Congress passed the Social Security Act in 1935, and for the first time the federal government guaranteed an old-age pension to American workers. The Social Security retirement program has been amended and expanded over time, and today it covers about 85 percent of all workers in the United States and pays an average benefit (to new retirees as of 2016) of $1,400 per month, or $16,800 per year.11 That may seem like a modest sum. But Social Security is a baseline public option: it provides a decent floor, not abundant riches. (People who want a higher living standard need to save money on their own—an issue we consider at length in Chapter 7.) Still, together with private pensions and private savings, the Social Security program has proved to be one of America’s most successful anti-poverty programs. The poverty rate among the elderly as of 2017 was less than 10 percent. If Social Security were suddenly repealed, the poverty rate among those over sixty-five would jump to an astonishing 40 percent.12
Social Security remains one of the most popular public programs in the United States. Poll data show that the great majority (about three-quarters) of Americans don’t mind paying Social Security taxes, because they believe they’ll receive benefits and know that they would have to support their parents if there were no Social Security.13 Between two-thirds and three-quarters of Americans actually want to increase Social Security benefits.14
Social Security has endured well beyond the Great Depression because it isn’t just an anti-poverty program: it also fills predictable gaps in private retirement provision. Free marketeers like to argue that if Social Security were repealed, workers would save for their own retirement. But the strategy of relying on private markets alone has several problems.
First, workers don’t know how long they’ll live. The fact that the average life expectancy of a sixty-five-year-old is about twenty more years is a useful statistic, but it doesn’t reassure any particular individual that she needs to provide for herself only to age eighty-five.15 In theory, individuals could buy life annuities from private insurance companies: these annuities pay out a monthly income for as long as one lives, making them very useful hedges against outliving one’s savings. There’s just one problem, and it’s a showstopper: the private annuity market is a failure. Sure, there’s a small number of private annuities available, but they are extremely expensive—which makes them very poor investments for the average person.
The reason the private annuity markets fail is the dynamic called “adverse selection.” If every sixty-five-year-old adult bought an annuity, there’d be no problem: insurance companies could estimate that the average buyer would live to eighty-five. But in a pure private market, not everyone buys an annuity. And those who do are likely to have information (say, a family history) that leads them to believe they’ll live longer than average. We’d all like to be one of those ninety-five-year-old marathon runners, but, realistically, people who are sick or who have a family history of early death won’t spend their time shopping for annuities. Instead, it’s healthy people with a family history of longevity that will enter the market.
This dynamic might at first seem just fine: shouldn’t annuity markets cater to the people who need annuities? The problem is that the skew in the marketplace makes it difficult for insurance companies to estimate average life span. Knowing that mostly longer-lived people will buy their products, the companies price the annuities as if everyone lived to, say, a hundred. But that means some people who expect to live “only” to ninety-five will find it too expensive to buy an annuity, and they’ll drop out. The result is a downward spiral, making private annuities scarce and expensive.
Second, workers face additional uncertainty about investment returns. Imagine that you’re thirty-five years old and you’d like to accumulate $1 million for retirement at age seventy. If you anticipate interest rates of 8 percent, you can save just $5,800 per year and you’ll meet your goal. But if interest rates are much lower (say, 1 percent), you’d have to save way more—a whopping $24,000 per year.16 Compounding the problem, most workers aren’t investment experts, and yet the stakes are high. Workers who fail to diversify or who adopt the latest investment fad (tech stocks in the 1990s, anyone?) could find their retirement savings decimated when booms go bust. And because most people aren’t investment experts, it is awfully easy for private firms to sell them low-quality products at high prices.
This isn’t just a supposition: this is exactly what has happened in the 401(k) marketplace. You may have heard of the investment management firm Edward Jones, which has storefront locations inviting passersby to “put the power of personal attention to work for you.”17 But the firm’s own 401(k) plan reportedly offered its workers subpar investment options at high fees. Edward Jones, employee lawsuits allege, got “partnership fees” from investment providers. Put bluntly, the wealth management firm’s own workers believed that the firm cheated their retirement plan in order to receive hidden kickbacks from investment providers.18
Third, private markets can’t solve a basic dilemma of budget arithmetic: low-income workers find it hard to save. When your earnings are just barely enough to pay for food and rent, saving for retirement just isn’t going to happen. Today, for instance, a startling 15 percent of households have a net worth of zero or less than zero. That means one American family in seven has debt that equals or exceeds the value of its assets.19
Social Security solves all three problems with a baseline public option. First, the program provides all retirees with a life annuity. Once workers retire, they receive a Social Security check every month until they die, whether that’s ten more years or forty. Social Security can offer a stable annuity in part because the program requires virtually all workers to contribute: because nearly everyone is covered, the program doesn’t suffer from the adverse selection that undermines private annuity markets.
