Social Security

Social security, also known as social insurance, refers to a wide range of government policies designed to redistribute income. Such policies are generally justified as collective protection against various hazards of life, including illness, old age, disability, unemployment, and poverty. In the United States, the term social security refers specifically to a program of taxing those who are currently working to support senior citizens and the disabled.

Government programs to alleviate economic hardship have deep historical roots. The English Poor Law of 1601 required localities to impose taxes to fund almshouses and other forms of poor relief, and similar poor laws were adopted by English-​speaking colonies in North America. Modern social insurance, at least as it is understood today, arose in Imperial Germany under the chancellorship of Otto von Bismarck. Over the course of the 1880s, the German Reichstag passed legislation to enact health, accident, and old age and invalid insurance. Although these programs were styled as insurance and featured payments by current workers to fund the benefits that were currently paid out, they were by no means actuarially sound, but instead consisted of a “pay as you go” redistribution of wealth from workers to beneficiaries. Bismarckian social insurance provided the basic model for welfare state policies adopted around the world during the 20th century. In the United States, the Social Security Act, which provided for unemployment insurance, old-​age pensions, and aid to families with dependent children, was signed into law by Franklin D. Roosevelt in 1935 as a crucial element of his extensive “New Deal” programs.

Libertarians oppose social security programs because they usurp functions that more properly belong to those areas that should be private and voluntary. First, private commercial enterprises are fully capable of providing many of the benefits of the contemporary welfare state. Insurance companies can protect against the risks of accident and illness, while company pension plans and investment firms can provide for retirement security. In addition, there exists a whole range of both private profit-​seeking enterprises in addition to nonprofit institutions and initiatives designed to further a wide range of shared purposes, including protection against risk.

In the absence of government social security programs, it is true that some people—whether through lack of foresight, lack of resources, or extraordinary misfortune—would fail to provide adequately against various risks and consequently would face economic hardship. Libertarians contend that such cases would be marginal and could be addressed either through private charity or government “social safety net” programs.

Social insurance goes far beyond the limited redistribution provided by a social safety net, in which the goal is only to guarantee some minimum standard of living for those in dire need. Instead, it sweeps everyone into a monolithic, compulsory program, the burdens of which (in the form of heavy payroll taxes) make it difficult or impossible for many people to pursue private alternatives. Such full-​blown, all-​embracing collectivism is against all libertarian principles.

Social security programs around the world are currently experiencing serious and deepening financial problems. In richer countries, populations are aging, which means that the number of beneficiaries is growing at a faster rate than the number of current workers who are financing the costs involved. Therefore, older people are becoming a progressively heavier burden on the worker. The effect is that, at some point, benefits must be reduced substantially if the collapse of the system is to be avoided. In 1950, there were 16 workers in the United States for every retiree; today that ratio is only 3 workers to each social security recipient, and in 20 years this ratio will have fallen to 2 to 1.

Programs in less developed countries also are in distress despite their having much younger populations. These countries typically have large informal sectors or underground economies—a fact that triggers a vicious circle. Because many people work in the informal sector, payroll taxes (collected only in the formal sector) have to be higher than would otherwise be necessary. These high payroll taxes, however, create incentives for even more people to retreat into the informal sector, necessitating even higher rates, which push more people into tax evasion, and so forth.

Libertarians take differing approaches in proposing alternatives to the social security status quo. Some libertarians oppose all forms of coercive income redistribution as illegitimate, and they call for the complete abolition of social insurance and safety net programs, arguing that there is every reason to believe that the marketplace and private charity will fill the void. Other libertarians, such as F. A. Hayek and Milton Friedman, distinguish between social insurance and safety net policies. Hayek, writing in The Constitution of Liberty, endorsed public assistance for the indigent; as a corollary, he accepted the propriety of requiring people to purchase insurance and save for retirement so that they would not become public charges. In Capitalism and Freedom, Friedman opposed compulsory saving, but did propose a “negative income tax” that would serve as a safety net.

A number of countries, the first of which was Chile in 1981, have moved away from pay-​as-​you-​go public pension systems toward compulsory private retirement savings. The merits of some form of social security privatization are now under intense debate in the United States.

Further Readings

Ferrara, Peter J., and Michael Tanner. A New Deal for Social Security. Washington, DC: Cato Institute, 1998.

Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1982 [1962].

Hayek, F. A. The Constitution of Liberty. Chicago: University of Chicago Press, 1960.

Lindsey, Brink. Against the Dead Hand: The Uncertain Struggle for Global Capitalism. New York: Wiley, 2002.

World Bank. Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. New York: Oxford University Press, 1994.