We have a chance, said President Clinton, to “fix the roof while the sun is still shining.” He was talking about dealing with Social Security immediately, while the economy is growing and the federal budget is balanced. The audience was a regional conference on Social Security, in Kansas City, Missouri, that the White House had helped bring together.

The roof analogy is illuminating, but we can make it more accurate. Imagine that it’s not going to rain for more than 30 years. And the rain, when it does arrive (and it might not), will be pretty light. And imagine that the average household will have a lot more income for roof repair by the time the rain approaches.

Now add this: most of the people who say they want to fix the roof actually want to knock holes in it.

This is the situation facing Social Security, and it is well known to those who have looked at the numbers. The program will take in enough revenue to keep all of its promises for over 30 years, without any changes at all. Thirty years is a long time—it’s hard to think of any other program that can claim to be secure for that long. Furthermore, the forecast of a shortfall in 2034 is based on the economy limping along at less than a 1.7 percent annual rate of growth—about half the rate of the previous three decades. If the economy were to grow at 1998’s rate, for example, the system would never run short of money.

But even if the dismal growth forecasts turn out to be true, and the program eventually runs a deficit, it’s not exactly the end of the world. For one thing, the Social Security system would be far from “broke.” While it would indeed be short of revenue to maintain promised benefits, it would still be able to pay retirees higher real benefits than they are receiving today. And the nation has managed obligations of this size in the past: the financing gap would be roughly equal to the amount by which we increased military spending between 1976 and 1986 (a period in which we were not, incidentally, at war).

The program has promised, and historically delivered, a benefit that rises with wages in the economy. In order to maintain this commitment, we may have to increase the system’s revenues at some point. Would this place an undue burden on the post-2034 labor force? Hardly. Even if we were to increase payroll taxes to cover the shortfall, the added cost would barely dent the average real wage in 2034, which will be over 30 percent higher than it is today. It takes a great deal of imagination to perceive this as some sort of highway robbery by tomorrow’s senior citizens against the youth of today.

The simple truth is that our economy is generating more than enough income to provide a rising standard of living for future generations while meeting our commitments to Social Security. That’s true even at the terribly slow rates of growth projected for the future.

The strength of the economy isn’t perhaps as obvious as it should be, mainly because the majority of employees haven’t been sharing in the gains from economic growth. For more than 20 years, most wage and salary earners have actually seen a real decline in their pay (Mishel, Bernstein, and Schmitt 1999). So when people hear that future generations will be able to meet Social Security’s obligations out of a much higher income, they don’t believe it.

To reclaim the majority’s share of the economic pie is the real “challenge and opportunity of the twenty-first century,” to paraphrase another of President Clinton’s favorite lines. Yet the question of income distribution has been removed from the political agenda. Instead we are told that we can no longer afford our not-so-generous social safety net for the elderly. It is one of the greatest triumphs in the history of public relations to have transformed this prolonged episode of class warfare into an intergenerational conflict.

Mark Twain once said that a lie can get halfway around the world before the truth even gets its shoes on, and it’s hard to find a more compelling example than the lie about Social Security’s finances. Despite the fact that none of the numbers cited here are a matter of dispute, the public has been overwhelmingly convinced that Social Security is in deep trouble. According to a February 1998 poll by Peter Hart Research, 60 percent of nonretired Americans expect Social Security to pay much lower benefits or no benefits at all when they retire. The proportion is even higher, at 72 percent, for people aged 18-34.

Ironically, the only real threat to Social Security comes not from any fiscal or demographic constraints but from the political assaults on the program by would-be “reformers.” If not for these attacks, the probability that Social Security “will not be there” when anyone who is alive today retires would be about the same as the odds that the U.S. government will not be there. The latter event is, of course, a possibility, but not enough of a likelihood that most people would plan their retirement around it.

Confusion over these issues is not confined to the general public: it has infiltrated the upper reaches of the economics profession as well. Lester Thurow is a former dean of MIT’s Sloan School of Management, arguably one of the nation’s best writers on economic topics. He is also to the left of most economists with regard to issues concerning the appropriate size and scope of government and its intervention in the economy. Yet in an essay in the New York Times Magazine, he argued that the nation’s growing elderly population constituted “a new…revolutionary class, one that is bringing down the social welfare state, destroying government finances, altering the distribution of purchasing power and threatening the investments that all societies need to make to have a successful future” (Thurow 1996).

