to large scale change. However, this is not to say that there have not been small layers added to the program. The pooled public social security system is now supplemented with private programs that have softened the social arena for privatization. Since people have opted to further prepare for retirement by creating private retirement accounts like 401(k) s, they begin to have more of a vested interest in the wellbeing of the market. At the same time, the American people are faced with more insecurity than ever before1 as, Social Security is faced with a looming financial crisis. Conservatives attribute this pressing problem to the design of the program and Progressives attribute it to a demographic problem. The conservative policy stream is rich with plans to privatize social security to solve the Social Security Trust Fund problem. Progressive interests lie in fighting inequality and ensuring a secure retirement plan for all individuals. To fight privatization, the progressives must boost the Trust Fund by raising taxes, changing payroll caps, cutting benefits or ensuring equal access to private pensions for all individuals. Obama has introduced a social security plan that will not cut taxes or raise the retirement age, but will encourage diverse retirement plans while protecting the middle class. Error! Bookmark not defined. Historical Context Social Security was created by the FDR administration in 1935 to protect the retired population that was suffering from poverty. Social Security, officially the Old- Age, Survivors, and Disabled Insurance, is an entitlement program that is funded by payroll taxes. Social Security is a form of universal social insurance that pools risks over a large distribution so that individual insecurity and risk is almost negligible. The original design of the program is very important to its survival since current retirees, who already contributed to Social Security feel entitled to their benefits and therefore would not allow for a full reform or revision of the program. The payroll tax, called the Federal Insurance Contributions Act (FICA) takes 6.2% from employers’ income and 6.2% from the employees’ income. The money is used to finance Social Security for current retirees and the potential surplus goes to the Social Security Trust Fund. The Committee on Ways and Means in the House has jurisdiction over most of the programs authorized by the Social Security Act. Retirement Security is a Hybrid of the Public and Private Sectors 1 Hacker, Jacob. The Great Risk Shift: The Assault on American Jobs, Families, Health Care and Retirement And How You Can Fight Back. New York: Oxford UP, 2006. 1 Social Security Policy Briefing Income security for the retired and elderly is currently a hybrid of public and private pensions. Retirement security can be classified into three categories: publicly- provided Social Security, employment benefits like 401(k) s, and tax-favored savings accounts like IRAs.2 The two latter demonstrate a semi-privatization of Social Security and individuals who invest in such accounts benefit from favorable tax expenditures and regulations. The Employee Retired Income Security Act (ERISA) of 1974 created regulations on employee benefit plans such as pensions. Tax and regulatory policies leave pensions largely to the discretion of employers. Theoretically, these pensions are beneficial to the employees however they aren’t enforced enough to significantly improve situations. ERISA also protects companies that decide to self-insure.3 Historically, programs like Social Security and pensions provided defined benefit programs for employees that promised a fixed amount of money every year upon retirement. Newer programs are gravitating towards defined contributions programs like IRAs and 401(k) s. These programs invest a percentage of an employee’s income in the market which employees get access to upon retirement. Defined contributions widen the income inequality gap in the United States as they are more difficult for the poor to contribute to because of costs and lack of employee assistance and financial advising. Defined contributions assist the wealthy in becoming more financially secure while leaving the poor, who couldn’t open a private account or weren’t offered an employee pension, with only Social Security income. They also make companies less responsible for retirement accounts by shifting risk from the companies to employees and responsibility to the invisible hand of the market. Tax deductible individual retirement accounts (IRAs), are created by workers who wish to invest additional funds for personal retirement benefits. Along with 401(k) s, they represent private retirement income security. They are supplemental layers over Social Security in the Welfare system that are promoted through federal tax subsidies and can be seen as a hidden schema to soften up the arena for privatization. Attempts at Retrenchment There is constant pressure from opposing parties to either expand or cutback the benefits of Social Security. Liberals tend to promote expansion while Conservatives encourage Social Security expansion, retrenchment and privatization. Interest groups and a very supportive population provide positive feedback that keeps the program strong. However, there have been changes in Social Security’s policy since its creation, particularly in the creation of alternative, private retirement funds. The slow layering of new legislation on top of the original framework threatens Social Security by the expansion of privatization and disguised retrenchment in retirement income security. President George W. Bush responded to the threat of the reduction of the Social Security Trust Fund by creating a tax policy that favored personal investment accounts. 2 Hacker, Jacob. Privatizing Risk and the Growing Economic Insecurity of Americans. State of the Union. Ssrc.org. 7 Jan. 2006. Social Science Research Council. 7 Feb. 2009 <www.msnbc.msn.com/id/6903273/>. 3 Hacker, Privatizing Risk. 2 Social Security Policy Briefing George W. Bush attempted to partially privatize Social Security in his second term as President. Bush outlined the reform of Social Security as “the biggest domestic priority” during the State of the Union address in 2005 saying “We must join together to strengthen and save Social Security.”4 His plan proposed the creation of ‘personal accounts’ for workers born in 1950 or later. Individuals would contribute 4 percent of their income, up to $1000, to their personal accounts and could choose from a small number of stock and bond funds5. Bush declared “Your money will grow, over time, at a greater rate than anything the current system can deliver.”6 The proposed plan would create a higher risk for people’s retirement income by making them subject to the market and the American people responded with risk aversion. However, the plan eventually disintegrated. The Bush Administration saw a window in which they could privatize Social Security; however, with every day of delay, they received more opposition from Democrats and many interest groups. Finally, the Katrina disaster lowered the reform on the political agenda and shortly after Democrats gained majority in Congress and the reform died. Bush tried, unsuccessfully, to pass tax cuts for investments into personal retirement accounts throughout his presidency. Legislation supporting private pensions and individualized retirement accounts increases risk and insecurity, creates unequal retirement savings based on economic status and thus spurs heavy opposition. At the same time, employer contributions have decreased resulting in reduced benefits for employees. 75 million Americans lack employer based retirement plans and pension obligations are avoided. Life savings vanish when companies declare bankruptcy. Moreover, employers rarely face consequences when they suddenly retain employee’s benefits while executive bonuses rise. Without representation workers at the bottom of the pyramid are oppressed. This has heavily affected the working and lower classes that depend on employer support.7 While Bush’s attempt for institutionalized partial-privatization failed, informal growth of private security funds continues and has increased risk and insecurity for the general public, many of whom aren’t fiscally capable of shouldering such a risk. The history and changes to the Social Security system are important to analyze because they give insight to political dynamics and party strategies. The expansion and retrenchment of Social Security, has depended on the political climate, party balance, coalition support, and the leniency of implementation and rule change within policies. We can understand what may lie in the policy stream by understanding historical trends. The conservative strategy has been to create a viable alternative to Social Security in the hopes of one day dismantling it in the interest of the market.8 Reagan tried this in 1981 4 "Bush pushes his Social Security overhaul - State of the Union- msnbc.com." Breaking News, Weather, Business, Health, Entertainment, Sports, Politics, Travel, Science, Technology, Local, US & World News- msnbc.com. 6 Feb. 2009 <http://www.msnbc.msn.com/id/6903273/>. 5 Ibid 6 Ibid 7 Hacker, Jacob.
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