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Chapter Summary

Katz, Michael B., 2001. New Models for Social Security, Chapter 9 in The Price of Citizenship: Redefining the American Welfare State. New York: Henry Holt.

Katz examines Social Security in the United States and the question of whether or not government should privatize this system. He believes that though flawed, Social Security will continue to exist and to serve senior citizens in America indefinitely. It is central to the maintenance of the welfare state, and it would be a mistake to change the fundamental structure of Social Security to a market based model.

Social Security was created to address the poverty fears of senior citizens after retirement and was implemented through the Economic Security act of 1935. FDR advocated the importance of keeping the program self-sustaining by basing it entirely on individual contributions versus a broad-based tax. This debate continues to be an issue for the Social Security system. Social Security is a social insurance program, distinct from public assistance and private insurance. It is compulsory, sponsored and regulated by government, financed through earnings-based contributions, redistributive- and its benefits are prescribed by law.

Though Social Security has effectively decreased the poverty level of senior citizens without adding to the national deficit, it is still criticized. One of the major fears is that the program will run out of money. Critics also feel Social Security will not repay a fair proportion of contributions to US citizens. Katz evaluates the financial instability of the program as stemming from the 1970s, when the oil crisis led to inflation and prices increased more rapidly than wages. As a result, the cost of Social Security increased more than the taxes that supported it.

The Libertarian Cato Institute advocates privatizing Social Security, in order to end the paternalism of government in favor of choice and to promote a free market and reduce labor tensions. Criticisms of the privatization of Social Security include increased costs due to transition and administration and individual ignorance about financial markets. Efficiencies gained as a national system could be lost through privatization. There also is fear that citizens would perceive private institutions as ones from which they could withdraw their funds before they are due, undermining the system.

The question of whether to privatize remained until the economic surplus in the late 1990s that enabled Clinton to stabilize Social Security. Clinton ultimately addressed both camps by maintaining the system as it stands but incorporating elements of privatization by creating universal savings accounts for low and middle income citizens whose investments would be matched in proportion to income. Clintons plan incorporated the important elements of not raising taxes, lowering debt and utilization of the stock market and is described by Katz as a reasonable and painless reform of Americas premiere domestic program. It was decided that the Social Security reserves should be invested in less risky federal bonds, and not the stock market.

George W. Bush reintroduced privatization of Social Security in his campaign by recommending investing a percentage of payroll tax into separate retirement accounts. His plan was found to be economically inefficient, especially for young employees, but revived the continuing debate as to whether or not to privatize social security.