Even Paul Krugman, one of the nation’s foremost economists and winner of the John Bates Clark award (for best economist under 40 years of age), fell victim to these popular notions of demographic determinism. In a favorable review of Peter G. Peterson’s latest book, Will America Grow Up Before It Grows Old?, he endorsed the volume’s thesis that major reform of the Social Security system was necessary to avoid an unresolvable budget crisis 20-30 years from now. “The budgetary effects of this demographic tidal wave are straightforward to compute, but so huge as to defy comprehension,” he wrote (Krugman 1996a). Krugman later admitted, though, that he “went overboard in supporting Pete Peterson’s position on entitlements and demographics…I broke my own rule that you should always check an argument both with a back-of-the-envelope calculation and by consulting with the real experts, no matter how plausible and reasonable its author sounds” (Krugman 1996b).

Both Krugman and Thurow fell for the “entitlements trick,” a device deployed with great success by advocacy groups like Peterson’s Concord Coalition. The idea is to lump Social Security and Medicare together as “entitlements for the elderly.” On the basis of the last 30 years of health care inflation, it is easy to project explosive growth in future Medicare spending. The federal budget deficit therefore also explodes, and the whole economy goes down the tubes.

But Social Security and Medicare are separate programs, funded by separate taxes. There is a connection in that Medicare’s Part A, which covers hospital insurance, was modeled after Social Security in the sense that it is a social insurance program for the elderly. Most people probably do not distinguish between the part of their payroll tax that goes to Social Security and the part that goes to Medicare. As a political matter, for example, a large increase in the payroll tax for one program would make people less willing to pay more for the other.

But the two programs are financed separately, and they face very different financial problems, with different causes. Although Social Security is not facing any serious financial difficulties, Medicare will run into serious trouble within the next decade if medical care inflation continues at its historic rates.

Because the fees paid by Medicare to health care providers are overwhelmingly determined in the private health care system, Medicare’s financial problems have been driven by decades of double-digit inflation in the private sector. The program could be abolished entirely, but that would not avert the economic disaster 35 years from now that emerges from a simple projection of past increases in health care spending into the future. In short, past rates of increase in health care spending are economically unsustainable, regardless of what happens to Medicare (see chapter 3). These projections make a good argument for health care reform, but they say little about “entitlements for the elderly,” and nothing at all about Social Security.

The generational warriors have shunted aside these basic facts, preferring instead to view Medicare’s real financing problems, like Social Security’s imagined problems, through a fantastic prism of demographic determinism. Peter Peterson conjures up frightening dystopian visions of “a nation of Floridas” (Peterson 1996), with hordes of gray-haired baby boomers jetting around the country on senior citizen travel discounts, laying waste to the potential savings of Generations X, Y, and Z. The media have been influenced by these warnings, and we are regularly informed, as in the New York Times, that “Social Security faces a crisis early next century when the 76 million in the baby boom generation start retiring and putting a strain on the system” (Mitchell 1998).

But the baby boomers begin retiring in 2008, and at that time Social Security will still be running an annual surplus of about $150 billion (in constant 1999 dollars) per year. In fact the last of the baby boomers will already be retired by the time the system suffers it projected shortfall, even assuming the slow growth described above, at the end of 2034. It may come as a surprise to many readers that the main reason for this projected shortfall in the second half of the 75-year planning period is not the retirement of the baby boom generation. Actuarially, the main reason is that people are living longer.

Another example of how the truth of these matters can be so easily turned upside down is the belief of millions of people that Social Security has actually contributed to the federal budget deficits and the national debt. In fact the opposite is true: the Social Security trust fund loans its annual surplus, now running at over $124 billion, to the federal government. The surplus, which has been accumulating since 1983, when the payroll tax was increased, will help finance the baby boomers’ retirement, which is why the program will not have any trouble meeting its obligations while the boomers are retiring.

