What Is Social Security?

Much of the contention in the debate about Social Security derives from one basic source: few agree on what Social Security is. Many see it as a safety-net program and most of the rest want to the system to be a retirement plan. Oddly enough it is neither.

Social Security is basically insurance. Insurance protects you from large costs that you may or may not have to pay.  The likelihood of living to 100 is about 1%.  The cost of living for more than 30 years without a job is staggering.  Like fire or health insurance, Social Security protects you against the cost of an unknown event. 

The terms of insurance vary by type.  For instance, auto insurance insures a momentary event.  Health insurance insures costs occur within a whole year.  Social Security measures longer old-age in two week intervals with a small check, one that may payout over a very long period of time.  The length of the event does not change the nature of insurance.
 

No insurance pays the full cost of the event, likely or not.  Social Security does not pay the full cost of living without working.  Social Security does not prevent poverty.  It provides supplemental income to provide the retiree some measure of certainty against falling into poverty ridden old-age.  FDR's words not mine.
 

Insurance is an expense, not an investment.  Without Social Security, how could anyone retire?  Without insurance, the worker would need to create sufficient savings to live 30 years or more.  That is a lot of savings to require of someone who expects to live about 17 years, and may live less than 1 in actual retirement.  Insurance allows the worker to buy protection against the possibility that he might have an extended life, enabling him to retire at a reasonable age.
 

Insurance fits into a retirement plan with other tools.  When it was designed, Social Security was suppose to be only one part of a three legged stool.  The rest of the stool was private savings and private pensions. An investment is something that accumulates the wealth on which you retire.  Insurance protects that wealth so that you do not have to draw it down too early in retirement.
 

Some people argue that the force of law exerted by the government makes Social Security a welfare program.  Yes, Social Security is legally required for most workers.  This requirement is no different than the one by which most states have for auto insurance.  Yet your auto insurer is not an arm of the government to provide welfare.  The legal requirement to participate does not change the nature of the program. 

The reason that many struggle with the nature of Social Security comes from the way we pay for it.  The pay-as-you-go system doesn't work.  Instead of old-age insurance, this approach structures Social Security as i-dont-want-to-live-with-my-parents insurance. Invariably we look at the cost as too high, the benefits too low, and give politicians the power to sort-out the difference.  This is the unavoidable outcome of using the money of one to buy the insurance of another.

Until we agree upon what Social Security is, there will be no way to fix it.