Social Security is an insurance program

By DON McINTOSH, Associate Editor

There’s no way GEICO could compete. Neither could State Farm. Or Allstate.

Imagine a private insurance company trying to offer a policy to 205 million Americans that would cover death, disability and retirement. The policy would guarantee a monthly check to the policy-holder and their dependent spouse and children. And all the benefits would be adjusted with an annual cost-of-living increase. Plus the insurer could make no profit. And the administrative costs would be just six-tenths of a percent.

And yet if you’re a working person in America, odds are you and your family are covered by such an insurance policy.

It’s called Social Security.

In his campaign to partially transform Social Security into a giant 401(k), President George W. Bush speaks only about the retirement portion of Social Security. And he speaks about it mostly in terms of “individual” return. And he speaks about it as if it were a savings plan.

But Social Security is not a savings plan. It’s an insurance policy, and its trust fund is an insurance reserve.

“FICA,” an acronym many workers see on their pay stubs, stands for Federal Insurance Contributions Act, and includes contributions to Social Security and Medicare.

The Social Security trustees’ annual report calls Social Security by its legal name — Old Age, Survivors and Disability Insurance — which the trustees describe as providing “protection” to workers and their families “against the loss of earnings due to retirement, death, or disability.”

President Franklin Delano Roosevelt, who fought for and won passage of Social Security, spoke of it repeatedly as a form of social insurance.

“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life,” FDR said in a speech accompanying his Aug. 14, 1935 signing of the Social Security Act.

“But we have tried to frame a law which will give some measure of protection to the average citizen and to his family … against poverty-ridden old age.”

Social Security began as a form of old-age income insurance, providing what Roosevelt called “old-age insurance annuities.” Disability insurance and life insurance (survivor benefits for widows and orphans) were added later.

Why is all this important to the debate over Bush’s proposal to privatize Social Security?

Because supporters of privatization want to compare Social Security to retirement savings and investment plans, like the Federal Thrift Savings Plan Bush often talks about (a kind of 401(k) plan for federal employees.)

Such a comparison ignores two important facts. It ignores that Social Security covers the whole family — not just the workers themselves. And it ignores Social Security’s disability and life insurance components.

Of the 48 million people receiving benefits at the end of 2004, 7 million were survivors of deceased workers and 8 million were disabled workers and their dependents.

“A young worker with a couple of young kids has over $400,000 in life insurance from Social Security,” says Notre Dame economics professor Teresa Ghilarducci, former assistant director of the AFL-CIO’s Department of Employee Benefits. “Social Security is probably the most valuable asset they have. Moreover, the same worker has over $300,000 in disability insurance.”

William Spriggs, senior fellow at the Economic Policy Institute, says it’s important to keep in mind that Social Security is designed to protect families, not just individual workers.

“You can’t look at Social Security as if it were a savings plan,” Spriggs says. “Social Security is an insurance program, an unbelievably good insurance program … We’re spreading the risk over the entire population.”

So when supporters of privatization talk about “return on investment,” they’re missing the point, critics say.

Most commentators analyzing Social Security’s “rate of return” have focused on the retirement program, ignoring the benefits provided by the survivors and disability insurance portions of the program.

In a 1998 paper for the Century Foundation, Dean Baker, co-director of the Center for Economic and Policy Research, took into account the value of the insurance aspects of Social Security, and estimated that Social Security’s rate of return was a full percentage point higher than a privatized system could offer.

“Social Security is an insurance program,” Baker told the Labor Press.

“If my house never burns down, you could say I’m not getting a good return on my homeowners insurance policy,” Baker said. “We don’t normally think of insurance in terms of return on investment, because it’s intended to shield us from harm. People pay for that because they value the security.”

Social Security offers disability insurance, life insurance and a kind of old-age annuity, all with inflation-adjusted benefits. How much would it cost to buy such insurance on the private insurance market? Private insurance won’t even offer an inflation-adjusted annuity — it’s too risky. And even a fixed annuity means fees of 15 to 20 percent right off the top.

“On average, you won’t be disabled,” Baker said. “On average, you won’t die while your children are young. But what if you do?”

Social Security is a good deal on average, Baker concludes — best not to trade it for a 401(k).