Monday, October 12, 2015

What is the difference between Social Security and Old-Age Insurance?

It’s a trick question!

When most people say “Social Security” what they really mean is “Federal Old-Age, Survivors and Disability Insurance”. When they say Social Security “tax” what they are referring to is a mandatory “contribution” made under the Federal Insurance Contribution Act.

The loose use of words leads many to believe that Federal Old-Age, Survivors and Disability Insurance is something like “retirement” when it is actually “insurance”.

Retirement programs are supposed to begin paying out when you are too old to work hard and/or long hours; the statutory age is 55. Many people would partially retire and continue to do lighter work or work shorter hours after age 55 but many others are ready to fully retire.

Old-age insurance[1] is designed to pay benefits to those who have outlived their retirement. The expectation is that we will begin dying off sometime between age 62 and 72. Most working people will not have been able to earn enough in their working age years to live off their savings beyond age 67.

In theory, a person who works 35 years and saves diligently should be able to live 12 years off those savings. In reality … only a small percentage of working people will have incomes high enough to personally save for retirement.

When the old-age and survivors insurance program was conceived in 1935, a mandatory contribution[2] of just 2% on the first $3,000 of wages[3] paid for the benefits received by those who outlived retirement[4]. At that time, 70% of workers had annual wages less than $3,000[5].

The low wage earners who bore most of the expense were working class people who would not be likely to have incomes sufficient to save for retirement and employer-provided retirement was uncommon. Many, if not most, low wage earners worked until they died and died before they were eligible for old-age insurance.

On the other hand, 5% of wage earners had annual wages greater than $10,000[6]. Labors were light and hours were short for these high wage earners who were also able to save for retirement and were far more likely to have a company pension. Light work and early retirement contributed to longer lives and these were the primary beneficiaries of old-age insurance.

Even in 1935, old-age insurance was something of a Ponzi scheme that depended on contributions of a large, low-wage working class to insure the retirements of a smaller class of managers and owners.

The emergence of a middle-wage to high-wage working middle class changed everything!

Unions negotiated successfully for higher wages, better workplace safety and shorter work hours. Technology reduced the physical demands of work. Many working class people began to qualify for employer-provided pensions.

These new working middle class people began to live longer and the cost of providing old-age insurance benefits went up.

Today, the contribution rate is 12.4% on the first $118,500 of wages with an additional 2.9% contribution for Medicare hospital insurance.

This is how Ponzi schemes work and why they fail. They work when many contribute and few benefit. They fail when more people begin to benefit and the contribution requirements hit something like a maximum limit.

Nobody really cares how difficult it is for the low-wage working people to pay or how many of them die working without ever qualifying for old-age insurance benefits. But when the new middle-wage and high-wage working class people as well and the many managers and owners begin to feel the pinch of higher mandatory contributions and see their own benefits shrinking, their support for the scheme dwindles.

Some high-wage earning regressives call for an end to old-age insurance and a return to the wild and wooly days when every person had to fend for them self and only a very tiny percentage of society could ever expect to stop working hard, long hours. They think they would do better if they didn’t have to make contributions but they are terribly wrong and underestimate the benefit they receive. They also fail to see how much of it comes to them at the expense of low-wage and middle-wage earning workers.

Many middle-wage to high-wage earning workers take a moderate position calling for reforms to old-age insurance to keep it solvent. They want to make sure that they will continue to receive its benefits even if most low-wage earning people do not. This is a defense of the status quo made by people who insist they are taking a progressive position.

Regressives and moderates both hold conservative positions. They see themselves as a class above low-wage earning workers. But low-wage earners make up between 50% and 60% of all working people. The new working middle class and the old upper class have formed something like an unholy alliance to pick the bones of low-wage working class people.

The alliance breaks down along class lines when either class begins to see themselves as over-burdened or under-benefitted. It gets to be an argument about shifting costs and redefining benefits. The middle class insists that the upper class just needs to pay more and the middle class should pay less. The upper class insists that they already pay too much, should pay less and that the middle class should pay more.

Both classes agree that the lower class pays too little and costs too much. Every compromise made by the middle and upper classes cost the lower class more and reduces the benefits to the lower class.

True progressives are the only real liberals in the argument. They come from all classes but make up a minority of the voices in the argument. A truly progressive solution would be to terminate the old-age insurance scheme and replace it, and many other social assistance programs, with a basic income guarantee for all.

A basic income guarantee would be paid to everyone all of their life. It would eliminate the need to food assistance, temporary cash assistance to needy families, holiday and vacation pay, minimum wage, parental income support of college students, most alimony and child support payments in divorces, unemployment, disability and retirement.

Social Security and old age insurance are the same thing. They are part of the pseudo-socialist platform of programs that serve the agenda of the upper-class and the middle class including the new working middle class, at the expense of the low-wage working class.

A basic income guarantee would be different. It would benefit everyone and maybe that is what the middle and upper class fear most … they depend on the low-wage working class for their high quality of life and fear that their quality of life will diminish if the quality of life for others goes up.

They instinctively know that they are mega-consumers and that fair distribution of wealth would be unsustainable if everyone wallered up to the trough and slurped up goods and services like pigs. The middle and upper class like being pigs and mega-consumers and they don’t want to change anything.

They don’t care if the distribution is unfair and leaves many feeling deprived.

They don’t care if the distribution is inhumane and leaves many in a state of poverty.

They don’t care if their generation consumes resourced needed by future generations, if their generation’s money system leaves future generations in debt, if their generation’s destruction of the environment leaves future generations with an uninhabitable world.

They do not care about anyone but themselves.

It’s time for low-wage working people to get smart and realize that if they do not act now they will die deprived and impoverished. It is time for young people to realize that their generation will be left without resources, without a stable money system and will struggle to live in a world that has been devastated by the previous generation.

Stop listening to lame arguments about how much better off we would be if we would just end Social Security and let the so-called free market take care of it.

Stop listening to lame argument about how much better off we would be if we would just reform Social Security so that if would continue to care for the few at the expense of the many.

Start arguing for a better future in which everyone has a basic income guarantee at all ages and in all conditions!

Now that would be … different.

[1] Hereafter “old-age insurance” means “Federal Old-Age, Survivors and Disability Insurance”.
[2] Contributions include both the employer and the employee portions.
[3] "Historical Social Security Tax Rates", Table 1, Tax Policy Center,
[4] Includes workers, surviving family members and disabled workers.
[5] "Statistics of Income for 1935", U.S. Treasury Department, Bureau of Internal Revenue,
[6] "Statistics of Income for 1935", U.S. Treasury Department, Bureau of Internal Revenue,

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