Toward a New Social Insurance Era

Reprinted with permission from Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track by Mark Miller, Agate, January 2023.

When I hear from readers who are worried about the future of Social Security or Medicare, their questions and comments often take a passive tone—“what will happen to me if they cut my benefits,” or “what happens if they allow the Social Security trust funds to become insolvent.” But this is a book about action steps you can take to improve your personal retirement outlook. Social Security and Medicare both have played critical roles in improving the lives of millions of Americans, but as has happened throughout their history, these programs need to change, and do more. Or, better put: We need to advocate for changes in these programs so that they can serve us better.

Related: Rebooting Retirement: Mark Miller on His New Book

And we do have the power to make retirement more secure. We can do that by strengthening and expanding our two most critical social insurance programs for retirement: Social Security and Medicare.

There is good reason to worry about the American retirement system as it is today. In fact, it’s not a system at all, but a patchwork of programs and products. Over the past four decades, we have witnessed the rise of a tax-deferred saving system that has accrued wealth for the affluent, and has not come close to closing the gap left by the decline of traditional pensions. Health care out-of-pocket costs have eroded seniors’ standard of living. We have failed to protect seniors against the ruinous potential risk of a long-term care need. Elder poverty is far lower than it was 50 years ago, but far too many seniors struggle to meet their living expenses—or, they are one financial emergency away from ruin.

So, let’s consider the profound impact that social insurance has had on American life, and how the role that Social Security and Medicare both play might be renewed and expanded.

The very phrase social insurance has fallen into disuse—it’s rare to find it in newspaper or magazine headlines or stories these days, although it is used commonly by policy experts. We call these programs social because they bring us together as a society—with the federal government serving as plan sponsor. We call them insurance because Social Security and Medicare protect us from certain risks. Everyone who contributes is protected. Together, we pool our risks and our responsibilities.

But over the past three decades, we’ve moved away from this collective approach, and toward market-driven products and services offered to individuals by corporations, often wrapped up in tax incentives. Need retirement income? Save in a 401(k) or IRA. Worried about the high cost of health care in retirement? You need a Health Savings Account. Is the ruinous cost of long-term care a concern? Maybe a long-term care insurance policy is what you need. Even Medicare is rapidly morphing into a suite of “plans” offered by private companies in insurance “marketplaces.”

Some of these market-driven products have worked well for higher-income households, but they have failed to serve the needs of middle- and lower-income Americans. It’s time for the pendulum to swing back to social insurance. Indeed, we need a new American era of social insurance.

Roots and Beginnings

The American social insurance system has its roots in the economic devastation wrought by the Great Depression. Roughly 10,000 banks had failed, and the size of the gross national product had been sliced in half. In 1933, 40% of the U.S. workforce was unemployed, millions were traveling the country looking for any work they could find, and hundreds of thousands had lost their homes and savings. And in 1934, over half of the elderly population was impoverished. Nancy J. Altman writes in her book The Battle for Social Security: From FDR’s Vision to Bush’s Gamble:

Those unable to work almost always moved in with their children. Those who had no children or whose children were unable or unwilling to support them typically wound up in the poorhouse. The poorhouse was not some ancient Dickensian invention; it was a very real means of subsistence for elderly people in the world immediately preceding Social Security.

When Social Security became law, every state but New Mexico had poorhouses (sometimes called almshouses or poor farms). The vast majority of the residents were elderly. Most of the “inmates,” as they were often labeled, entered the poorhouse late in life, having been independent wage earners until that point. A Massachusetts Commission reporting in 1910 found, for example, that only 1% of the residents had entered the almshouse before the age of 40; 92% entered after age 60.

The existence of the poorhouse is foreign today, except perhaps for phrases we use but don’t understand, such as, “You’re driving me to the poorhouse!” But for hundreds of years, millions of elderly and disabled people and others found themselves as “inmates” in these homes, alongside able-bodied workers who exchanged their labor for shelter.

States had begun responding to the economic need of the elderly in the years leading up to passage of the Social Security Act in 1935. Thirty states had some form of means-tested old-age pension, but these programs were paying meager benefits to a very small number of the elderly.

Populist movements arose demanding change. Huey Long, the radical populist senator from Louisiana, called for the federal government to guarantee every family an annual income of $5,000. Everyone over age 60 would receive an old-age pension.

Francis E. Townsend, a California doctor who found himself out of work in 1933, was galvanized to become a champion of the elderly. He developed the Townsend Plan, which called for the government to provide a $200 monthly pension to every citizen age 60 or older, funded by a 2% national sales tax. The only requirement to receive a benefit was that the person must be retired, have no criminal record and that the money would have to be spent within 30 days of receipt. Dr. Townsend published his plan in a local Long Beach newspaper in early 1933 and within about two years there were 7,000 Townsend Clubs around the country with more than 2.2 million members actively working to make the Townsend Plan the nation’s old-age pension system.

