Tales of a New America

by Robert B. Reich

  The lot of “the poor” seems different. We all know we face some risk of accident, unemployment, or debilitating disease; we all expect to grow old. But we know we will not be born into poverty, and we assume that our children will not be. Welfare, accordingly, is thought to be for “them”—entailing a transfer of wealth from us. Expenditures on welfare are justified by a sense of “there but for my charity they’d go under.”

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  Together, welfare and social insurance comprised almost half of the federal budget in 1985; one dollar out of every nine that Americans spent that year went to pay for these programs. But 83 cents went for social insurance; only 17 cents for welfare. Social Security and Medicare alone accounted for over 6 percent of America’s national product; cash assistance for the nonelderly poor, substantially less than 1 percent. America paid out less in food stamps for the poor than in pensions for its retired civil servants. As a proportion of national product, programs aimed at the poor did not grow at all since 1972, while social insurance mushroomed. Aid to Families with Dependent Children, the centerpiece of welfare, declined by one third.

  The two largest social insurance programs, Social Security and Medicare, have remained extremely popular. By 1985, 39 million Americans were receiving government checks providing financial support and health care. These recipients were elderly, disabled, or dependent on breadwinners who had died. More than 22 million of them relied on such payments as their primary source of income. The programs were well-regarded because they benefited “us.” Opinion polls confirmed their popularity: In contrast to welfare, which the public treated with growing suspicion, at least two thirds of the nation supported Medicare; 90 percent favored Social Security.1 Ronald Reagan’s early proposal to cut Social Security benefits elicited such an outcry that his later budgets carefully sheltered Social Security and Medicare, just as they protected defense. There was not much left to cut, except for the relatively small welfare system.

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  Social Security came to America as a descendant of Otto von Bismarck’s insurance schemes for old age, sickness, and unemployment. The German leader had put them into effect in the 1890s, in an attempt to maintain the loyalties of the German working class in the face of the rising Social Democrats. The idea was later adopted by Britain’s Lloyd George in a similar effort to woo the working class away from the Labour party. The insurance schemes were to be universally applied and compulsory.

  Franklin D. Roosevelt emphasized these qualities when he brought the idea to America. “I see no reason why every child, from the day he is born, shouldn’t be a member of the social security system,” he said. Every child should be protected against misfortune, from cradle to grave. “When he begins to grow up, he should know he will receive old-age benefits direct from the insurance system to which he will belong all his life. If he is out of work, he gets a benefit. If he is sick or crippled, he gets a benefit.”2 Roosevelt never embraced the idea of welfare; he repeatedly denounced “the dole.” His New Deal involved no major redistribution of income from rich to poor, but only emergency relief designed to tide people over until the economy rebounded, and aid to the chronically ill, homeless, and abandoned. Even Social Security, in its initial stages, was limited to those who worked.3 It was sold to the American people as a system of insurance, not welfare: There would be a trust fund. Each American would have his own Social Security account, recording the amounts of money that he and his employer had contributed through payroll taxes. Retirees, disabled workers, or dependents would have a right to collect on these accounts. Charity had nothing to do with it. “Those [payroll] taxes were never a problem of economics,” Roosevelt recounted. “They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits.”4

  The initial concept proved so popular that the Social Security system grew over time. Its benefits were extended; its coverage was broadened. In 1950 only 16 percent of Americans over sixty-five years of age had been eligible for Social Security. By 1970 over 90 percent were. And as it expanded, its redistributions grew, while the principle (and the perception) of insurance endured. Widows and children were added early on, then the disabled. Beneficiaries who had had relatively low average earnings in their working years were deemed entitled to a higher return on their contributions than beneficiaries who had contributed more. Hospitalization benefits were added, in the form of Medicare. Workers could retire earlier than age sixty-five. And finally, as a hedge against inflation, benefit levels were tied to consumer prices. Together, these changes comprised a major system of redistribution. And they were expensive, requiring that payroll taxes go up, steadily, from 1 percent of a worker’s wages in 1935 to about 7 percent by the mid-1980s. (In fact, if employers’ contributions are counted as coming at the expense of higher wages, as they probably should be, the payroll tax rose to over 14 percent.)

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  By 1985 the biggest flow of income redistribution in America was from younger workers to the elderly. Social Security benefits had increased almost by half since 1970 in real terms, while average wages had hardly increased at all.5 Retirees who had had relatively high incomes during their working lives received (in real terms) about three times what they had contributed to the system; poorer retirees collected up to fifteen times their contributions. Medicare benefits ballooned too, as more Americans lived longer and tended to die of chronic conditions like cancer and heart disease rather than quick killers like pneumonia. By the 1980s the average retired person received an additional 50 cents of health care benefits for every dollar received of retirement payments.