So much for the “demographic time bomb” with which the system’s “reformers” have been threatening us. With a few selected facts dressed up as surprises—such as a rising elderly population or a declining ratio of workers to retirees—and an oversized dose of verbal and accounting trickery, opponents of Social Security have been able to create the impression that the program is demographically unsustainable. This impression is false, as would be any economic projections that failed to take into account the other side of the equation, namely, the growth of the economy (see chapter 1).

Even the financial problems of Medicare do not result, for the most part, from demographic changes. While it is true that older people, on average, require more health care than the young, overall health care spending, as a percentage of gross domestic product, does not necessarily have to increase with the average age of the population. In fact, among most developed countries there appears to be no correlation between health care spending and the percentage of the population that is over 65. As a percentage of our economy, we spend twice as much on health care as does Sweden, for example, yet 17.3 percent of Sweden’s population is over 65, a proportion we will not reach for another 25 years (see chapter 3).

Rather, the financial threat to Medicare arises as this relatively more efficient system—its administrative costs are less than one-fourth those of the private system—is subjected to increasing “marketization.” The number of senior citizens who get their Medicare coverage through health maintenance organizations (HMOs) more than tripled from 1992 to 1998 and has been growing at a rate of 25 percent per year. It doesn’t take a fiscal genius at an HMO to figure out how to profit in this market. With about 90 percent of senior citizens costing Medicare an average of only $1,200 each, and with the government paying HMOs up to $6,000 per person, depending on the region, managed-care providers have been able to profit enormously by selecting, as much as possible, the healthiest senior citizens and leaving the rest (the least healthy 10 percent cost about $37,000 each) in the hands of Medicare. It all works out quite nicely for the HMOs, who can point to rising costs for Medicare relative to the more “efficient” private sector. Never mind that the HMOs’ cost reductions are achieved not only through selection of healthier patients—wasting even more resources in the selection process—but also by cutting back on necessary medical procedures. The prejudice in favor of market-based solutions is so powerful that even the groundswell of consumer dissatisfaction has yet to force policymakers to reexamine it.

In the last few years, the spread of managed care has created the illusion of efficiency in the private sector by reducing private medical inflation to more manageable levels. It remains to be seen whether these lower levels of price increases can be sustained, particularly without further cuts in necessary medical services. In the meantime, the call for real health care reform has been muted, and the country has been moving in the opposite direction from where it needs to go. While HMOs soak Medicare for its profitable patients and services, cuts are proposed to bring the program closer to fiscal balance. And recent legislation has opened the door to further fragmentation of the risk pool by allocating $2.2 billion to create “medical savings accounts.” These would allow the healthiest among senior citizens to gamble that their health care expenses will be less than average and to keep some of the difference if they win.

Privatization fever has now spread to Social Security, fueled by the fasted run-up in stock prices in U.S. economic history. Advocates have crafted their appeal to the growing segment of the public that has at least some money invested in stocks, mostly in 401(k) retirement plans. This is still a minority of the population—about 41 percent of households at latest count. And ownership is highly concentrated: the typical stock-owning household has only about $14,000, with millions holding only a very small proportion of their assets in stocks. At the other end of the distribution, about 5 percent of households hold the majority of stocks.

Nonetheless, there had been rapid expansion in stock ownership, primarily through stock mutual funds, over the last decade. This growth has created a base of support for the idea that people could be better off if their Social Security payroll taxes were invested privately. According to various popular presentations of this idea, everyone could be a millionaire upon retirement.

And indeed they could, if stocks were to continue to double every three years. But there are limits to such speculative bubbles. The reality is that the very run-up stock values that has placed privatization on the political agenda makes even the relatively modest returns of previous decades less likely in future years. Furthermore, due partly to a slowing down of population growth and partly to a (largely unexplained) slowdown in the growth of productivity, the economy is not projected to grow as fast as it did previously. But neither the privatizers nor even the actuaries who made the projections for the recent Advisory Council on Social Security have taken these facts into account when projecting the rate of return for equities. This omission is strange, because it is only under the conditions of the very slow growth forecast that there is even a small projected shortfall in Social Security’s revenues. But if the economy is going to grow at less than half the rate of the past 75 years, as the Social Security trustees predict, then the return on equities cannot maintain its past performance.

