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Correspondence: Address correspondence to Pamela Herd, LBJ School of Public Affairs, University of Texas, Austin, PO Box Y, Austin, TX 78713-8925. E-mail: pherd{at}mail.utexas.edu
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Abstract |
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 TOP Abstract The Political Strength of...The Growing Popularity of...Social SecurityMedicareConclusionReferences |
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Key Words: Social Security • Reform • Privatization
Thus, after numerous unsuccessful attempts at dismantling the U.S.'s universal old-age welfare state, or even meaningfully restraining its growth, conservative critics have developed a new approach. They are wrapping promarket "privatization" policy proposals in the popular universal framework of Social Security and Medicare. As President Bush argues, he wants to institute individual accounts to save Social Security. What is fundamentally different about privatization as a reform goal is that it embraces (or at least acquiesces to) key aspects of universalism, including broad-based eligibility and benefits that "maintain accustomed standards of living," which leave universal programs with rock-hard public support (Korpi, 1983; Korpi & Palme, 1998).
Privatizing Social Security and Medicare would not change universal eligibility, unlike means testing reforms or proposals to make contributions to both programs voluntary. And in regards to benefits, a common refrain from privatization proponents runs along these lines: "Such an enormous financial gap (referring to Medicare and Social Security's current fiscal problems) cannot be closed by raising taxes and cutting benefits, which would greatly harm working people and retirees. The only solution is to reform the system by taking advantage of the efficiencies, incentives, competition, and productivity of the private sector" (Ferraro, 1998). Basically, privatizing will address the program's fiscal problems with a limited, and in some cases, positive impact on benefits. The validity of these claims are addressed in this article. Nonetheless, true or not, the key claim with this new reform approach is the promise to maintain key features of universal policies, particularly broad-based eligibility and generous benefits, which keeps middle-class Americans happy and the program popular.
But while privatization proponents promise a generous and robust old-age welfare state, privatization will retrench the redistributive aspects of both Social Security and Medicare. Ironically, past less popular retrenchment efforts, including means testing and even benefit cuts, did not directly challenge the redistributive nature of these programs.
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The Political Strength of Universal Programs |
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Any approach that would have significantly and negatively impacted the Social Security benefits of middle-class Americans, thereby undermining the program's universal principles, has gained no traction. Conservative politicians in the United States have faced voters' wrath in the past when they have attempted to do just that. Republican nominee Barry Goldwater's suggestion that participation in Social Security be made "voluntary" became a symbol of his "radical conservativism" (Derthick, 1979, p. 187) and contributed to his landslide loss to Lyndon Johnson in the 1964 election. Throughout the 1980s and into the 1990s proposals to means test Social Security benefits fell on deaf years. Reagan was attacked in the 1980s for proposals to reduce Social Security benefits. Examples like these led to Social Security's nickname as the "Third Rail" of politics. Thus, during the past 50 years, most changes to Social Security have expanded the number of beneficiaries and the size of those benefits.
Medicare, created in 1965 compared to Social Security's inception in 1935, has a similar, albeit a much shorter, political history. Most changes to the program have expanded, as opposed to retrenched, benefits. The most recent of which was the inclusion of a prescription drug benefit. And programmatic reforms that would undermine its universal principles have been met with significant resistance. One of the prime examples of this is the 1988 Medicare Catastrophic Coverage Act, which while expanding benefits, would have instituted significantly higher charges for higher income beneficiaries. The Act was unpopular with seniors, and it was repealed in 1989 (Rice, Desmond, & Gabel, 1990).
What connects all these past reform efforts is that they did not explicitly challenge Social Security's and Medicare's redistributive features. Instead, they tried to limit the programs' universality through means testing or significantly limit the depth of that universality by advocating large benefit cuts. Means testing, in theory, is actually more redistributive. And benefit cuts, though they would be hardest for the poorest, would not alter the programs' redistributive structures. Of course, though, the long-term concern with means testing or dramatic benefit cuts is that they would eventually destroy our most successful redistributive social policies by undermining the programs' popularity among the general public; means testing and drastically cutting benefits would hamper middle-class benefits and thus their support for the old-age welfare state.
