Social Security–Why It’s Under Attack

Hayden Perry

A CHILD BORN in a middle-class family in Europe or America today has a fair chance of living to 85.  In one way his/her life will be divided into three periods: First, twenty to twenty-four years growing up and getting educated.  Second, about forty years making a living.  Third, after 65, come twenty years of retirement.

This third segment is presenting problems to the elderly, the family, and society.  How can the unproductive be supported for so many years?  How have they been supported in the past?

Actually it was not such a big problem in days gone by. Before the 19th century not many people were hanging around after fifty or even forty years.  The few who survived longer were honored as elders who carried the memory of the community.  In an agrarian society the elderly could still contribute in some way to communal or family production.

In the United States the old folk often owned the farm and enjoyed life-long security while their children maintained the property which they would inherit before long.

Those who became 60 or 70, and had little or no property, faced a bleak future.  They were dependent on their children or other relatives, often as unwelcome boarders in other peoples’ homes.

The last resort of the indigent elderly was the county work house.  These Victorian institutions were run on the principle that poverty was the fault of the victim, who did not deserve to enjoy a life of comfort and ease at the expense of the taxpayers.  Little better than prisons, the county poor house probably shortened the lives of many of its elderly inmates.

When the urban proletariat crowded the nineteenth-century factories, thousands of injured, sick, and aged workers called for help. Unionists and socialists demanded pensions for those “too old to work, and too young to die.”

Otto Bismarck, Chancellor of Germany was the first to respond.  In October 1878 he countered working-class agitation by enacting the most restrictive laws against socialists and other leftists.  Then he proposed the institution of a great imperial insurance department that would compensate the injured and sick, and grant pensions to the aged.

This grand scheme was whittled down in parliament, creating a patchwork system.  More important, however, Bismarck established the principle that the prime duty of a government was to achieve social peace: with the iron fist when necessary, and concessions when possible.

In this spirit the British ruling class established old age pensions in 1908, and Australia, New Zealand, and a number of European countries followed.  Not the United States however.  Corporate America, with its Pinkerton thugs and National Guards, felt they could maintain social peace without any costly concessions.

How the U.S. System Developed

There was agitation for social insurance and old age pensions before World War I. Arizona voted for a pension scheme in 1914, but it was declared unconstitutional.  It took twenty more years of agitation, and a great social upheaval to bring the American people out of the era of private charity and the county work house.

The Great Depression affected citizens of all ages, including those who were no longer in the job market.  The elderly lost their savings in the Wall Street crash; they lost their homes and their unemployed relatives could not help them.

Old age pensions-or social security-was an idea whose time had come. Roosevelt, like Bismarck, realized that unemployment insurance and old age pensions were necessary concessions.  In August 1935 he signed the first Social Security Act, setting up a Federal system of unemployment insurance and pensions for the old. Widows and children were also covered.

It was decided at the outset that workers would pay for their own retirement.  In 1935 a payroll tax of one percent was levied.  The employer paid another one percent.  This tax was applied on only the first $3000 of a workers wage. So a low-wage worker and a highly paid professional paid the same tax.

It was necessary to build up funds before benefits could be paid out. Finally, on January 31, 1940, the first Social Security check was issued.  It went to Ida M. Fuller, a retired law clerk.  She had paid into the system for three years; together with her boss’s contribution, a total of $44.

Her initial monthly check was for $22.54.  This was increased in later years through cost-of-living adjustments.

Ms. Fuller collected monthly checks for thirty-five years, dying in 1975 at 99.  In that period she had collected $20,884 in benefits.  Obviously those thousands did not come out of Ms. Fuller’s account.

They came from the general fund accumulated from all the worker and employer contributions.  So long as payments into the fund exceed the payouts, Ida Fuller and others could collect far more than they paid in. On the other hand, some workers pay in for many years, and die before collecting anything.  Their spouses can receive these benefits, but they may live only a few years in retirement.

As more workers reached retirement age and started to collect, adjustments had to be made to keep the system in balance.  From time to time the percent of payroll and the maximum earnings subject to tax were raised.  Benefits were increased as the cost of living went up. Today workers and employers each pay 6.2 percent of the first $61,200 of earnings.

Benefits have been raised also, partly through annual cost of living adjustments.  Today the maximum benefit is $1200, while the average monthly pension is $745.  This means a life of poverty for many retirees if they have no other resources.  In San Francisco a one-bedroom apartment rents for more than $700 a month.

Supplemental benefits ease the strain somewhat.  Bus lines give discounted fares, as do most movie houses and other concerns.  Senior centers prepare low-cost meals.

Public housing projects charge no more than thirty percent of a retiree’s income.  But you may wait for years to get into a subsidized apartment.