Over the past 75 years, the stock market has averaged a real (after-inflation) annual return of 7 percent. This is a healthy rate, which would double an investor’s money about every 10 years. Privatizers argue that the extra risks of the market smooth out over a long period of time, making the market the best place for retirement savings. And they complain that employees whose savings are primarily diverted to Social Security are unfairly prevented from cashing in on these higher returns. During the stock market’s turbulence in 1997 and again in 1998, millions of small investors showed their faith in these arguments by buying during the dips and pushing the market back up. “I’m in it for the long haul” was a typical response by mutual fund owners to the market’s wild ride.

But it is precisely the long haul that one can actually say something about. In the short run, all kinds of speculative bubbles are possible. Psychological factors—most obviously, the expectation of either higher earnings in the future or simply higher stock prices—can drive the stock market to seemingly unlimited heights. But over a long period of time—certainly well within the enormously long 75-year planning horizon for the Social Security system—the price of stocks is limited by the earnings of their underlying assets. That is, stocks are ultimately valuable because the companies they represent earn profits. These profits either are distributed to shareholders in the form of dividends or, if reinvested in the company, form the basis for shareholders’ capital gains.

In the short run, there is no necessary relation between the price of stock shares and a company’s profits: investors will continue buying so long as they think the price will be higher next year. And it will be higher as long as enough people believe that it will. But this process has an upper limit, as the Japanese learned all to well in 1990. At that time the Nikkei index of Japanese stocks had reached 38,712; it now stands below 14,000.

No one can safely predict when the stock market will reach its upper limit—anyone with such forecasting acumen could get rich overnight. But there are certain things we can pretty much rule out when we look at a long enough period of time. For example, the price-to-earnings ratios of stocks in the United States are now at near-record levels of 33 to 1. If prices continue to rise faster than profits, this ratio could go higher still. But would investors still hold stocks if it reached 234 to 1? It strains the imagination that they would, yet these are in fact the consequences of assuming that the market will continue to provide a 7 percent return. As noted above, returns on stocks depend on profits, and the growth of profits is proportional to the growth of the economy. If the economy grows at half of its past rate, which is the assumption underlying the dire Social Security forecasts, then profits cannot grow as fast as they used to. And so, if we are to accept the projections of a 7 percent rate of return, we must also believe that the price of stocks will rise meteorically in relation to earnings. The arithmetic tells us that we would see a price-to-earnings ratio of 234 to 1 by 2055.

Undoubtedly the bubble would burst long before the price of stocks flew this far away from the earnings potential of the stocks’ underlying assets. So we can safely conclude that the forecast of the privatizers (and of the Advisory Council on Social Security) of a 7 percent real rate of return on equities is, for all practical purposes, impossible. It turns out that the rate of return that is compatible with their projected economic growth is about 3.5 percent. Then there are the quite substantial costs of administration and brokerage fees that the current system avoids but that a private system wouldn’t. Adding these in knocks the return to privatized accounts down another percentage point, to 2.5 percent (see chapter 5).

And this is still a very charitable evaluation of privatization. Its advocates would like to maintain the mandatory character of Social Security while channeling this money into private accounts. They could hardly choose otherwise. Most households have not taken advantage of existing tax breaks for private savings. According to the most recent data available, of the 70.5 million workers with annual incomes under $30,000 in 1993, only 5.4 percent put money into an individual retirement account. Forcing people to save and invest their money into privatized accounts raises a host of interesting but not easily resolvable problems. The government will be to certify certain mutual funds for participation in this system. It will have to protect against fraud and other forms of abuse. There will be a lot of political pressure to bail out funds that go bankrupt. And will the government prevent people from borrowing against their forced savings? How will it enforce the conversion of these savings into a stream of retirement income?

