Magic Accounting
From the May 14, 2012, issue of NR.


It was, however, the liberal architects and defenders of the welfare state, not its conservative opponents, who created the myth that spawned the subsequent confusion. Central to liberalism at high tide was a rhetorical effort to establish the untruth that Americans receiving social-insurance benefits were getting back nothing beyond what they had already paid for. A 1936 pamphlet describing the new Social Security system, for example, assured wage earners that “you will be earning benefits that will come to you later on” and “will come to you as a right.”

Vincent M. Miles, one of the inaugural members of the Social Security board, explained the basis of this right in a 1936 speech: The program’s old-age benefits “are best understood if we compare them to insurance.” The monthly checks from the government are “like the installments on annuities from an insurance company.” And, “like an insurance-company policy, the worker’s old-age benefit from the government must be paid for in advance. Instead of weekly, monthly, quarterly, or yearly premiums, however, the government collects weekly or monthly payments which are called ‘taxes.’”

One of the authors of the Social Security Act, J. Douglas Brown, went further in a 1955 speech, “The American Philosophy of Social Insurance.” The “first and foremost element” of this philosophy, he said, is that “the system must provide protection as a matter of right and not as a benevolence of a government, an institution, or an employer.” Establishing social insurance “reversed the presumption that a payment to an eligible individual was a generous act of mercy by a sovereign, to the presumption that such a payment, under social insurance, was the honest fulfillment of a contract between the citizen and the state.” Through “his individual contribution to our economy,” according to Brown, the citizen establishes his contractual rights, which define “the level of his protection.” Complex formulas determine social-insurance benefits on the basis of each individual’s unique wage history, since “we still believe in America that a man should be rewarded for his own efforts.”

President Johnson invoked this principle of individually earned benefits in 1965 when he signed Medicare into law. (The new legislation amended the Social Security Act.) Through Medicare, he said, “every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age.” He was to do so the same way workers were already paying for their old-age, survivor, and disability benefits — by contributing “through the Social Security program a small amount each payday for hospital-insurance protection.”

An American who warns an elected official to keep the government’s hands off a social-insurance program doesn’t misunderstand our welfare state but has grasped its central argument exactly as it has been presented. Social insurance, we have been told (and told and told), is a mechanism through which we insure ourselves against financial vulnerabilities. The benefits are ours because we paid for them in advance. They vary because the amount we paid for them varies. Having “contributed” our taxes, we insist on receiving our benefits, since we were assured that the former are just like insurance premiums, and the latter just like insurance settlements.