Social Security

A friend and reader saw my post last week on good governance and then sent me this question:  "Which social experiment failed:  unfettered, deregulated capitalism or Social Security and Medicare?"

In answer to the question:  Social Security and Medicare have been unmitigated successes, and deregulated capitalism has failed whenever it has been tried.

But a simple answer doesn't do justice to a concept as complex as capitalism, nor to governmental programs as huge and significant as Social Security and Medicare.

Looking first at the two government programs:  both have worked well, and will continue to work well as long as they get some tweaks and adjustments.  Social Security has taken in more than it pays out, allowing it to accumulate reserve funding that will be used to maintain full payments to recipients even as the program's income becomes insufficient to cover the committed payments.



Of course, if such a situation is allowed to continue, the program would clearly be on a going-out-of-business strategy.  This has already been partially-addressed by amending the program so that the age at which a person qualifies for full benefits is gradually increasing, thereby deferring early-stage payments.  More should be done.

At least two other actions should be taken to support Social Security so that it will stay in business:  first, the Social Security tax should apply to individual annual earnings beyond the current cap of about $110,000; second, we need more people working so that the ratio of tax-paying workers to benefits-receiving retirees is returned to a number that is more actuarially-sound than it now is.  Demographics being what they are, this second action is much more easily said than done.  The current large population will age, and even if we have an unexpected population explosion of babies it will require about three decades before their new earnings and tax power kicks in.

Nonetheless, no matter what the demographic implications of the current American population might be, there is in fact a huge supply of youthful and energetic workers available to be added to the Social Security earnings and tax base.  Some are already resident in the United States, some are not.  They all await sufficient job opportunities, they need to have appropriate education and skills, and, of course, they and the country require a sensible national immigration policy that would derive economic and social success from an under-utilized labor force.

Medicare is much more complicated than Social Security, largely because it is a program that attempts to fulfill a potentially-unlimited demand--satisfying healthcare needs as people age--by paying for the services and medications that meet those needs without there being consensus on what would constitute fairness for those payments and for the delivery of those services, coupled with absolute compliance to that consensus.

Medicare has worked well and continues to work well, but without addressing these major issues of consensus and compliance it will become increasingly expensive, perhaps prohibitively so.  Individual responsibility for healthful living will be a help, too, but is no substitute for addressing the major issues.

As for unregulated capitalism:  it almost brought America to its knees in the latter part of the 19th Century; likewise, in Great Britain and elsewhere in the world.  There is no case to be made for unfettered and unregulated capitalism, and there does not appear to be any credible voice calling for such an economic model.

Instead, today's environment requires a debate about the scope and intensity of business regulations.  Government oversight and regulation of business--when appropriately formulated and implemented--provides a more balanced and favorable environment for the individual than would be provided by unregulated business.  It also can encourage and promote competition and innovation among businesses.  When done best, government involvement will stimulate business creation.  That means more employment.

On the other hand, a totally free business is all about creating profit; that is the primal urge of business.  Employment is a necessary tool for acquiring that profit.  To use a business buzz-word:  employment is a "resource."  Competition and innovation are discouraged and even crushed in an unregulated and unfettered business environment.  That means less employment.  Corners are cut around safety and quality characteristics so as to minimize the cost of the resources needed to produce and provide the finished product or service.  That means the lowest possible value is assigned to the employment resource; and, in economic terms, it also means that costs are pushed off to the consumer.

We live better with government oversight and regulation.  There can be debates about how much regulation is needed, and the way in which it is accomplished.  But regulation has been a net positive for us, and there is no compelling argument that would say otherwise.

Over the last three decades we have seen--and continue to see--rhetoric that attempts to develop a case for "privatizing" Social Security or for replacing Medicare with some type of "voucher system."  These proposals cynically attempt to drive a wedge between generations by grandfathering the benefits for older people--excuse the pun--and phasing them out for younger people.  See the libertarian Cato Institute's 1983 discourse on this subject entitled "Achieving a 'Leninist' Strategy" for an example of this.

Besides being cynical, this is nonsense.  Social Security and Medicare have already proven themselves to be capable of providing on-going benefits for generation after generation.  Private options for savings, investments and health care already exist and show no sign of diminishing.  Investing in the financial markets--a "privatized option" for Social Security--is treacherous and usually unrewarding for those without experience or free time (and can be treacherous and unrewarding for those with experience and free time).

Privatizing Social Security or Medicare would be the antithesis of the investment "best practice" of achieving and maintaining diversification.  These two government programs have already helped us to achieve diversification for our financial and health care goals.  That diversification should be maintained.

We have had unregulated capitalism in our history and it didn't work out well, but we learned from that experience and improved on it so that it has worked out better than any other economic system.  Regulated capitalism and the regulated free enterprise system are winners and we should stick with them.

In the same way, Social Security and Medicare have been winners.  As they have matured we have learned more about them and about their future requirements and have made changes and will  continue to make changes to adjust them to a dynamic population.  We should stick with them, too.