Is it Really Insurance?


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But is it Really Insurance?        

By Jon N. Hall  (December 30, 2004)

Defenders of Social Security have long insisted that it is an insurance system. But is this so? Inasmuch as Congress is considering changes to the system, let’s put that claim to some scrutiny:
Insurance is for what we hope won’t happen. When buying insurance you’re betting against yourself, and the insurance company is betting on you. You’re betting that you’ll get sick, have an accident, or be sunbathing on the coast of Sri Lanka when a tsunami hits, and your agent is betting that you won’t. But Social Security is a sure bet: Someday you won’t be working.
Insurance is optional. True, many states require liability insurance to drive. But driving is a privilege, not a right. And if you borrow to finance a car or a home, your banker will insist that you have insurance to cover the loss of that car or home. But those are choices; you can always take public transportation and rent. But most of us must work to live, and Social Security is mandatory for almost all workers. Perhaps one fix for the system would be to require all workers to pay into the system.
Insurance companies compete with each other. When shopping for an insurance policy, the buyer will seek the most protection for the least money. He’ll also consider the soundness of the companies. Insurance companies have developed a science of risk assessment to help them price their products right. As risks go up, so does the cost of a policy. Some medical doctors are now opting to not carry malpractice insurance, because the premiums are so costly. But Social Security doesn’t compete, it’s mandatory, and Congress can set the tax rate for FICA—the payroll tax that funds Social Security and Medicare—at whatever level it so chooses.
Insurance charges policyholders the same. Of course, if you’re high risk, you’ll be charged more. But people who pose the same risks are charged the same rate; otherwise the company would be liable for a discrimination suit and hauled into court. Social Security, however, doesn’t assess risk, and merely looks at workers’ incomes, charging more to those who can pay more. Let an insurance company just try and get away with that. Next year the cap on FICA-taxable income will go up to $90,000, but some liberals feel all income should be subject to FICA. Since 1993 the portion of the FICA tax that goes to Medicare has been levied against all earned income (wages). So if you earn a million bucks one year, about $15,000 will be skimmed right off the top of your paychecks to go to one federal program, Medicare. Insurance companies must charge people equitably: the same rate to everyone who fits into each risk category.
Insurance must pay claimants the same. One of the more glaring inequities here is the way Social Security treats single people, in not allowing them to have a beneficiary.
Insurance companies can’t spend away their surpluses. That is, not if they’re going to stay in business, and out of jail. They can’t just divide up the surplus, and send it out as dividends to the shareholders or bonuses to management. They must amass any surplus during a lucky year and hold it in reserve, so that they’ll have it for the years when everything goes wrong, such as a year like 2004, with 4 major hurricanes and a killer tsunami. And the investments insurance companies make with their surpluses bring in additional income, which supplements premiums. Social Security has never saved nor invested a penny of its surpluses, which have added up to more than a trillion dollars; it’s all been spent on other federal programs, not Social Security.
Insurance doesn’t pay out to people who haven’t paid in. Social security has gotten very gnarled-up over the years with programs that that have nothing to do with retirement, programs like Supplemental Security Income. A while back SSI got fire for handing out checks to drug addicts and alcoholics who spent this assistance on their habits. Your “insurance” at work.
Truth is: The government would never allow any insurance company in the private sector to operate like Social Security. Social Security is neither insurance, nor a pension system, nor welfare, and has glaring differences from those kinds of programs.
Every time some conservative tries to explain to a liberal how steeply progressive our tax system is—how the top 5% pay well over half of the Individual Income Tax, while the bottom half pay less than 5% of that tax—the liberal will retort, on cue, that you’re not taking into account Social Security taxes. But if Social Security is really an insurance program, shouldn’t the payroll tax really be thought of as an insurance premium? Talk about trying to have it both ways.
So call it an entitlement, call it the social safety net, call it the Holy Grail; just don’t call it insurance.


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Date last modified February 2015