Even if all these problems could be resolved at reasonable expense, and without creating an enormous, hateful bureaucracy, the big question remains: what to do about all the people who have been promised Social Security payments over the next four decades? That’s how long it will take for the first cohort of private Social Security investors to be able to retire on the returns from their individual accounts. In the meantime, while investors’ money is going into these private accounts, the system cannot do much for the tens of millions of beneficiaries whose checks are due. That means a major tax increase, enough to guarantee a negative return for the first generations of privatized savers.

A number of other dubious arguments advanced in favor of privatization are addressed in chapter 5. These arguments have been put forward with increasing urgency as the privatizers struggle to achieve their goals before the public discovers that stock prices can go down as well as up.

Other “fixes” are on the table as well, all of which would cause enormous casualties among the elderly. For example, many people would like to raise the normal retirement age. The idea might seem reasonable enough at first glance, since average life expectancy is increasing each decade. But consider what it means in light of the vast discrepancies in life expectancy among demographic groups. A typical black male worker who is 39 years old today can expect about 2.3 years of full retirement benefits, compared with 8.4 years for his white counterpart. Do we really want to drastically worsen that ratio by taking a year or more away from each?

Differences in life expectancy along class lines—income, occupation, and education—are about as big as the disparity by race. Raising the retirement age is therefore one of the most regressive ways to cut Social Security spending. It is analogous, in the realm of tax policy, to a per capita income tax increase. In other words, one could make the argument that since per capita income is growing every year, why not just increase everyone’s tax bill by $1,000, regardless of his or her income or wealth? Such a proposal would never get serious consideration—it is much too regressive even for the advocates of a “flat tax” and similar schemes—yet this is essentially what we do through the Social Security system when we raise the retirement age along a population in which there is such a great disparity of retirement years.

Other proposed fixes are similarly regressive, and unjustifiable on economic grounds, yet they seem to get serious attention. One of the more prominent of these (discussed in chapter 4) is the proposal to cut the Social Security cost-of-living adjustment (COLA), under the assumption that the consumer price index (CPI), on which COLAs are based, overstates the true rate of inflation (see Baker 1997). A panel of economists was appointed by the Senate in 1995 for the purpose of determining how much the CPI overstates inflation. The Boskin Commission, chaired by President Bush’s former chief economist, Michael Boskin, decided that the CPI was off by 1.1 percentage points. This meant, or at least it was hoped, that Social Security’s COLA could be cut by that amount. That may not sound like a lot, but if this conclusion had been adopted in 1998, the average beneficiary would have lost about $1,500 over the following five years.

Since America’s poorest seniors rely the most heavily on Social Security, such changes would cause a significant increase in poverty among the elderly. If this change had been made 10 years ago, there would be at least 600,000 more senior citizens in poverty now than there are currently (Weisbrot 1997, 20-21).

Supporters would like to dress these measures up in a white coat of “technical expertise,” but that coat looks rather shabby on closer inspection. The most serious problem is that adopting the Boskin Commission’s estimate of inflation would require us to radically change our view of the economy. For example, if we have been overstating inflation by as much as the commission claims, then real income has been growing a lot faster than we thought—so fast, in fact, that most Americans must have been living near or below the poverty level in 1960 (a year in which 57 percent of households owned their own homes and 76 percent had cars). Furthermore, the whole history of declining real wages for the majority of workers over the last two decades will also need to be rewritten—conveniently for some—as an illusion.

Looking toward the future, we get even more interesting results if we accept the commission’s estimate. It means not only that we have underestimated real wage growth in the past but that we are similarly off the mark in forecasting the future. The Boskin future is so bright that the typical wage earner will be hauling in more than $50,000 a year in real (inflation-adjusted) income by 2030, or about twice the typical wage in 1995. The irony of this effort to redo the CPI is that, if its proponents are correct, their rationale for cutting Social Security benefits disappears. We would be cutting benefits for those who spent most of their lives in poverty in order to maintain lower taxes on generations who will have, even by today’s standards, quite healthy incomes. Even the most shameless granny-bashers should have a hard time justifying this kind of redistribution.