Some states responded to the crisis of the Great Depression by creating unemployment insurance systems—a precursor to social insurance in that they pooled together premiums paid by employers and workers in order to pay benefits. But these local systems were difficult to launch and fund in the midst of the economic crisis. Wisconsin was the first state to create such a system, and its architects were students of the first real social insurance program, which was enacted in 1883 in Germany. Chancellor Otto von Bismarck created a national health insurance program for wage earners, and went on to add work compensation, retirement, disability, and survivors’ benefits. That system was soon copied in many other European countries.

When Franklin Delano Roosevelt decided to address elder poverty as part of his New Deal, he recruited some of these students of the European system to join him in Washington to create Social Security, which was passed into law in 1935. By contrast to the economic radicalism offered by populists such as Huey Long, social insurance is a much more mainstream concept—it is government-sponsored, but relies on the principle that it is a benefit earned through work. In this sense, social insurance is very different from the American concept of welfare, which is paid on the basis of need.

The concept of retirement as a time of independence began with the enactment of Social Security. In the 1930s we had no meaningful system of pensions. Retirement saving programs such as 401(k)s
 or commercial annuities did not exist. While some employers offered old-age pensions, relatively few employees were covered, and the arrangements were extremely insecure.

Together with Social Security, President Roosevelt considered the creation of a universal health insurance program. He abandoned the idea in the face of ferocious opposition from the American Medical Association (AMA), because he feared that it could jeopardize passage of Social Security by Congress. But discussion of the idea lit the flame for an active discussion of the topic that continued into the Truman and Kennedy administrations. Legislation proposing universal health insurance was introduced in Congress every year, beginning in 1939. But opposition from the AMA and other powerful health care industry forces continued. The fierce opposition finally prompted advisors to President Truman to propose scaling the plan back to cover the elderly as a first step to a more universal program, but even that met fierce opposition. Theodore Marmor and Jonathan Oberlander write:

In 1957, AMA President David Allman declared the Medicare proposal “at least nine parts evil to one part sincerity” and “the beginning of the end of the private practice of medicine.” Ronald Reagan warned in a 1962 AMA recording that if Medicare passed, then “behind it will come other federal programs that will invade every area of freedom as we have known it in this country.”

Medicare started as a very limited idea: provide just 60 days of insurance for hospitalization, and only for seniors enrolled in Social Security. The very idea of creating a health insurance program offered only to the elderly was peculiar and unique to the United States among major industrial nations. But it had some logical and political appeal. These Americans had the lowest income (since they were retired), and had higher medical costs due to age. The mean health care cost for an elderly couple was $442 in 1962—$4,022 in today’s dollars. But
11% experienced much higher expenses: $9,000 in
today’s dollars.

The elderly were also the most likely to be uninsured. In 1952, just 26% of the elderly population had some form of insurance coverage, and often the coverage was inadequate. By 1962, coverage levels had risen to 52%, with the greatest improvements shown in younger retired seniors who were able to carry over coverage from their former employers.

The creation of Medicare (and Medicaid) by Congress in 1965 had a profound effect on the economic well-being of seniors. So did Social Security—although its significant impact was not felt until the 1960s. The program began to pay benefits in 1940, but the decade of the 1940s saw no increases in payments: first because of World War II but also because there was no mechanism for automatically increasing them to reflect inflation or wage growth. Congress amended the program in 1950 in a way that dramatically expanded coverage and increased benefits, both to adjust for inflation and productivity gains. Indeed, Congress continued to increase benefits every few years until 1972, when it enacted automatic annual adjustments.

In 1966, 28.5% of Americans age 65 and older had family incomes below the federal threshold of poverty; by 2019, the poverty rate among the aged population had dropped to 8.9%. That is a stunning public policy achievement—it has helped millions live independently and with financial security.

Social Security and Medicare provide the financial foundation for living independently in old age. Social Security benefits account for about half of the income received by adults age 65 and older, and three-quarters of the income received by those in the bottom third of incomes. Medicare provides near-universal health insurance for Americans over age 65 at a reasonable cost, smoothing out the cost of most health care expenses.

The Rationale for Expansion

Now is the time for social insurance to do more. The COVID-19 pandemic has accelerated an already-wide income gap between the have and have not households—a problem that persists in retirement. Eighty percent of older adult households are struggling financially or at risk of falling into economic insecurity as they age. Any gains in wealth that are occurring are accruing to households that already are well off: the bottom 20% made no gains in net total wealth from 2016 to 2018, while the top 20% saw their net wealth rise, due mostly to jumping real estate values.

Many middle- and lower-income households have some savings and assets to meet living expenses, but not enough to cover a major, unexpected financial expense, such as a large medical bill, a long-term care need or a major home repair. And these risks become more significant with age—more than two-thirds of adults age 70 or older will experience at least one major financial shock with financial consequences. Half of Medicare beneficiaries live on an income under $30,000 per person, and one in four has income under $17,000. Medicare costs alone can consume a significant part of these lower incomes—in 2016, the average out-of-pocket expense for enrollees was $5,460.

What’s more, Gen-Xers and millennials are likely to fare even worse than boomers and today’s seniors when they reach retirement—the result of escalating higher education costs and staggering student debt burdens; wage stagnation; soaring housing costs; and the decline of traditional defined benefit pensions.

Now is the moment to expand Social Security and Medicare to meet our current and future pressing needs.