Social security in the cross-hairs

David Coates - Professor of Anglo-American Studies, Wake Forest University, North Carolina

Like the UK, the US pension system is a three-legged affair. There is a public pension financed out of taxation. In the US, this is known as Social Security because the scheme also includes long-term disability pensions and pensions for the dependents of workers who die young. There are employment-based pension schemes to which employers and employees both make contributions. There are private pensions and other forms of private saving.

As in the UK, employment-based pensions in the US are increasingly shifting from defined benefit ones to defined contribution ones, often now taking the form of investment portfolios known here as 401Ks. As in the UK too, levels of private savings by most working Americans are entirely inadequate for later pension purposes; and like the UK’s, the US public pension system is a pay-as-you-go one. Contributions by workers pay pensions to retirees now, on the assumption that, when those same workers retire, the public pension for which they have supposedly saved will be paid from the contributions of workers in the generation behind them. The public pension in both countries is financed by a payroll tax rather than by general taxation, but, unlike in the UK, in the United States that payroll tax then goes go directly into a separate Social Security Fund and the resulting state pension is, by UK standards at least, a generous one.

It was not always so. The original Social Security pension, established as part of the New Deal, was restricted to a limited group of occupations and was deliberately modest in value. But a Democrat-dominated Congresses in the 1950s extended its coverage to virtually all categories of employment, including self-employment; and Republican presidents (Richard Nixon and Ronald Reagan) first linked pension increases to the inflation rate and then increased the payroll tax to keep the Fund solvent. The Social Security Fund is indeed still solvent, though now for the first time it is paying out more in pensions than it takes in from tax revenue. So it will become insolvent at some point in the distant future unless other ways of increasing its revenue flows are legislated into existence, or unless baby boomers co-operate by dying off at a disproportionately rapid rate. Neither of those things seems likely to happen.

Social Security used to be an entirely bi-partisan issue in American politics – a genuine third rail that no sensible politician was foolish enough to touch. But we now live in different times. Contemporary Republicans do not like increasing tax revenues, and the baby boomers are refusing to die. Modern-day Republicans actively prefer market-based alternatives to publicly-funded programmes, and so regularly propose the full/partial privatisation of the entire Social Security system as a way of guaranteeing the value of pensions for generations to come. They invariably leave Social Security intact for existing pensioners – white retirees vote heavily Republican in key battleground states in modern America – but propose private savings accounts for young and middle-aged workers. Those savings accounts, created by reducing payroll tax, would leave Republican lawmakers with even more depleted tax revenues to cover the pensions of existing retirees. That is a conundrum they tend to solve by proposing a raising of the retirement age, and a weakening of the link between Social Security rates and inflation.

Most Democrat legislators, by contrast, treat the protection of Social Security in its existing form as a litmus test of party principle and loyalty. They do so partly out of concern for those most dependent on Social Security for the maintenance of their living standards in old age: particularly women who both live longer than men and are less likely to have adequate employment-based insurance; and the American working poor (largely black and Hispanic) whose low incomes deny them the capacity to save privately for their old age.

But Democrats defend Social Security for another reason too, the same reason inspiring their political opponents to attack it with such venom: namely, its status as the last remaining major element of the New Deal programmes put in place by Democrat presidents either side of World War II. Like the NHS in the UK, Democrats insist that ‘Social Security is safe in their hands’, so woe-betide any Democrat President who even hints at scaling back Social Security as part of some grand bargain with intransigent Republicans.

Democrat presidents are often tempted to do precisely that. Bill Clinton came within a whisker of making such a bargain with Newt Gingrich’s Republicans in the 1990s. Only the Monica Lewinsky affair and his impending impeachment got in the way. And Barack Obama has, on occasion, hinted that he too might strike such a bargain. Hence the fear and watchfulness of Democrats in Congress and the country as budget negotiations get underway again in Washington, ahead of the next possibility of a government shutdown in January and a debt default a month later.

So don’t be surprised if, when watching American politics from afar over the next several months, you see people on the streets, actively campaigning against any ‘reform’ of Social Security. Because, as the very term implies, any such reform (other than to make Social Security more generous) can only undermine that security of income in old age which, in today’s America, contrasts so sharply with the insecurity of employment and income in people’s pre-pension years.