DIVIDENDS FOR ALL can be to the twenty-first century what social insurance was to the twentieth — a major contributor to economic security for our middle class. So it’s worth understanding how social insurance came about, and how it has managed to endure and grow.
Social insurance is a system for sharing the risks of unemployment, sickness, disability and old-age poverty. The basic idea is that everyone contributes to a shared risk pool and has the right to withdraw from the pool when the need arises.
Social insurance was first created in Germany in the 1880s and gradually installed in all industrial economies during the twentieth century. It was the invention not of socialists but of the conservative chancellor Otto von Bismarck, who wanted to strengthen the German nation, build a prosperous economy, enlarge the middle class and blunt the appeal of real socialists. Social insurance helped him do all these things at once.
It arrived in the United States when President Franklin Roosevelt’s advisers (especially Labor Secretary Frances Perkins) recognized that old-age poverty wasn’t a temporary problem awaiting an upturn in economic activity, but rather a systemic problem arising from demographic changes that had begun decades earlier. Over the years, America had become an industrial nation of single-generation households. This meant that millions of aging parents were no longer cared for at home by their children. Moreover, because of improvements in public health and sanitation, people were living longer than ever. The result was that more than three-quarters of Americans over sixty-five lived in poverty.
THE 1935 SOCIAL SECURITY ACT created a trust fund into which active workers and employers contribute and out of which retired workers receive monthly payments for life—much as Tom Paine proposed in 1797. The result is a self-financing system in which each generation supports its predecessors in return for being supported by its successors. The fund’s trustees keep operating expenses low (they’re currently 0.5 percent of the money handled), and no private entity skims money off the top.
This simple system works so well that, once it was in place, subsequent Congresses expanded it many times. They added coverage for unemployment, workplace injuries, and medical care past age sixty-five. Today, social insurance amounts to 9 percent of our economy, and the poverty rate among elderly Americans is below 10 percent.
SOCIAL INSURANCE AS IT NOW STANDS can’t solve the problems of the twenty-first century, but it offers several useful lessons.
Policies come and go; institutions endure. Social insurance is far more durable than tax laws or most other public policies. That’s because it’s not so much a policy as a set of self-financing institutions. As such, it’s built into the fabric of people’s lives. People make regular contributions and expect checks to arrive as promised. Undoing such institutions isn’t easy.
Universality beats means testing. Virtually everyone in America is covered by social insurance; this gives it a huge middle-class constituency.
Universality also avoids the pejorative distinctions that come with means testing. If only economic “losers” get benefits, they become “takers,” “moochers,” or “welfare recipients.” Those who don’t get benefits resent those who do, and those who do feel bad about themselves. No one is happy with the arrangement.
Build the pipes first; then add water. When Social Security began, payroll contributions were 1 percent, benefits were around $20 a month, and large categories of workers were excluded. Over time, as the system became better known, it also became more popular. Benefits grew, more people were covered, and health care for seniors was added.
President Roosevelt’s Committee on Economic Security, which drafted the original Social Security Act, did so with this long-term vision in mind. “A program of economic security, as we vision it, must have as its primary aim the assurance of an adequate income to each human being in childhood, youth, middle age, or old age,” the committee wrote in its report to Congress. “A piecemeal approach is dictated by practical considerations, but . . . whatever measures are deemed immediately expedient should be so designed that they can be embodied in the complete program.”