  The idea of an insurance pool, funded by the same people who would later draw on it, was a mirage, and indeed had been from the start. The little-understood premise of the Social Security system, even as Roosevelt designed it, was that it was funded by the next generation of workers. Their contributions went directly to pay the benefits of those who had already retired. For most of the system’s history, the buckets have been emptied as fast as they were filled. The trust fund was primarily a bookkeeping device. There were no personal accounts; nothing was being accumulated by individual contributors. So as Social Security benefits were expanded over time, current workers had to contribute that much more to keep the buckets filled. They did so willingly on the supposition that they were in fact saving for themselves. But as they did so, their take-home earnings declined; and as average earnings stagnated through the 1970s and 1980s, they became ever more resistant to paying out additional sums in welfare to “them.”

  The result was a shift, over time, in the distribution of American poverty. As late as 1970 an elderly person was more likely to be living in poverty than a child. But by 1985 a child was nearly six times more likely to be poor than an elderly person. This shift occurred imperceptibly, without public discussion or deliberation. It was a natural consequence of our prevailing social philosophy, our governing myth. The elderly were “us”; they had earned their social insurance. Poor children—many of them black or Hispanic, living in central cities—were “them.” They were the objects of our charity.

  This distinction was illuminated in the 1980s by what was perceived to be a remaining gap in the system of social insurance for the elderly. Over 5 percent of Americans over age sixty-five lived in nursing homes. Nursing home care was expensive—costing over $30,000 a year. And many elderly found themselves facing huge medical bills, far in excess of what Medicare would reimburse or retirement benefits support. But no help was available to pay these sorts of expenses, outside of welfare. And to qualify for welfare, in the form of Medicaid, it was first necessary to join “the poor.” You had to use up your accumulated savings and accept the stigma of poverty and charity. Since its inception under the Johnson administration, Medicaid had been Medicare’s poor stepchild. Rather than being financed by payroll taxes, it was supported by general revenues. Part of its financing came fr
om the states, which meant that it was subject to differing state regulations. And it remained politically vulnerable. Medicaid was for “them”; Medicare, for “us.” Medicaid was charity; Medicare, social insurance. To become an object of charity was too humiliating for many Americans. Many swallowed their pride.6 But they wanted “insurance” instead. Accordingly, politicians of all stripes, including many enemies of welfare, duly pledged to expand the social insurance system to deal with these hardships.

  Roosevelt had appreciated from the start the mythic importance of casting redistribution as insurance rather than welfare. In 1939 one of his advisers noted that Social Security could be streamlined by dispensing with all the clerks who distributed Social Security cards, assigned numbers, maintained files on how much each cardholder and employer had contributed to date, and responded to personal inquiries about specific accounts. The adviser argued that these costly chores were a waste of time, since there were no real accounts to start with; money was simply transferred from contributors to beneficiaries. Roosevelt heard the argument and then patiently explained why all the clerks were necessary. They were not there to maintain the individual accounts. They were there to maintain the perception of social insurance.

  Your logic is correct, your facts are correct, but your conclusion’s wrong. Now, I’ll tell you why that account is not useless. That account is not to determine how much should be paid out and to control what should be paid out. That account is there so those sons of bitches up on the Hill can’t ever abandon this system when I’m gone.7

  And they never would.

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  Most Americans also benefit from a third major instrument of the social benevolence. These benefits are delivered to employees by the companies they work for. Like Social Security and Medicare, employee benefits have ballooned in recent years. In 1983 they comprised over 14 percent of employee compensation, up from just over 5 percent in 1950.8 And like Social Security and Medicare, employee benefits have been enormously popular. Tax reformers periodically have tried to limit them, to no avail.

  Most people tend to think of these benefits as private insurance rather than social spending. But they have been financed substantially by the income taxes all of us pay. Corporations provide these benefits in place of higher wages precisely because their employees do not have to pay income taxes on them.9 Since a dollar’s worth of tax-free health care is worth more to an employee than a taxable dollar of income destined to be spent on health care, for example, the company can save money by paying more in benefits and less in wages. The gap is filled by other taxpayers, who must pay more income tax to make up the difference. Thus this system of benefits has all the characteristics of social benevolence—a broad pooling of risk, financed through government, entailing substantial redistributions.

