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Janice Nittoli

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Back to Basics on Social Security

Posted: 08/04/10 10:37 AM ET

Americans like what's new -- whether it is ideas or cars or derivatives. Digging out from the financial crisis is no different -- not in 70 years have we been so desperate to find a new way to create lasting economic security. But there is an old tool we are not using as effectively as we could, and certainly not as it was intended. It is popular, efficient and universal.

It is the Social Security system.

We all know it and, still, we overlook it. Fifty-one million people got Social Security benefits in 2008 and virtually all workers -- 162 million of them -- are covered by it. It takes in $805 billion in annual revenue, distributes $615 billion in benefits, manages assets of $2.4 trillion and does so with an administrative charge -- total expenses as a percent of total expenditures - of 0.6 percent. The average for the smaller, private sector mutual fund industry is 0.99 percent.

For this kind of coverage and performance, Social Security is popular. A recent poll conducted for the National Academy of Social Insurance and The Rockefeller Foundation found that 77% of respondents believed that workers should increase their contributions to the system if that is what is needed to maintain benefit levels. Americans are so confident in this institution that they are willing to pay higher taxes to support it.

In spite of popularity and performance, we tend to think of Social Security as fragile -- perhaps a tad elderly itself. Yet, it remains a revered if somewhat musty compact between the older and younger generations. Whether it's George W. Bush's "carve out" or Al Gore's "lock box", Social Security has come to be something not to be fiddled with. But that rigidity stands in sharp contrast to the dynamic, even muscular framework its creators had in mind.

When Social Security legislation passed in 1935, its intent was to provide the scaffolding for a vital, agile system that would change with the times, but would, at all times, provide a stable, substantial measure of economic security for Americans: not just old age insurance, but retirement pensions for workers and widows, support for women and children who had none, unemployed industry workers and domestics. Drafters of the legislation even considered an allied system of national health insurance, but the idea was scuttled out of fear it would bring down the entire bill. (The Rockefeller Foundation offered support and staff to the 1934 committee that designed Social Security, and as early as 1923 provided support for work that led to the first American proposals of social security as a concept in 1926.)

For more than 40 years Social Security, as intended, changed with the economy and the work force. A 1996 Congressional Research Service report detailed 28 major changes to the program, amendments that by and large expanded eligibility, established new programs and raised the level and range of benefits. Social Security, in short, changed along with us.

This vision of adaptability has faded in recent decades. Old age insurance is now so untouchable it has become synonymous with the "third rail of American politics." Unemployment insurance is under-funded by states struggling to balance their own books at the same time its residents need help with theirs. Welfare has not been a federal entitlement since the 1990s and the jobs program intended to complement this support disappeared in the 1940s.

Perhaps today's turmoil, however, can provide an impetus to return to the animating spirit of 1935. Rather than putting Social Security in a lock box, what if our rallying cry was "use it or lose it"? Here are a few ideas about what we might do.

Unemployment insurance (UI). The current system is run by states, which set benefit levels and finances them through payroll taxes. Since states cannot print money and thus cannot spend countercyclically in a recession, they are least able to provide UI benefits when people need them most. Yet, perhaps 40% of unemployment insurance benefits are now being used by families to make mortgage payments. On the other hand, high contribution requirements and the exclusion of freelance workers mean that only 10 of the 14 million unemployed workers today have access to these benefits. Increased federal responsibility for UI would begin to chart a needed path toward two improvements: first, standard levels of support (levels vary widely across states and none provides support that meets the poverty level for a family of four); second, an extension of benefits to freelance workers.

Retirement savings. As access to, and funding of, employer based retirement savings plans decline -- 54% of Americans have no private pension -- Social Security becomes even more important. This is a question not only of benefit adequacy, though it is that, but also the untapped power and potential of annuitization. One of the beauties of Social Security is that it is there for you as long as you (or spouse) are, well, there. Annuities similarly guard against the risk of outliving savings and provide predictable payments -- in sharp contrast to the lump sum check provided by a 401(k). This principal of annuitization, a kind of Savings for Dummies, is one of the untapped potentials of the Social Security apparatus. Social Security is already set up to efficiently send checks based on a wide range of eligibility criteria. There are several proposals for using the Social Security system to create universal, mandatory individual retirement accounts to which employers and workers would contribute, and from which retirees would draw annuities. The Guaranteed Retirement Account is one such proposal. Others include voluntary savings plans that are managed and routed through the Social Security Administration.

Adapting to new circumstances. Americans today enjoy more years of active life -- in 1935 the additional life expectancy of a 65 year old was 12.5 years, today it is 18 years. We could, as Stephen Attewell of the New America Foundation suggests, consider half-pensions for older active seniors who want to work less than full time and at no risk to their full pension. Women, now half of the workforce, have dual care-giving challenges in providing for children and parents. Proposals to let workers accumulate family and medical leave, such as those developed by Heather Boushey and Ann O'Leary at the Center for American Progress, are creative ways to take advantage of Social Security's vaunted accounting system.

Whichever of these possibilities prove to have the most appeal, what should be clear is that, while financing Social Security may be a near term problem, our Social Security system presents opportunities our society badly needs to consider exploring.

Ms. Nittoli is Associate Vice President and a Managing Director of The Rockefeller Foundation, where she directs Rockefeller's "Campaign for American Workers".