Second, Social Security removes investment risk from workers and places it on the community—that is, the government. Every worker receives a defined-benefit pension via Social Security: a guaranteed payment every month, no matter whether interest rates are high or low or whether the stock market has boomed or bottomed out. Defined-benefit pensions have become a rarer and rarer bird in the private employment market, and so this feature of Social Security provides an important financial baseline for everyone.
Third, Social Security helps lower-income workers save for retirement. For one thing, the payroll tax “contribution” is mandatory: all workers pay something toward Social Security with each paycheck. For another, the program offers low-earning workers a far better deal than they could get in the private marketplace: every dollar they pay in taxes “buys” higher benefits than higher earners receive. In other words, retirement benefits through Social Security are better than those through private competitors for the same price. As a result, the Social Security system insures workers against having low earnings by ensuring that even low earners will have a decent retirement income.
Taking the long view, Social Security has not only protected the elderly against poverty but also promoted freedom and equality in myriad ways. In the agricultural era, aging farmers relied on their kids to stay around and work on the farm. Industrial work changed these patterns: no longer would multiple generations live on the same land, and no longer would children take up their parents’ way of life. Social Security helped the United States make the transition to this modern, industrial economy, because it allowed Americans to be more mobile. It also permits the elderly to live independently—something that retirees very much want, as do their children. We sometimes like to think that in some bygone era multigeneration families lived happily together. But historian Dora Costa found that older people have always preferred independent living when they could manage it.20 Having a measure of retirement security means that Americans—and almost all Americans are covered by Social Security—have greater opportunities to live independently.
To be sure, Social Security makes a major claim on federal expenditures. In 2016, for instance, Social Security
alone (without Medicare) accounted for 24 percent of federal spending.21 Budget cutters have made the program a target and have on many occasions predicted that the program will become insolvent. The only solution, some politicians claim, is to privatize the program or cut benefits sharply.22
But rumors of Social Security’s so-called problems and insolvency have been exaggerated. First of all, the size of the program shouldn’t be surprising: it provides retirement security (plus disability and life insurance) for nearly every American worker. Second, we must remember that this isn’t an ordinary line item in the budget. Americans have paid into Social Security throughout their lives. Finally, thinking about Social Security only as a matter of the budget misses the point. To address the retirement crisis, many have advocated expanding this highly successful baseline public option. Most Americans want to do so, and with some changes to make its tax provisions more progressive, expanding Social Security is possible.
This is not to say that Social Security is perfect. The program’s design merits consideration as social conditions change. For instance, the average sixty-five-year-old has gained seven years of life expectancy since 1900. At the same time, the gap between rich and poor has grown: at age sixty-five, richer men can expect to live more than five years longer than poorer ones. In the near future, then, Social Security will need an update to ensure that its benefit structure remains sustainable and progressive under current conditions.23
Still, a note of caution is appropriate when we look beyond Social Security to the broader topic of retirement security. The program continues to succeed at providing a baseline public option. But it was never intended to provide 100 percent of the income individuals need in retirement. Rather, Social Security was designed to coexist with employer pensions and private retirement savings. The real problem is that the latter two have failed most Americans dismally. The demise of the Treaty of Detroit has led more and more employers to cut or eliminate worker pensions. And despite massive tax subsidies, there is a national shortfall in private pension savings, with more than 50 percent of workers having too little retirement savings.24 Only the well-off find themselves nearing retirement with anything like enough money for a secure old age. In Chapter 7, we’ll propose a public option for private retirement savings that would lower costs and improve options for most workers by offering them something like the very successful savings plan that the federal government offers to its own workers.
But even as it is, Social Security works well in three ways: it fosters freedom and equality in ways that private markets cannot, it has a clear and limited mission to provide a baseline of retirement security, and the distribution of monthly checks to retirees is well within the capabilities of public administration. It’s a success story all around.