This is not to say, however, that small benefit cuts, means testing, and decreasing eligibility ages have not happened or that they are no longer being proposed. Universalism has been "stretched" (Kingson, 1994). Social Security's eligibility age rose from 65 to 67, and higher income beneficiaries now have their benefits taxed. In the next few years, high-income Medicare beneficiaries will pay higher premiums, and changes in 1997 entailed that beneficiaries would pay more for their benefits. Further, proposals to privatize have been accompanied by proposals to reduce benefits to offset Social Security's long-term fiscal problems. But these potential benefit cuts are a separate policy issue from privatization. Moreover, advocates argue that necessary benefits cuts due to Social Security's fiscal problems will be smaller because of privatization.
Ultimately, what makes privatization different from past retrenchment efforts is that it embraces key aspects of universalism to generate public support for reforms while attacking these programs' redistributive features that have for so long been protected within the programs' popular universal frameworks. That said, I am not arguing that privatization will have no negative impact on universality. The extent to which universal programs inspire social solidarity and mutual obligation would likely be harmed by a reform that fosters the individualistic, rather than collective, aspects of Social Security. Moreover, privatization would likely weaken important insurance aspects of the program, particularly disability and spousal and survivor benefits. That said, Social Security has always fostered an individualistic spirit by clearly linking individual retirement worker benefits, and to a lesser extent disability benefits, with individual earnings. In the end, most privatization proponents claim privatization will maintain the aspects of universalism that keep programs popular—broad-based eligibility and generous benefits.
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The Growing Popularity of Privatization |
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Support for privatizing Medicare is even more striking. To fix Medicare's fiscal problems, almost 8 in 10 Americans support allowing seniors to choose among many private health plans with a fixed monetary contribution from the government (Employee Benefit Research Institute [EBRI], 2001). Comparatively, 54% support increasing Medicare premiums for those with incomes above $50,000, while 27% favor increasing the age of eligibility (EBRI).
The following two sections, which explore Social Security and Medicare separately, answer these two questions. First, why is privatization more popular than past reform or retrenchment efforts? Specifically, how is this reform agenda being sold? Second, how does this reform agenda line up with the conservative agenda and what are the impacts of this on the redistributive elements of Social Security and Medicare?
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Social Security |
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While I will examine these claims momentarily, what is critical to point out is that a major reason why privatization has been a relatively popular reform idea is because politicians and policy advocates no longer talk about eliminating or downsizing the program. Instead, privatization is framed as a way to save Social Security. Yet, this is a reform that can still meet a common conservative principle: limited government intervention. Specifically, privatization would give individuals more control over their payroll taxes, and the government would have a lesser ability to redistribute. Privatizations falls in line with past retrenchment efforts, means testing and benefit cuts, because it shifts individual contributions back toward individuals who would bear the risks and rewards of controlling these resources.
Part of the public support for privatization is because proponents argue it will help save a bankrupt social policy. But is it really bankrupt? Many have shown how the "crisis" is severely overstated (Quadagno, 1996). The Social Security trustees estimate that the program's 75-year shortfall could be fixed by a 1.9% increase in payroll tax (shared between employers and employees), which hasn't been raised since 1983, while the Congressional Budget Office (CBO, 2004a) estimates a 1% increase. Another way to lend some proportion to the issue is that while President Bush has specifically argued Social Security is financially unsustainable in its current form, the money spent on the recent tax cut would have completely offset the 75-year shortfall. Finally, the projections that show a deficit are based on all kinds of assumptions about fertility, mortality, immigration, and the economy. For those in their 20s, the analogous forecast is predicting what their children, who are not born yet, will be doing in retirement. (Herd & Kingson, 2005)
Further, would privatization "save" Social Security? The argument to prefund the system is theoretically appealing. There would be no fiscal problem if each individual was funding their own retirement. But when theory hits the ground, the possibility that creating individual accounts will financially save Social Security is not even a remote certainty (Diamond & Orszag, 2002). First and foremost it would cost around 2 trillion dollars to switch the system over. Current beneficiaries need their benefits as future individual account holders shift their payroll taxes towards those accounts. Thus, there is a need for additional revenue.