Other numbers in the Boskin report don’t make much sense either. To take just one example: the commission argues that the CPI doesn’t adequately take into account quality improvements, such as better gas mileage or the installation of air bags in cars. But the Bureau of Labor Statistics (BLS) makes extensive adjustments for quality. In 1995, the CPI rose 1.8 percent; without the quality adjustments made by the BLS, it would have risen 4.0 percent. This is a large adjustment, but the Boskin Commission, without conducting any original research on the subject, asserts that this is not enough. Their arguments are not convincing. In the case of cars, the BLS asks auto companies how much of their price increases are due to quality improvements. It is hard to imagine that these companies would respond with severe understatements.

The Boskin Commission was stacked with five economists who had previously proclaimed their belief that the CPI seriously overstates inflation. They looked for everything that might support this conclusion while overlooking evidence and arguments that pointed in the opposite direction. The scenario is a sad illustration of what happens when those pursuing a political agenda—in this case the Senate Finance Committee—attempt to corrupt the process of estimating fundamental economic statistics.

Congress has thus far failed to incorporate the Boskin changes, but the issue is far from settled. Indeed, one of the more prominent Social Security “reform” proposals on the table right now, put forth by Senator Daniel Patrick Moynihan, contains a COLA cut.

Social Security and Social Insurance

Social Security is our largest and most successful antipoverty program, keeping about half of the nation’s senior citizens from falling below the official poverty line (SSA 1998b). In 1959, the poverty rate among the elderly was more than 35 percent; by 1970, it was twice the rate of that for the general population. Largely as a result of the Social Security program, it has since fallen to 10.8 percent, or slightly less than that for the general population (SSA 1997). For two-thirds of the elderly, Social Security makes up the majority of their income; for the poorest 16 percent, it is their only source of income (SSA 1998b).

Social Security provides about $12 trillion worth of life insurance, more than that provided by the entire private life insurance industry (Ball et al. 1997, 32). The program’s 44 million beneficiaries today include 7 million survivors of deceased workers, about 1.4 million of whom are children (SSA 1998a, 1). Some 5.5 million people receive disability benefits, including not only disabled workers but also their dependents. For a typical employee, the value of the insurance provided by the program would be more than $200,000 for disability and about $300,000 for survivors insurance (Ball et al. 1997, 32).

The coverage of the program is nearly universal—about 95 percent of senior citizens either are receiving benefits or will be eligible to receive them upon retirement (Advisory Council 1997, 88). For a society that wants to ensure some minimum standard of living for its elderly, this is an important achievement in itself. But it also allows for other accomplishments that would be difficult or impossible to replicate in the private sector. For example, Social Security provides an inflation-proof, guaranteed annuity from the time of retirement for the rest of the beneficiary’s life. The cost of retirement, survivors, and disability insurance does not depend on the individual’s health or other risk factors. And the benefits are portable from job to job, unlike many employer-sponsored pension plans.

The success of Social Security also owes much to the superior economic efficiency of social insurance as a means of providing core retirement income. The program’s administrative costs are a small fraction of the private alternatives: they amount to less than 1 percent of payout (SSA 1996a), as opposed to 12-14 percent for the private life insurance industry. On these strictly economic grounds alone, the case for Social Security is strong.

But social insurance also embodies a different ethic and a different conception of the relation between the individual and society. The ethic is a solidaristic one, which is different from either self-interest or altruism. It transcends this dichotomy in favor of a collective self-interest that promotes the advancement of everyone.

Most of us will grow old and will, either before, or during that time, experience health problems or reduced capacity for work. The ethic of social insurance says that “we are all in this together” and that it is in our collective and individual interest to pitch in and provide for these eventualities and risks. We can contribute when we are relatively young, healthy, and working, and draw benefits when we are not. Some will draw a luckier number in the genetic lottery or inherit wealth or even be more successful or healthy or live longer by virtue of their own efforts or wisdom; but this is no reason to deny the necessities of life to anyone else, any more than we would want our local fire department to ignore calls from the poor, or even from those whose fires were caused by their own carelessness.