6
Mixed Results in Education and Housing
No policy tool is perfect in every case, and it is essential to take a hard look at some of the less-happy instances, where policy has fallen short of its ambitions. Public schools and public housing are both important public options, but they have both also occasioned bitter controversy. Public housing has been widely criticized, especially (but certainly not exclusively) by politicians on the right. A (Democratic) former mayor of Worcester, Massachusetts, noted, “For many, public housing has become a perverse legacy handed down from one generation to the next.”1 The New York Times described Chicago’s notorious Robert Taylor Homes, a large public housing project, as “slums” occupied by “drug gangs” and swarming cockroaches.2
By contrast, public schools enjoy solid popularity. The overwhelming majority of Americans believe that the government should guarantee a quality public education to all and that the government should spend more, not less, on education.3 Still, there is a well-known puzzle in people’s attitudes toward public schools. Parents give their own children’s public schools high marks—77 percent in a recent survey gave their child’s own school a grade of A or B. But in the same survey, only 18 percent gave the same rating to the nation’s public schools as a whole.4
Since the 1980s, right-leaning policy makers have promoted market subsidies as the solution to the problems, actual and perceived, of public housing and public schools, and this approach has accelerated with the Trump administration. Instead of funding public housing, critics say, the government should offer housing vouchers to tenants or subsidies to private developers. And instead of funding public schools, the argument runs, the government should provide vouchers that let families choose any school—public, private, or religious.5
As we sorted through the evidence on public schools and public housing, we reached two conclusions. First, the failures of these public options have been exaggerated, usually for political gain. Right-wing think tanks invoke “dilapidated and crime-infested public housing [as] a vivid reminder of the government’s failure when it comes to solving social ills.”6 And they dismiss the public schools as failing their students in order to protect lazy, unionized teachers. A memorable 1983 report concluded that “if an unfriendly foreign power had attempted to impose on America the mediocre educational performance that exists today, we might well have viewed it as an act of war.”7
But these tropes are as dubious as the Reagan-era stereotype of the “welfare queen.” They are long on ideology and short on facts, and they play to race and class prejudice. The truth is more mixed. Public housing and public schools have helped many Americans step up to better lives, but they have failed to do enough to advance opportunity for poor and minority Americans. These failures are not, by and large, due to massive incompetence or corruption in government (though we don’t ignore the possibility that either might be behind a specific case). Instead, they reflect America’s intense residential segregation by race and by class—and the economic and political structures that prevent poor and minority voters from challenging their isolation and gaining access to greater resources. The upshot: although politicians talk about crime-infested “projects” and mediocre public schools, the underlying problems are as much social and political as anything else.
And this brings us to our second key conclusion: vouchers are not a panacea. Without thoroughgoing reform in politics, even ideal market subsidies can’t change much. Indeed, robust evidence shows that neither vouchers nor private competition consistently outperforms public options, either in housing or in schools.
The problems plaguing public housing and public education can and should be addressed. Housing and schools are critical prerequisites for equal opportunity, and they merit a public option that works for everyone. The real barriers are both well known and too seldom addressed: residential segregation and political structures that make segregation difficult or impossible to challenge.
Public Schools and the Voucher Debate
Public education is a competitive public option: it provides universal access to free K–12 education, but it isn’t mandatory. Parents can choose to pay for private or parochial education, although the vast majority don’t. In 2015, 90 percent of children nationwide attended public school.8
Public schools have existed since before the American Revolution, but they took a big step toward becoming a public option—open to all—when states enacted compulsory attendance laws beginning in the nineteenth century. In 1954, the nation took a giant leap toward a true public option with the Supreme Court’s decision in Brown v. Board of Education, which ended de jure segregation in the schools. Over the centuries, public education has helped create and sustain the American middle class and the transition from an agrarian society to an industrial and technological one.
Public education today faces two major problems. The first is ensuring a quality education for every student. By a number of measures, the United States is behind other major countries in student achievement.9 Policy wonks and politicians have debated the best fix for the quality problem. Some advocate national standards: this is essentially the approach of the Bush-era No Child Left Behind Act, which has evolved over time to require sta
ndardized testing and impose sanctions on low-performing schools. The Common Core, a set of national curricula, was another effort to raise educational quality by promoting national standards.
We think the quality problem is well worth attention, not so much because it reflects a “crisis” but because public reflection on quality and cost are exactly what help public options function well. The merits of testing and metrics remain to be worked out, and there is no easy solution, but—again—all of this is standard operating procedure for a robust public option.
The second problem, which is tied to the first, is segregation by race and by class. While states may no longer formally segregate schoolchildren based on race, residential segregation and local politics have permitted de facto school segregation to flourish. True, lawmakers cannot enact rules that explicitly direct greater resources to rich, white kids. But lawmakers can take notice of a few salient facts that permit them to maintain segregation with plausible deniability.
For one thing, centuries of residential segregation (abetted by Jim Crow and zoning laws, among others) have left poor and minority students largely concentrated in neighborhoods that are geographically distinct from those occupied by richer and whiter kids. For another thing, schools have always been run locally and largely funded by taxes imposed by localities. Putting all this together, school district boundaries effectively segregate poor or minority students into certain school districts. And by funding schools through local taxes, politicians have ensured that poor people will have poorly funded schools.
The funding gap is especially perverse because poorer students need more resources if they are to flourish. Poor students enter first grade with lower achievement scores already, and as they advance through the grades, they will predictably face adverse conditions in their neighborhoods and homes that are much less common in richer areas.
The Public Option Page 10