And though proponents argue privatization would increase peoples' benefit, this claim is questionable. The privatization proposal that came from the President's Commission to Strengthen Social Security made benefit comparisons between the current and proposed system based on current projected benefit levels reduced by 30% to account for the shortfall (Diamond & Orszag, 2002). Then, using this baseline, they claimed privatization would increase Social Security benefits when, in fact, benefits would be substantially reduced to address the shortfall. Aside from the shortfall issue, administrative costs and the ability of individuals to invest wisely call into question whether individual accounts can produce the strong return proponents of privatization hope for (CBO, 2004a).
How Privatizing Undermines Redistribution
The effort to privatize Social Security has its roots in neoliberalism, which argues against most government intervention. The basic theory is that income is best left in the hands of individuals, as opposed to the government. The notion of redistribution, shifting resources from wealthier to poorer Americans, runs contrary to this sentiment. And this is precisely why opponents of government intervention dislike Social Security. While it is questionable that privatizing Social Security will "save" it, there is little doubt it will have a significant and negative impact on the program's progressiveness. So how does creating individual accounts, or privatizing Social Security, undermine the program's progressiveness? Privatization limits the program's ability to redistribute.
While Social Security's universal structure has engendered wide public support among middle class Americans, it has also been enormously successful at protecting some of the poorest Americans. In 1970, before the largest expansion of Social Security benefits with the automatic cost of living increases, about 1 in 4 elderly persons lived below the poverty line. In 2003, just 1 in 10 elderly persons lived below the poverty line (Census Bureau, 2004). Comparatively, the poverty rate for children rose and remained stagnant for working-age adults.
Social Security protects poor Americans because, as Theda Skocpol (1991) argues, it "targets within universalism." Poor Americans benefit from the redistributive benefit formula. Simply, low-income workers have a higher percentage of their lifetime earnings replaced by their benefits than do high-income workers. It is these beneficiaries who are most vulnerable to poverty. Not including Social Security benefits in individuals' incomes raises the poverty rate from 10% to almost 50% (Porter, Larin, & Primus, 1999).
Targeting, however, is done under the cover of universalism. Unlike means tested programs, like the eliminated Aid to Families with Dependent Children (AFDC), which are constantly retrenched because they lack broad support, universal programs like Social Security maintain popular support because everyone contributes to and benefits from the program.
The shift toward individual accounts would restrain Social Security's ability to redistribute resources. The high-income replacement rates that low-income workers receive may be threatened by privatization. Quite simply, the more payroll taxes are diverted to individual accounts, the less the government will be able to redistribute those resources. Of course, women, Blacks, and Hispanics would be particularly hard hit given their relatively low earnings. Compared to the White man's dollar, women still earn just 70 cents, Black women earn just 63 cents, Hispanic women earn 53 cents, and Black and Hispanic men earn 60 cents (National Committee on Pay Equity, 2004).
One of the most enlightening studies of privatization was done in the county of Galveston, Texas (Wilson, 1999). On January 1, 1982, the county opted out of Social Security and developed a privatized system. The study found that those with higher earnings had higher benefits under this plan than they would have under the Social Security system. Contrastingly, low earners had lower benefits under the plan than they would have under Social Security. Their initial benefit was about 4% lower. But because Social Security institutes cost of living increases to offset inflation, the difference grows over time. So after 15 years, their benefit would be 63% of what it would have been under Social Security. More moderate earners would have a higher initial benefit, but after 15 years their benefit would be 91% of their original benefit and after 20 years it would be just 78%. Contrastingly, the highest earners would have an initial benefit 177% of their Social Security benefit. After 20 years it would be equivalent to what their Social Security would have been. Overall, they would have obtained a substantial gain through a private contribution system.
There are numerous reasons other than restricting redistribution as to why disadvantaged groups do not fare well. There is concern about peoples' ability to make good investment decisions (Williamson & Rix, 1999). Others point out the relatively high administrative costs for small accounts (CBO, 2004b). Women, who live 7 years longer than men on average, will not gain as much from individual benefits more directly linked with overall contributions; Social Security does not penalize women for their longer life spans (Williamson & Rix). And of course the smaller one's income in retirement the less able one is to absorb large changes in income that would likely occur if it was heavily tied to the stock market (Herd & Kingson, 2005).