In most states a joint federal Supplementary Security Income program brings the lowest Social Security benefit up to a maximum of $630 a month.

For over fifty years Social Security has maintained a safety net for millions of elderly citizens.  An additional safety net, Medicare, was established in 1960, partially paying medical bills.  Retirees pay $48 a month, and many buy additional private insurance to meet expenses Medicare does not cover.

Is There A Crisis?

Despite shortcomings, social security has been a major success.  But some people are sounding an alarm.  We are told that the system is going bankrupt, benefits must be slashed, and younger workers will never collect a penny.

It is true there are problems.  In 1950 there were six workers paying into the system for every retiree taking out. Today there are three.  In the next decade there will be two or less. By 2010 the huge crop of baby boomers of the ’40s will be retiring, creating a further imbalance.

People are living longer.  When the system was set up a person of 65 could expect to live twelve and a half years longer, today he/she could collect benefits for seventeen and a half years.  Today there are 34 million retirees, in 2030 there will be 69 million.

Adjustments have been made to partially meet this problem.

The retirement age will be gradually raised to 67.  Further raises to 70 are considered.  Cuts in benefits are also scheduled.

With these adjustments it is estimated that income will balance outgo until 2029.  After that revenue from current payroll taxes will continue to finance pensions for another forty years, if the benefit rate is cut twenty-five percent.

Taking A Cue From Thatcher

All this suggests problems ahead, but no crisis for a generation.  Why then are politicians sounding the alarm so loudly?  They are not worried about the very real health care crisis.  The answer is they see an opportunity to turn a government guarantee of security into a stock gamble. Their not so secret formula is “privatization.”

Prime Minister Margaret Thatcher of Great Britain led the drive to turn over railways, water works, and every possible government project to private enterprise.  The free market can deliver these services better than any bureaucrats, she proclaimed.  Her message was well received in corporate circles in the United States.

Their campaign against “big government” is a drive to privatize the postal service, the prison system and any other government function that might produce profits under private enterprise.

Social Security is a major target.  The thought of controlling the billions of dollars in the Social Security system has Wall Street drooling.  To make this possible Congress will have to end Social Security as we know it.

Certain conservative think tanks, notably the Cato Institute, are preparing the ground for such an historic reversal.  The Cato Institute takes an extreme conservative position on nearly every social issue.  They oppose the Civil Rights Act of 1991, the Americans with Disabilities Act, bilingual education and affirmative action.  To privatize such a popular program as Social Security they have to overcome many obstacles and contradictions.

They start with the Trust Fund. This comprises the billions of dollars paid in Social Security taxes.  This money is invested in government bonds that are safe, but pay a low rate of interest.  If this money were invested in stocks and bonds, some people argue, the return to the Fund would be much higher.  They ignore the roller coaster nature of the stock market, or the heavy fees and commissions money managers demand.  Social Security spents only one percent on administration costs and government interest payments are guaranteed.

The Cato Institute does not favor putting all Social Security funds in the market.  They point out that the 2,723 stocks traded on Wall Street in 1995 were valued at $6 trillion.  Social Security has $2.9 trillion to invest.  With serious money like this, the government would dominate the market and dictate market decisions.  That would mean Socialism on Wall Street.  The solution to this contradiction, the Cato Institute says, is to let the Fund evenutally run out.

The investor the Cato Institute wants to lure into the market is the citizen who is paying his or her social security payroll tax, hoping to get a decent pension later on. They are aiming their campaign at the younger worker.  They point to the rising stock market, and argue, “Every week you pay money to Social Security for a pension you probably will never enjoy.  If you invested that money, week by week, in the stock market, you would build up a nest egg worth more than any federal pension.”

The privatizers point to Chile as an example of successful privatization.  It is true workers got a high rate of interest in the 1980s when they first invested their Social Security money in the stock market.  But interest rates fell in the `90s and investors are lucky to get three percent today.  Out of this three percent money managers take big fees, leaving little for the generous pensions promised.  Another drop in the market can leave millions of Chile’s elderly penniless.

Not many Americans know of Chile’s experiment.  Some young workers, who see that their payroll tax often equals their income tax, and see retirement far off in the hazy future, are listening to the siren song of social security wreckers.

Others are nibbling at the bait. The AFL-CIO favors investing funds in the market.  For years they have invested their pension funds and other money in stocks and bonds, and feel at home there.

However they want the government, and not the worker, to do the investing.  Clinton is for some investing so long as the Social Security system is maintained as a safety net.

