Ok, we call it social security (SS), but how is it reflected on your pay stub? Usually you’ll find a deduction for OASDI, not SS. OASDI and SS are one and the same thing, though nearly all of us know it as SS. OASDI is an acronym for Old-Age, Survivors, and Disability Insurance. Coverage for “survivors” and “disability” didn’t come about until the sixties, but the word that’s most important here is “insurance”.

There are 2 definitions for insurance that bear on this:

1. Coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril. And:

2. A means of guaranteeing protection or safety.

OASDI was created as a means to protect against a loss of total income in the event another depression akin to the Great Depression ever happened again. Of course this was a very real concern in 1935 given the consequences of the Great Depression in the preceding five years and going into the next six, where families lost everything, unemployment peaked at 30%, most of the elderly were especially hard hit given the lack of jobs and pensions for retirees, and the prospects for the future were greatly clouded.

This was something of a risky bet back in the 30’s. During this time betting on the U.S. government wasn’t such a sure thing, and indeed betting on Uncle Sam was what the government was asking the people to do. There's no more visceral connection to something than that which you put your hard earned money into, and in this case the government was asking citizens to turn over their money to for safe keeping until they were of retirement age.

Communism during this time in our, and the world’s history, was a very attractive alternative government and economic system to a capitalistically driven alternative, especially one that had recently failed miserably to sustain a user-friendly level of economic stability for the country. By getting the American people to buy into social security Roosevelt was being extraordinarily daring and clever, in fact I'd go so far as to say that it was one of the cleverest marketing campaigns of this past century as people were being asked to sustain the government by buying into it. Roosevelt was making the promise that the government was going to be there for us when we got old, regardless of what we saved on our own or the condition of the country at the time, and this provided a great deal of comfort to a nation of people who were profoundly scarred by what they saw from the Great Depression. Of course this isn't what Michael Barone or the Cato Institute would like for you to believe as I mentioned in yesterday's post.

Whatever the underlying implications there were to SS, the purpose was to create a progressively-based insurance system, not per se a retirement system. The idea was to make all wage-earning Americans pay into it, thereby spreading the cost of the system, which in the end would create what was essentially an annuity that would provide benefits to participants until they died, NOT until what they put into the SS fund was doled out. The prevailing promise, though, was that the American
elderly would never be left financially high and dry as they had been during the Great Depression. The reality is that today such a guarantee is every bit as important to Americans as it was some 70 years ago, but for slightly different reasons. Today companies are bailing out of their pensions and retirees will be fortunate to see a percentage of what they originally expected in retirement, and the old defined-benefit retirement plans which were once a sure thing if you kept a job are being replaced in large measure by retirement plans that are tied to the stock market or other investments with associated risk and their are no guarantees for what a retiree will find themselves left with to live on when they retire. Social security today is insuring against loss, the nature of the
loss is simply different from what it was 70 years ago.

Barry Schwartz, who wrote Choose and Lose in the NY Times on the 5th of January 2005, offers
this about the insurance aspect of SS:

This brings me to the final defense of privatization: the payroll taxes you pay are your money, and you ought to be able to do what you like with your money. This, I suspect, is the real justification behind the move to privatize, and it is the worst reason of all. The payroll tax is not "your" money; it's our money. Social Security was created as an insurance scheme, not a pension scheme. It was meant to provide a safety net, to protect the unlucky from immiseration [blogger’s note: not a common word at all, mostly used in economics circles, meaning to make miserable or impoverish] in old age. The benefits we get are not payouts from accounts in which we have accumulated our own private stash. What we get is largely determined by what we earned, but we keep getting it even after we've taken out every penny we put in. And if we happen to die early, someone else
reaps the benefits of our contributions.

Granted, Schwarz is a psychologist, not an economist, whose most recent work is The Paradox of Choice: Why More Is Less, but the point is valid enough. If you die before you reap what you invested in an insurance system, what remains of what you put in doesn’t go to your heirs, so in effect it’s NOT your money, the same as it’s not when you die under a standard insurance annuity
(though you can make provisions for spouses that will keep benefits flowing). Any money “in excess” goes to the system to be used by all the other participants. Of course the advantage to this is that you very often get to take out of the system more than you put in.

Ok, my next post will talk about some suggestions as to what we can do to help "fix" social security.