If your friends and colleagues seem entranced by George W. Bush's pitch for diverting Social Security payroll taxes into a collection of personal investment accounts, try snapping them out of it with the word "insurance." Social Security insures Americans against risks: disability, the death of a working spouse, inadequate pension coverage and savings, declining purchasing power during retirement, and outliving one's assets. No privately available insurance comes close to serving all those purposes. And private insurance and investment options soak up far more money for administration, marketing, and commissions than Social Security does. Viewed as insurance, Social Security remains a terrific deal for both retirees and workers--although it's a better deal for some Americans than others.
Political leaders shy away from talking about social insurance as such--maybe because the suffix "ism" is too easily attached to "social." But Americans view Social Security and Medicare as the federal government's most worthwhile domestic enterprises, which suggests an obvious opportunity for a strategy that strengthens the bond between the public and Washington. The task of translating the idea of social insurance is precisely the sort of endeavor that scholars with an interest in such matters ought to undertake when political debates become inert.
Up to the plate step New York University law professor Daniel Shaviro with Making Sense of Social Security Reform and Yale law professors Michael J. Graetz and Jerry L. Mashaw, authors of True Security. Both books attempt to develop a fresh definition of social insurance with the goal of improving public policy, although Shaviro focuses primarily on retirement income while Graetz and Mashaw have a broader scope. The more important distinction between the two contributions, however, is that Shaviro's idiosyncratic work doesn't deign to spell out a clear agenda that an average voter would understand and embrace. In that respect, unfortunately, his book is typical of most academic writing about public policy. Graetz and Mashaw, in contrast, are not only meticulous in explaining their vision, but they are mindful of the need to address and persuade a broad public audience.
Shaviro self-consciously elevates himself above today's political fray, zinging both advocates of Social Security privatization and defenders of the traditional system. He justifiably argues that privatizers are insufficiently concerned about economic redistribution and overly preoccupied with increasing national saving, while their opponents worry too little about the public's inability to comprehend how the program's complex financing and benefit schemes work. At the same time, he glosses over details that are central to most publications with titles like his, warning readers that he will pay scant attention to particular reform proposals in circulation, specific numbers and projections about the program, the costs of making a transition from one approach to another, or Social Security's disability and survivor's insurance.
What bothers Shaviro most about today's Social Security is the disconnect between the flat payroll tax (on earnings up to $76,200) that finances the program and the formula for determining retirement benefits, which is based on each worker's earnings history. Because the tax calculations and the benefit computations are not directly connected to each other, discrepancies can result in how much individuals get back relative to what they contributed. While some of those variations can be defended, as with redistribution toward lower-income retirees, Shaviro disdains inequities that are difficult to support as a matter of policy. Without question, the system is biased against two-income versus one-earner couples, against workers with earnings that remain relatively steady from year to year, and against individuals with shorter life expectancies. Of course, such biases could be alleviated if the current tax and benefit formulas were tinkered with. But Shaviro dislikes Social Security's "two imperfectly related Rube Goldberg systems" because they are difficult for average citizens to comprehend and for policy makers to rationalize.
What would Shaviro prefer? In a breezy, six-page explanation, he touts a system of individual accounts with a "progressivity adjustment." Under the vaguely described adjustment mechanism, retirees with above-average earnings histories and investment account performance would pay a onetime subsidy to those with below-average earnings and investment account balances. Shaviro offers only a cursory strategy for financing the transition to his system (noting that "the old-law benefits should not be considered entirely guaranteed") and barely a mention of the added administrative burdens and costs his scheme would impose.
Most important, he never really broaches the question of how he would convince the broad public that the problems he cites with today's system are worth fixing with the costly repairs he proposes. He is especially negligent in ignoring the risk that in the real world his "progressivity adjustment" will be less substantial than the adjustments embedded in today's program, however complicated and imperfect Social Security might be.
At the end of the book, Shaviro writes that "effects on people are what matter, not effects on an artificially designed system, and the effects that matter depend on overall substance, not just line-drawing or labels or bookkeeping." It's a valid sentiment. But as the welfare reform debate demonstrated, the effects that arise from a policy change also fundamentally depend on the power of rhetoric, political clout, and public perceptions. Dismissing those forces as beyond the purview of the book diminishes the usefulness of Shaviro's study.