A final salient concern is how those benefiting from the insurance portion of the program, particularly disabled workers and survivors, would fare given money would be shifted out of the insurance portion of the program and into private accounts. The basic insurance benefit would thus be around one third lower for survivors and disabled beneficiaries (Diamond & Orszag, 2002). Survivors, however, could inherit whatever savings had built up in the deceased worker's account, which would be highly dependent on the age he or she died at. The size of disabled workers' accounts would be highly dependent on the age at which they became disabled. Generally, the individual account, particularly for disabled workers, would not have accrued enough value, leading to lower benefits overall than under the current system.
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Medicare |
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The reason privatizing Medicare is a more popular reform than limiting eligibility through significant means testing or raising the program's eligibility age is because, similar to privatizing Social Security, privatizing Medicare is being sold as the way to save this universal program. Some privatization proponents argue it would protect Medicare from fiscal ruin and improve its benefits without requiring increases to the eligibility age, benefit cuts, or significant means testing (Bush, 2004). Other proponents, however, are more pragmatic and acknowledge benefits cuts will be necessary (Pauly, 2004). While I will examine these claims momentarily, it is critical to note that privatization is being sold in such a way that does not challenge the basic aspects of universalism that make Medicare popular. Everyone contributes and everyone would continue benefiting; the size of the beneficiary pool would not be decreased due to an increased age of eligibility or significant means testing. What would change is the extent to which Medicare subsidizes the sickest, and generally the poorest, beneficiaries.
Much like the claims made by proponents of privatizing Social Security, there is no evidence that privatizing Medicare will improve its fiscal problems. Medicare's dilemma is far more serious than Social Security's. Currently, Medicare comprises 2.7% of gross domestic product (GDP). By 2030 it will comprise 7% of GDP (MedPAC, 2004). But what is often ignored is that Medicare's fiscal problems are rooted in the larger problems of the U.S. health care system. Overall, health care spending is expected to rise from 15.3% of GDP to 25% of GDP from 2004 to 2030 (MedPAC). The only country in the industrialized world without the government as the primary health insurer for its citizens and residents is also consistently the most expensive system in the world.
Proposals to privatize would severely limit the government's role as the primary health insurer to all older Americans and expand the private sector's role. But Medicare has been far more effective at controlling health care costs than the private sector has been (Boccuti & Moon, 2003). From 1972 to 2002, average annual cost increases have been 9.6% in Medicare compared to 11.1% in the private sector. There are two reasons for the government's success at holding prices down. First, the large pool of beneficiaries (almost all older Americans) makes it easy to negotiate low prices with health care providers and suppliers. Second, it has much lower administrative costs: 3% compared to the private sector's 12.8% (Davis, 2004).
The goal of privatizing Medicare is to reduce the government's current role as the primary health insurer for almost older Americans. Proponents argue that older Americans should be able to "decide what kind of health plans they want, the kinds of benefits packages they want, the medical treatments and procedures they want, and the premiums, co-payments, deductibles, and coinsurance they are willing to pay" (Lemieux, 2003; Moffit, 2004). More choice will lead to more competition and further reduce prices. Ultimately, proponents argue that the increased competition that results from privatizing Medicare is a way to "save" and improve Medicare without resorting to benefit cuts or tax increases.
But there is no evidence that increased competition will reduce costs (Moon & Herd, 2002; Rice & Desmond, 2002). First, the larger number of companies, and consequently different health plans, involved will increase administrative costs. Second, for competition to reduce costs, elderly people would have to switch plans on an almost yearly basis, but there is significant evidence that older adults will not switch plans (Buchmueller, 2000). Third, it will be very difficult for seniors to sort out which plans will give them the most for their money. It is difficult to compare plan benefits and costs because plans vary so widely within and between health insurance companies.
How Privatization Will Undermine Redistribution Within Medicare
How does Medicare redistribute? The redistributive nature of Medicare is less obvious than Social Security's. But the key progressive feature of Medicare is that, regardless of how sick or poor, individuals are guaranteed access to the same basic coverage at the same costs as wealthier and healthier individuals. This is most certainly not the case for younger Americans who may not be able to access health insurance or often have to pay considerably more for it depending on their employment status, health status, and where they live.
