Social Security as Insurance

Our government is in serious financial trouble today.  The crisis today exists because the three
huge entitlements (Social Security, Medicare and Medicaid) are going to bankrupt
our government, our currency and our country.
This is shown by a simple chart prepared by the Heritage Foundation.

Social security is today the largest federal program, paying
out over $700 billion per year.  It is
going broke today – receiving in payments less than it is spending on benefits
forever, unless something is done about it.
Many Americans believe that the taxes and premiums that they pay into Social Security go into real trust funds where they are used to cover the promised future benefits.  That is not
the case.  Instead, the money paid in
from one set of Americans is immediately paid out to pay for benefits to
others.  The problem arises today because
there used to be five people paying in for every one person drawing benefits.
Today only two people pay in for every retired or disabled social security beneficiary.
The payments do not cover the expenses.

The original idea of Social Security was insurance against
economic disaster like the Great Depression.  As President Roosevelt said in 1935: The establishment of sound means toward a
greater future economic security of the American people is dictated by a
prudent consideration of the hazards involved in our national life. No one can
guarantee this country against the dangers of future depressions but we can
reduce these dangers. We can eliminate many of the factors that cause economic
depressions, and we can provide the means of mitigating their results. This
plan for economic security is at once a measure of prevention and a method of

 In other words, Social Security was sold as a form of insurance against the hazards involved
in our national life.  It was not sold as
a retirement program.  Insurance is
something that all Americans understood in 1935 and understand today. We buy
fire insurance for our homes. If they burn down, we get a specified payment. If
they do not burn down, we get nothing except for the assurance that we are
protected from loss due to fire.

Over the years, the benefits promised to Social Security
recipients have grown – far faster than the contributions. The number of recipients
has grown faster than the number of contributors. If we are to save our
government and save Social Security, we must return to the principles that were
used to set it up in the first place.

Make it insurance so that no one falls into poverty.  If there is no crisis and you have enough to
live on, you get nothing (your house did not burn down).  If you are old, or disabled, and do not have
enough to live on, Social Security will pay you enough to avoid poverty.

The Heritage
Foundation Plan

The Heritage Foundation has a plan that will save Social
Security and keep our nation from bankruptcy. It involves some basic

Like insurance, it will be paid only to those
who actually need it.  After 2012, those
who have non-Social Security income above $55,000 will receive lower payments
than those with lower incomes. This reduction will grow as their non-Social
Security income grows. Those with non-Social Security income above $110,000
will receive no Social Security payments at all.

Those who work longer than their full retirement
age will receive a $10,000 special annual tax deduction regardless of income
level. This will reward people who keep working longer, thus strengthening the
Social Security system.

3)      Beginning
in 2014, a new savings plan will be introduced. Under
this plan, 6 percent of each worker’s income is placed in a retirement savings plan
that the worker owns and controls unless he or she explicitly declines to have
such an account. Savings would be invested in an improved version of the IRA/401(k)  employment-based retirement savings system already familiar to Americans. The
money put into these savings accounts will not be double-taxed, unlike today’s
Social Security payments and many other savings mechanisms.

This Heritage plan reforms Social Security to create a
retirement security system that will be available for future generations. It
will be one that provides a reasonable, predictable, and affordable benefit
that ensures that no retiree who has worked for 35 years or more faces poverty
or economic insecurity. At the same time, this new system will protect our
children and grandchildren from the massive tax increase that would be
necessary to pay all of the Social Security benefits that Washington has irresponsibly

The complete Heritage report can be found at

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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One Response to Social Security as Insurance

  1. Dave says:

    Great explanation of the problem. I like the Heritage plan.

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