Insure or Invest?



by John Tyler Connoley





In the United States, every one of our paychecks includes a payment line for FICA, and most of us know that our FICA payments go to the Social Security Administration. But have you ever wondered what the acronym actually stands for?


Turns out, FICA doesn't stand for Federal Investment of Cash and Assets, as some of us might have guessed. Nor does it stand for Federal Institution for Cheating Americans, as some others of us might assume. FICA stands for "Federal Insurance Contribution Act," which is the 1935 law that allowed for the collection of Social Security Insurance taxes.


Although most Americans have come to think of the Social Security Administration as a kind of governmental investment company for retirement accounts, Social Security was actually created as a federal insurance agency -- insuring American workers against abject poverty. As we begin a national debate about the future of Social Security, it's important to recognize this simple fact: Social Security is not an investment company but an insurance agency.


Along with payments to retirees, the Social Security Administration provides disability benefits to workers who are injured and can no longer work, and payments to the children and spouses of workers who die. It also administers the Medicare program, which provides healthcare to elderly citizens. Like any insurance program, Social Security is based on a premise that more people will pay for the insurance than will claim benefits.


When I pay for my automobile insurance, I send a check to a large company that collects money from millions of individuals across the country. While the insurance company waits for someone to make an accident claim, it takes all the money it collects and invests it. Then, when someone does make a claim it uses that cumulative wealth to pay for the accident.


Assuming I continue driving until I'm 75, I'll probably pay roughly $60,000 in car insurance premiums in my lifetime. And, with luck, the $3,000 I've collected in insurance payments up to now is all I'll ever collect. I don't keep track of the money I spend on insurance and I don't expect to get it all back, because I know that's not how insurance works. My hope is that I'll never be in a position where I have to collect on my premiums, but I gladly make my insurance payment every month anyway, because I like the security of knowing that the cost of an accident would be covered if I ever had one.


All insurance works this way. We each make payments into the system, while hoping we don't ever have to ask for any of that money back. At the same time, we know that we may end up receiving far more than we paid. The insurance company acts as a diffuser to spread the bad luck of the few among the millions of us who have better luck.


When Congress passed the Federal Insurance Contribution Act in 1935, it made employment insurance mandatory for all Americans. After the Great Depression, there was a feeling that Americans needed a way to spread the bad luck of the destitute among the rest of the country's citizens. Some people, through no fault of their own, found themselves at the end of a long work career with no savings. Others usually women and children, found themselves destitute after their spouses or parents died suddenly. Still others were injured and unable to work. Congress thought they could help these people by taking small payments from all workers, pooling the money, and then offering insurance to the unfortunate. The system would pay for itself, because most people wouldn't need the insurance.


However, somewhere between then and now, we got the idea that the money we paid into Social Security was our personal retirement savings. We also stopped saving our own money, believing the government would pay for our retirement without our having to do anything. Of course, we still expected Social Security to pay us insurance payments when we became disabled, and we also expected it to make insurance payments to our children if we died at an early age. But, if we got to retirement age and were in the position of not needing our Social Security money, we couldn't imagine letting that money go to someone else. "That's my money, by God, and I deserve to get out of Social Security what I paid in!"


Now, in 2005, we have a system that will likely be in serious financial trouble by 2052, according to The Congressional Budget Office. And most of the proposals to fix the system (including the President's) betray the fundamental nature of Social Security as an insurance fund. This is also why proposals, like the PresidentŐs, that intend to transform Social Security into a system of personal retirement accounts require subsidizing the fund with trillions of dollars to cover current membersŐ expectations for guaranteed retirement payments.


It may be that we've already gone too far down this track to stop the train of government-enforced personal retirement accounts. However, as we rush forward with plans to reform Social Security, we also need to recognize what we're leaving behind. Personal retirement accounts are good, but they're not insurance. Yes, I'm secure in knowing that all the money in my savings account belongs to me, but I'm also stuck with what I've saved if I decide (or am forced through injury) to retire early. As we think about Social Security reform, lets also think about what we want Social Security to be. Will it be insurance or investment? It can't be both.




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Copyright © 2005 by John Tyler Connoley

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