Graetz and Mashaw are no less intellectually serious than Shaviro, but they are more attentive to the relationship between politics and policy. Indeed, Social Security's widespread popularity underlies their argument that this kind of social insurance should be extended to other areas.
Central to their book is a definition of social insurance that is at once expansive and austere. The purpose of social insurance, they argue, is to protect all Americans against a significant loss of earnings--no more, no less. In particular, the federal government should directly provide or guarantee compensation for household costs associated with bearing and raising children, a family member's death, old age, and periods of unemployment, illness, injury, and disability. While the government has other useful roles to play as well, the authors argue, social insurance should be confined to replacing lost earnings. Graetz and Mashaw cite Medicare's efforts to subsidize teaching hospitals and to encourage or discourage the use of particular health care services as examples of straying from the mission of social insurance. Intertwining the goals of insurance with the pursuit of other public interests produces political conflicts and administrative difficulties, they argue.
This basic construct of social insurance has great political potential at a time when many families feel the financial insecurity that is part of the new economy. The authors would create a federal entitlement (shhh!) for all working families with children, subsidize mandatory purchases of catastrophic health coverage, and plug today's vast gaps in unemployment insurance and worker's compensation in part by federalizing those programs. That would elate those (such as sociologist Theda Skocpol) who fret that middle-class interactions with the federal government are limited to correspondence with the IRS, the daily mail, and Amtrak rides. Since the government has proven its efficiency at writing checks, it wouldn't be too fanciful to imagine a time when the public would wonder why Prudential couldn't be more like the public sector. In that dream, the extension of universal social insurance from the elderly to the broader population might subsequently generate support for public efforts to address deeper problems like disparities in the quality of education, health care, child care, housing, and employment opportunities.
Back to reality. Social insurance is now equated with Social Security and Medicare, and political debates are stuck on the future financing of those programs. The authors don't see major problems with Social Security and don't propose sweeping reforms--although they do endorse supplemental accounts to increase household savings levels.
The lever Graetz and Mashaw would use to pry open the prevailing political deadlock is health insurance. The authors chastise the U.S. system for spending so much while leaving so many underinsured or entirely without coverage. So, they say, out with Medicare, Medicaid, and tax breaks for employer-provided medical coverage. In their stead would be a federal requirement that all Americans purchase catastrophic medical coverage, encompassing all physician, outpatient, and hospital expenses as well as prescription drugs. Under one such policy, individuals would pay the first $1,500 of medical expenses and co-payments of 20 percent for costs above that deductible, up to an annual maximum of $2,500. The government would partially defray premiums and out-of-pocket medical outlays for middle- and low-income workers and foot the entire bill for those below the poverty line. Individuals would be free to buy additional coverage, but the government would not be obligated to help.
To their credit, the authors have more in common with Clinton's onetime health care planner Ira Magaziner than with Governor Bush--or Daniel Shaviro, for that matter--when it comes to offering details about their eclectic assortment of proposals. But their dissection of the specific challenges connected to their proposals seems to undermine part of their own rationale for streamlining the mission of social insurance. One set of administrative headaches and bureaucracies would be replaced by another. More important, debate over other social goals will inevitably permeate the process of creating any new social insurance system. Leaving aside the obvious political resistance to transforming the status quo, decisions about the progressiveness of subsidies, what gets covered and what doesn't, regional variations in costs, and so forth, will generate big fights with winners and losers. Social insurance, however defined, will always be administratively messy; it will always include political decisions about social goals beyond the replacement of lost household income.
Nonetheless, the broad story line of True Security is more important than the minutiae. The simple message of social insurance for everyone to replace lost income is a compelling political strategy for blowing away the inertia in Washington. This book ought to be read by policy makers and pundits alike, especially as Social Security and Medicare continue to be political footballs in the current presidential debate. Unfortunately, though the book has been available since January, it has been only sporadically reviewed and was recently ranked close to 300,000th in Amazon.com's sales. It's regrettable that the preponderance of aloof entries like Shaviro's in the policy book genre discourages potential readers from seeking out a work as important as True Security. ¤