The key to understanding Medicare's success is understanding what older people's health insurance dilemmas were before Medicare. Before Medicare was enacted in 1965 about three quarters of older Americans had inadequate health insurance coverage, and half had no coverage whatsoever (Century Foundation, 2001). Wealthier older Americans were the only ones able to afford health insurance. Moreover, buying health insurance as individuals in the market left them with few protections. The sickest older Americans could be charged exorbitant premiums making the coverage unaffordable. Now all older Americans are guaranteed affordable health insurance. Their Medicare premiums are not effected by how sick they are or where they live. And most polls show approval ratings for the program at almost 90% among the elderly people who rely on it (Public Agenda, 2004).
Again, the long-term goal of privatization supporters is to dramatically reduce the role of Medicare fee-for-service or rather limit the government's current role as the primary health insurance provider for older Americans. Though the government does contract out Medicare's administrative responsibility to private companies, ultimately the government determines what services beneficiaries receive and how much they have to pay. Under a defined contribution approach, the government plan—Medicare fee-for-service—would just be one of hundreds of primary health insurance plans with varying premiums and services covered.
The problem for poorer and sicker beneficiaries is that these changes are likely to increase their health care costs. Multiple insurance pools make it much harder to spread and redistribute the costs of health care from the sickest and poorest beneficiaries to the healthiest and wealthiest. In the current system, everyone is in the same insurance pool so costs are spread evenly; the more pools, the harder to evenly spread costs. The problem is that HMOs are skilled at attracting the healthiest individuals who bring the highest profits. Studies show that sicker individuals end up concentrated in certain plans when people have multiple options. With a defined contribution approach, the sickest and most expensive beneficiaries would be concentrated in fee-for-service Medicare. Sick and expensive beneficiaries concentrated in one plan drives up costs, leaving these vulnerable beneficiaries with extraordinarily high premiums, deductibles, and copayments (Moon & Herd, 2002; Rice & Desmond, 2002).
Unlike with Social Security, partial privatization of Medicare has already begun. And these experiments demonstrate the problems with privatization for sicker and poorer Americans. The main example is the participation of HMOs in Medicare. Millions of older Americans have participated in an HMO as opposed to traditional Medicare fee-for-service. Beneficiary premiums remained the same, but for years those elders in HMOs, who are the healthiest and wealthiest, received better benefits than the average participant in Medicare fee-for-service. The government was overpaying the HMOs. But as soon as the reimbursements were corrected, HMOs began dropping Medicare coverage. In 1998, 17% of beneficiaries participated in an HMO; by 2004 that had fallen to 11% (Kaiser Family Foundation, 2004a). In 2002, Congress significantly increased reimbursements to HMOs to further encourage their participation. Currently, the government pays an extra $552 per enrollee in Medicare HMOs as compared to fee-for-service, even though the sickest and poorest beneficiaries are in Medicare fee-for-service (Cooper, Nicholas, & Biles, 2004).
The second piece of privatization in Medicare is the new prescription drug bill, whereby private insurers, as opposed to the government, will provide coverage (Kaiser Family Foundation, 2004b). The benefit premium will vary depending on where beneficiaries live and what kind of plan they choose. Beneficiaries already in HMOs will simply receive their coverage through them. Beneficiaries who want to remain in Medicare fee-for-service (who are sicker and poorer beneficiaries) will have to buy an additional policy from a private insurer, which is on top of whatever Medigap coverage they currently have. There is concern that Medicare fee-for-service participants will have to pay more for less coverage due to the stand-alone nature of the coverage. The overall incentive is to push more individuals into HMOs and away from fee-for-service Medicare.
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Conclusion |
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What privatization does clearly limit is the redistribution that occurs within these programs. The magnitude of the impact on redistribution, however, will depend on policy details. A few recent proposals for Medicare and Social Security have tried to limit the impact of reform on poor beneficiaries (see Pauly, 2004). That said, the basic premise of these proposals is to more tightly link individual contributions with individual benefits, which reduces the potential for redistribution. Given Social Security's and Medicare's success at securing the incomes and protecting the health of elderly Americans, we need to pay close attention to the ramifications of privatization on the beneficiaries who need these programs the most.
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Footnotes |
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Decision Editor: Linda S. Noelker, PhD
Received for publication November 15, 2004. Accepted for publication February 24, 2005.
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