The case for social insurance is also grounded in a view of society that differs considerably from the agglomeration of atomized individuals, each maximizing his or her own utility, that forms the foundation of contemporary neoclassical microeconomics. In this broader context, the national product is seen more as a social product, which requires the efforts and cooperation of all who work. Market outcomes are not necessarily fair or just, nor should they determine one’s fate, especially in times of hardship.

Despite the political resurgence of a market-driven ethic in the last two decades, the majority sentiment is probably still closer to the solidaristic ethic embodied in the principles of social insurance. At the very least, this is true for the areas that social insurance has typically covered: protection against the reduced earnings potential and hardships of old age, sickness, disability, and unemployment.

Social insurance has also succeeded in avoiding the stigma and political weaknesses from which means-tested welfare programs have suffered. These weaknesses have been increasingly exploited by politicians since the 1980s, culminating in the elimination of Aid to Families with Dependent Children (AFDC) in 1996. Programs like Social Security and Medicare have been protected from these types of divisive attacks, largely due to their universal coverage and work-based entitlement.

Social Security has also become increasing important in light of what has happened to the other two major sources of retirement income: private savings and employer-sponsored pension plans. The regressive changes in income distribution that have taken place over the last two decades have made it increasingly difficult for most people to save for their own retirement. The median wage actually fell 6.8 percent from 1973 to 1997, and declines have been much worse for those with less education. This is a drastic change from the previous era, from 1947 to 1973, when the typical wage earner saw real gains on the order of 79 percent (Mishel, Bernstein, and Schmitt 1997, 140-43; 1999, 131).

At the same time, private pensions have shifted from defined-benefit plans to defined-contribution plans. In a defined-benefit plan, the employer assumes the risk associated with the return on accumulated pension funds by guaranteeing a specified benefit upon retirement. In defined-contribution plans, such as 401(k) plans, which allow employees to defer compensation tax-free into retirement accounts, the employee assumes the risk. In the past, defined-benefit plans were the norm: 94 percent of those receiving private pension benefits today receive them through defined-benefit plans. But today more employees participate in defined-contribution plans than in defined-benefit plans. Together with the difficulty of saving for retirement out of declining real wages, these trends have made Social Security the one part of retirement income that the majority of Americans can really count on.

All of this makes a strong case for expanding, rather than shrinking, social insurance, especially if we want to counter the now decades-old trends toward increasing inequality and poverty in the United States. As noted in chapter 3, the health care system would be a logical next step in such an expansion. Medicare was an attempt to extend the principles of social insurance to health care, but only partially, since the elderly are still segmented from the rest of the population. Insurance involves the pooling of risk, and from an economic standpoint the most efficient way to do this is to put everyone in one large risk pool. Together with the enormous economies of scale in administration, this is the basis for the superior efficiency of social insurance.

Although Medicare has succeeded in providing access to health care for millions of older Americans and in reducing administrative costs relative to private insurance, it has not been able to contain the explosive medical price pressures that have been generated by the private sector. The rational solution would seem to be to extend social insurance for health care to the rest of the population, thereby eliminating enormous amounts of waste and placing global controls on overall spending. The administrative savings alone, according to some estimates, would be enough to provide health care coverage to the 43 million Americans who are currently uninsured. But it will be difficult to have an informed public debate about the expansion of social insurance as long as widespread misconceptions prevail about our existing programs of Social Security and Medicare.

Copyright notice: Excerpt from pages 1-15 of Social Security: The Phony Crisis by Dean Baker and Mark Weisbrot published by the University of Chicago Press. ©1999 by the University of Chicago. All rights reserved. This text may be used and shared in accordance with the fair-use provisions of U.S. copyright law, and it may be archived and redistributed in electronic form, provided that this entire notice, including copyright information, is carried and provided that the University of Chicago Press is notified and no fee is charged for access. Archiving, redistribution, or republication of this text on other terms, in any medium, requires the consent of the University of Chicago Press.

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Dean Baker and Mark Weisbrot
Social Security: The Phony Crisis
©1999, 200 pages
Cloth $27.00 ISBN: 978-0-226-03544-4
Paper $12.00 ISBN: 978-0-226-03546-8

For information on purchasing the book—from bookstores or here online—please go to the webpage for Social Security: The Phony Crisis.

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