In this favorable climate anti-Social Security forces feel free to propose various plans for scuttling the system.  One would give a government bond to every person currently paying payroll taxes or collecting a pension.  This would represent the total the individual and his/her employers had paid in. This bond could be cashed to buy stocks, bonds, or a private annuity.  The authors of this plan call these “Freedom Bonds,” presumably freeing the citizen of the burden of Social Security taxes.

The Cato Institute does not support this simplistic and irresponsible plan. They recognize that benefits must be continued for the current retirees, if for no other reason than the seniors’ heavy political clout.  When Congress raised taxes on the wealthiest retirees in 1983, to cover catastrophic illness, well-to-do and well-connected elderly immediately descended on Washington and forced Congress to rescind the measure.  This was a pity because the law was a good deal for most pensioners, lifting the burden of overwhelming medical expenses.

Tinkering with the System

Several plans are under active consideration at present.  All would continue benefits for present retirees.  Other aspects of Social Security such as Medicare would continue under separate funding.

This means privatization can only be accomplished gradually over a period of time. The aim of the Cato Institue and others is to get partial privatization started right away before people realize what is happening.  Because present retirees cannot be cut off abruptly there has to be a difficult transition perid when young workers are investing in the stock market, but money must still be paid out for the current retirees.

Everyone seems to have a plan:

  • The Ball Plan would permit the Social Security Administration to put forty percent of its funds in the market., but do little more.
  • The Gramlich Plan would add an additional 1.6 percent of a worker’s payroll tax to be invested in the market under government supervision.
  • The Scheiber plan would cut the average pension almost in half to $410, then give the worker five percent of his/her payroll tax to invest as he/she pleased.

These schemes all intend to ease the country gradually from a government-guaranteed pension, to a gamble that the market will return your money, augmented by a high rate of interest, far in the future.  Unwise investments, or a market collapse, could leave thousands of elderly destitute.  Without the safety net of Social Security, they would be thrown back to the old system of county welfare and private charity.

These attempts to abolish Social Security must be resisted.  The fake cries of alarm must be exposed.  The system can be adjusted to operate for more than a generation.  A few easy steps would extend the system further:

  • Take off the cap on earnings subject to tax. Why should the Social Security tax be a regressive tax?  Many professionals make a lot more than $62,000.
  • Bring in those state employees and others who are not now covered.  Laws passed in 1983 have brought most federal, military, and non-profit employees in but almost four million are still outside the system.
  • Keep Social Security funds separate from general revenues.  They are now lumped together to make the federal deficit appear smaller.  The government borrows from the fund, with Treasury Bonds that will have to be repaid eventually.
  • General revenue can be used to supplement Social Security income when necessary.  Cutting the bloated military budget would free up billions for this purpose.

That gives us time for a rational examination of the new situation that demographics is creating.  Certain facts must be recognized: The present system of capitalist greed can never allocate the resources needed to support our elderly adequately.  They can’t even educate our children.

In the long run we must see the question of retirement in a new light.  This is the first time in history 45 million people are taken out of the production process, to live passively for twenty years.

Today, many elderly could be productive till 70 or 75.  But there is prejudice against even the middle aged in the corporate world.  In Silicon Valley a man of forty is considered old.

Many people retire early, with reduced benefits, because no one will hire them. Others accept a smaller pension to escape soul-destroying labor on an assembly line. Here we have a transition from all to nothing.  >From a productive, if overworked, member of a team, the retiree becomes irrelevant to production and many other aspects of human society.

But isolation of the elderly will not be a permanent condition.  The nature of work is changing.  Advanced technology is making the eight-hour day obsolete.  Machines and computers are taking the drudgery out of work.

In the next millennium work will involve so much less time in a person’s life, that retirement will not be that abrupt cessation of productive activity it is today.  It will be more like the traditional family farm where the old folk are still contributing as they can, and are accepted as welcome members of the community.

To get to this stage we must first replace this regime of profit motivated corporate greed with a humane, democratic, rational organization of society.  Meanwhile young and old must fight together to preserve Social Security against the wreckers and privateers.

Some references:

  • Lubove, Roy, The Struggle for Social Security, 1900-1935 (Boston: Harvard University Press, 1968).
  • Shore, Warren, Social Security: Fraud in Your Future (New York: Macmillan, 1975).
  • Swisher, Karin (editor), The Elderly: Opposing Viewpoints (San Diego, CA: Greenhaven Press, 1990).
  • Ferrara, Peter J., A Plan for Privatizing Social Security, Washington, DC, Cato Institute publication.

At 84, Hayden Perry has been enjoying Social Security for nearly two decades.  A veteran of the Trotskyist movement of the depression years, he joined the Workers party in 1934.  Since then he has been an activist in the Socialist Party, The Socialist Workers Party, Socialist Action, and now is a member of SOLIDARITY.

ATC 76, September-October 1998