  The public costs of this form of social benevolence have been high—below the cost of Social Security and Medicare, but a good deal higher than welfare spending. In 1984 Americans paid out $115 billion in income taxes to finance employee benefits.10 This was almost twice the amount we paid out that year to finance all welfare programs for “the poor.”11

  Taxpayers spent about $18 billion to subsidize corporate health plans in 1984, or roughly as much as they spent on health care for the poor through Medicaid. But the two programs were never considered as alternative means of meeting the same goal. Political controversy swirled around Medicaid; but tax-free employee health insurance, by contrast, was seen as something that workers earned; the public contribution, when it was understood at all, was seen as self-evidently justifiable. A similar comparison could be drawn for other categories of aid. Tax-free day care for employees has never been subjected to budget review and continues to grow; Head Start, a comparable program for impoverished preschoolers, has been chronically vulnerable to budget cuts. Tax-free group life insurance for employees cost taxpayers about $2 billion. The welfare cost of supplemental food for poor women, infants, and children was half that sum. Tax-free pension contributions and earnings cost taxpayers over $50 billion; the total cost of cash aid for the poor was less than half that. All these welfare expenditures, and others like them, were declining or barely hanging on; their political legitimacy was eroding amid demands that the federal deficit be reduced. Employee benefits, meanwhile, were expanding.

  By the mid-1980s most Americans were collecting at least one form of social benefit financed directly or indirectly by tax funds. About 65 percent of the population was covered by tax-favored employee health plans. Half the workers were employed by firms with pension plans. But a significant minority enjoyed no such benefits. Many small companies and self-employed workers found insurance premiums and pension plans to be too expensive, even with government’s indirect support. Many of the nation’s working poor, engaged in temporary or part-time jobs, had no access to company plans. Workers who were laid off from their jobs often lost their coverage. Thus millions of people fell through the gap—ineligible for welfare but detached from the system of tax-favored employee benefits. One result of this gap was that one out of five American children had no health insurance whatever.12

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  The fourth broad category of social benevolence comprises liability judgments against firms whose products or services cause injury. By the 1980s the nation’s courts had embarked upon an unmistakable trend: Judges and juries were less concerned with whether the company that caused the injury was negligent than with how best to compensate the victim. Like the other instruments of social insurance we have been considering—Social Security, Medicare, and employee benefits—liability judgments mushroomed. In 1975, 1,500 product suits were filed in federal courts. Only 25 of them resulted in judgments over $1 million. Ten years later the number reached 11,000, and over 400 of them passed the million-dollar mark.13

  This instrument of compensation should be considered of a piece with other forms of social insurance because we all pay for it. Doctors, ski resorts, and toy manufacturers, among many others, have sought to insure themselves against the possibility that one of their customers would sue them and collect a large award. As the risks and costs of such lawsuits have mounted, insurance premiums have risen. The costs of the higher premiums have been passed on to consumers in the form of higher prices for medical services, ski tickets, and toys. It was as if, in purchasing the item, we also purchased a small insurance policy against the possibility that we might be injured while using it.14

  Liability suits are inherently inefficient instruments for insuring ourselves against injury. As total awards mounted, many victims received nothing, either because they lost in court or because they were unaware of their right to sue. And the victims who did get compensated ended up giving more than half their awards (on average) to their lawyers, who had instituted the suits on condition that they would receive a healthy fee upon winning.

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  We all know the world is a perilous place. Some people reach old age without adequate savings. Some die, leaving dependents without the wherewithal to fend for themselves. Some fall prey to sickness, which prevents them from working or requires expensive medical care. Some are seriously injured. Some lose their job and are unable to find another for a long time. Some lack the skills and child support to get a job in the first place. Many of these hardships can precipitate a long-term fall in economic status, or perpetuate poverty.

  Which of these risks should we insure ourselves and our fellow citizens against? Which are the proper justifications of welfare or of charity? Does it matter which label we apply?

  The choice matters a great deal. The idea of social insurance is inclusive. Its premise is that we all, mutually, depend on and contribute to the system, because we are all subject to the risks it secures us against. Social insurance reminds us of our interdependence. We are all in the same boat. By contrast, the idea of welfare is exclusive. Its premise is that some rely on the compassion of others. This logic emphasizes our differences. We are safely on the big ship, while they—the objects of our benefic
ence—are barely staying afloat on the life rafts we toss out.

  In 1934 the framers of the Social Security system hoped that it would one day replace welfare. The idea of social insurance was both consistent with current versions of the American mythology, and compelling in a time when one quarter—and a quite representative quarter—of the nation was unemployed. Then, nearly everyone’s boat was leaking. This was also a time when most blacks and millions of very poor whites lived invisibly on southern farms far removed from urban centers, and when most American families had two parents. Relatively few Mexicans and Puerto Ricans had reached our shores, few blacks had streamed into our cities from the South. Perhaps it was easier then, under those circumstances, to envision one comprehensive system of social benevolence, rather than two—one for “us” and one for “them”—and the accompanying patchwork we have contrived. But the subsequent discovery of “the poor” bifurcated the system. This discovery inspired antipoverty programs and eligibility formulas that sharply distinguished the needy from the rest of us.