- The Washington Times - Wednesday, March 30, 2005

The debate over Social Security reform is growing more contentious with each passing day. Critics decry personal accounts as destroying the legacy of FDR’s New Deal. Yet, FDR might well favor the proposed shift from social insurance to ownership programs if he were alive today. After all, he hated means-tested welfare (then called “relief”) and supported Social Security and unemployment insurance partly because they would eventually allow welfare programs to wither away. Today, might ownership programs play a similar evolutionary role by lessening the need for social insurance?

To make this progression a reality, we must look beyond the public-private dichotomy and recognize ownership programs as operating along a continuum of methods that help people deal with risks. At one end are income-tested (or welfare) programs, in the middle is social insurance and at the other end is explicit ownership.

Income-tested programs, like food stamps and cash welfare, can efficiently target most of their payments to the poor or near-poor. The trouble is, they phase out as income increases, which discourages work and indirectly discourages marriage. These programs often require people to dump their assets to qualify for benefits, so they discourage saving as well.

Also, welfare programs are often viewed as a kind of charity that people receive simply because they can’t support themselves. A stigma attaches to these programs, so many eligible low-income families feel uncomfortable accepting benefits, and a high share choose not to enroll.

Social insurance programs aren’t welfare. They include unemployment insurance and Social Security, both of which require participant contributions to fund benefits. Such benefits are seen as an earned, quasi-property right. But these programs don’t do a good job of shifting resources from the well-off to the needy. Plus, Congress can change the already haphazard program rules as political winds shift, limiting the property rights of participants.

Unlike social insurance, ownership programs offer explicit property rights that legislators can’t abrogate. Benefits are linked to an individual’s payments, and beneficiaries view the payoffs as a return on their contributions. Participation involves using your own savings and is anything but embarrassing.

Consider the case of unemployment. Theoretically, policy-makers can grapple with this problem through an income-tested unemployment assistance program, a contributory unemployment insurance program, an unemployment insurance account or a combination of these options.

Unemployment assistance targets the poorest unemployed, but neither taxpayers nor recipients like the program’s disincentives to work and need-based benefits. With unemployment insurance, benefits are partly linked to the taxes workers pay. Less stigmatized and without the requirement that applicants dispose of their assets, unemployment insurance has greater emotional and political appeal than a means-tested unemployment program.

But it is not as well-targeted toward low-income workers and limits the eligibility of those with short, unstable work records or those who quit. Work disincentives arise during the eligibility period and job-search requirements are arbitrarily enforced. Worse, contributors to the fund may not be able to reap the benefits at a time of need if, for example, they have to leave a job for family reasons.

Unemployment insurance accounts would force savings that could be tapped only during spells of unemployment or at retirement. Individuals who lose their jobs before building up accounts to pay a basic allowance during unemployment would get federal loans that would be forgiven if they reached normal retirement age with a negative balance. For the small share of people who know they will have negative balances, work disincentives will remain. But the vast majority would have a property right to an account that would insure against unemployment risks, while largely eliminating work hurdles, stigma and often-arbitrary rules about access to benefits.

Can we combine these advantages of ownership programs with sufficient help for low- and moderate-income families that match the protections offered by social insurance programs? The short answer is yes, for two reasons. First, major social-insurance programs redistribute only a modest amount of funds from high- to low-income participants. Second, ownership programs could have the government match contributions or provide other subsidies to low-income families. Careful program design is important here.

If we get the details right, ownership initiatives might ultimately reduce the need for social insurance, just as social insurance reduced the need for income-tested programs. Although residual income-tested and social insurance programs should continue for the least advantaged, on the continuum from charity to self-reliance, it’s clear where most Americans want to be, and it’s getting clearer how government programs can help them get there.

Robert Lerman is a senior fellow in labor and social policy at the Urban Institute and a professor of economics at American University. The opinions are those of the author and do not necessarily reflect those of the Urban Institute, its trustees or its sponsors.

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