Definitions and Basics

Social Security, by Thomas R. Saving. Concise Encyclopedia of Economics

Social Security, or, to be precise, Old Age, Survivors and Disability Insurance (OASDI), is the U.S. government program that pays benefits to workers after retirement, to spouses and children of deceased workers, and to workers who become disabled before they retire. In 2003, the program had 47 million recipients, of whom 32.6 million were retired workers and their dependent family members, 6.8 million were survivors of deceased workers, and 7.6 million were disabled former workers and their dependent family members. Social Security is financed through a payroll deduction (FICA) tax that is more than adequate now, but soon will be less than the amount needed to pay benefits.

Pensions, by Henry McMillan. Concise Encyclopedia of Economics

A private pension plan is an organized program to provide retirement income for a firm’s workers. Some 56.7 percent of full-time, full-year wage and salary workers in the United States participate in employment-based pension plans (EBRI Issue Brief, October 2003). Private trusteed pension plans receive special tax treatment and are subject to eligibility, coverage, and benefit standards. Private pensions have become an important financial intermediary in the United States, with assets totaling $3.0 trillion at year-end 2002, while state and local government retirement funds totaled $1.967 trillion. By comparison, all New York Stock Exchange (NYSE) listed stocks totaled $9.557 trillion at year-end 2002. In other words, private and local government pension plan assets are large enough to purchase about 60 percent of all stocks listed on the NYSE.

Welfare, by Thomas MaCurdy and Jeffrey M. Jones. Concise Encyclopedia of Economics

The U.S. welfare system would be an unlikely model for anyone designing a welfare system from scratch. The dozens of programs that make up the “system” have different (sometimes competing) goals, inconsistent rules, and over-lapping groups of beneficiaries. Responsibility for administering the various programs is spread throughout the executive branch of the federal government and across many committees of the U.S. Congress. Responsibilities are also shared with state, county, and city governments, which actually deliver the services and contribute to funding.

In the News and Examples

Autor on Disability, podcast on EconTalk. April 16, 2012

David Autor of MIT talks with EconTalk host Russ Roberts about the Social Security Disability Insurance (SSDI) program. SSDI has grown dramatically in recent years and now costs about $200 billion a year. Autor explains how the program works, why the growth has been so dramatic, and the consequences for the stability of the program in the future. This is an illuminated look at the interaction between politics and economics and reveals an activity of government that is relatively ignored today but will not be able to be ignored in the future.

Joshua Rauh on Public Pensions. EconTalk Podcast.

Joshua Rauh, Professor of Finance at Stanford University’s Graduate School of Business and a senior fellow at Stanford University’s Hoover Institution, talks with EconTalk host Russ Roberts about the unfunded liabilities from state employee pensions. The publicly stated shortfall in revenue relative to promised pensions is about $1 trillion. Rauh estimates the number to be over $4 trillion. Rauh explains why that number is more realistic, how the problem grew in recent years, and how the fiscal situation might be fixed moving forward. He also discusses some of the political and legal choices that we are likely to face going forward as states face strained budgets from promises made in the past to retired workers.

A Little History: Primary Sources and References

Great Depression, by Gene Smiley. Concise Encyclopedia of Economics

…The Great Depression is often called a “defining moment” in the twentieth-century history of the United States. Its most lasting effect was a transformation of the role of the federal government in the economy. The long contraction and painfully slow recovery led many in the American population to accept and even call for a vastly expanded role for government, though most businesses resented the growing federal control of their activities. The federal government took over responsibility for the elderly population with the creation of Social Security and gave the involuntarily unemployed unemployment compensation. The Wagner Act dramatically changed labor negotiations between employers and employees by promoting unions and acting as an arbiter to ensure “fair” labor contract negotiations. All of this required an increase in the size of the federal government….

Brink Lindsey on the Age of Abundance, podcast on EconTalk. March 30, 2009.

Brink Lindsey, of the Cato Institute and author of The Age of Abundance: How Prosperity Transformed America’s Politics and Culture, talks with EconTalk host Russ Roberts about the interaction between culture and politics and prosperity. Lindsey outlines the nature of prosperity in America in the 20th century, then focuses on the last half of the century when cultural change was perhaps as dramatic as economic change. The conversation concludes with a discussion of Lindsey’s essay, “Paul Krugman’s Nostalgianomics,” a look at the longing for a return of the economic policy of the 1950’s. Lindsey argues that the policies that led to a more egalitarian distribution of income in the 1950s had other much less attractive characteristics.

Advanced Resources

Richard Epstein on Happiness, Inequality, and Envy, podcast on EconTalk. November 3, 2008.

Richard Epstein of the University of Chicago talks with EconTalk host Russ Roberts about the relationship between happiness and wealth, the effects of inequality on happiness, and the economics of envy and altruism. He also applies the theory of evolution to explain some of the findings of the happiness literature.

Related Topics

Roles of Government
Fiscal Policy
Aggregate Demand
Government Budget Deficits and Government Debt
Government Failures, Rent Seeking, and Public Choice
Income Distribution