What is Social Security?

When most Americans refer to "Social Security", they generally mean the monthly payments that retirees receive from the government. That particular program is called the Federal Old-Age, Survivors, and Disability Insurance (OASDI) and was enacted in 1935 and has been amended many times since. There is a lot of debate around OASDI ranging from concerns about its long term solvency to ideological differences over its very existence. However, it would seem that all too often its creation as an insurance program seems to be forgotten.

During the 1930s, the average life expectancy did not reach the full retirement age of 65. Hence the program was meant as an insurance policy in case someone outlived their ability to work and had no steady source of income. Setting aside the controversy of such an insurance program in the first place, it is hard to reconcile today's system with the original intent of the program. OASDI is no longer viewed as an insurance plan, but rather as a form of guaranteed retirement income. Since current life expectancies in the U.S. are more than ten years above current full retirement age, it seems like less a plan for "what if" and more for "when".

This presents a problem for a program designed to work as an insurance policy. For example, homeowner's insurance only works because not everyone's house burns down. Premiums are kept low because many people pay in, but only a few ever need the benefits. If it was a pretty good chance that everyone's house was going to burn down, the insurers would have to raise premiums to cover the payouts. But if almost everyone is going to receive a payout at some point, then almost everyone would have to pay a premium equal to that payout. At some point, homeowners are going to begin wondering why they have insurance at all and don't just save the money that they would have paid towards premiums to cover the eventual loss of their home.

And to some degree, that is where we stand today. People are asking questions about whether they would receive a higher rate of return with a private program or with a government one. Many are concerned about whether taxes will go up or benefits will go down or if there will even be any benefits at all when they retire. It is clear that something needs to be done. Yet, before any real debate can begin, it would probably be useful to determine just exactly what the program is supposed to be, an insurance policy, or a retirement plan.

~ Another Guy