Welfare State

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Most politicians know that tampering with Social Security is dangerous to political life and limb. Ronald Reagan forgot this central truth of American politics and saw his 1981 proposal to slash Social Security benefits defeated in Congress. The plan called for a significant tightening of disability requirements and an increase in the early retirement penalty from 20 percent to 45 percent loss of benefits.

Moreover, the changes were to be implemented immediately rather than phased in over several years. The president thought this plan would permanently fix the Social Security problem without raising taxes. He also thought everyone on Capitol Hill would go along wholeheartedly with this proposal, but he was very wrong. Members of Congress were furious.

Reagan had to withdraw his proposal and abandon a key element of the Reagan Revolution. The president bent with the prevailing winds and announced the formation of a bipartisan commission as a way to remove Social Security from politics. The commission eventually presented its plan for changes in Social Security after the 1982 elections. The bipartisan commission's modest package eventually passed Congress and was signed by the president.

Social Security is the largest part of the American welfare state. It is dear to the hearts of most Americans and virtually immune from criticism and tampering. In contrast, public assistance, which is usually called welfare, is almost universally disliked.

This chapter explores the differences between Social Security and public assistance and how these policies developed. It also examines why a society that believes strongly in the benefits of the free market and individualism has a welfare state at all. Answering these questions requires that we take account of structural, political, and governmental influences.

Why Social Welfare?

A social welfare state is a society with a set of government programs that protect the minimum standard of living of families and individuals against loss of income due to economic instability, old age, illness, disability, and family disintegration. It represents a recognition by people in a democracy that a market economy, even when it is working at peak efficiency, does not guarantee minimum decency for all of its citizens or offer protection against economic dislocations. All modern capitalist societies have social welfare states.

Structural and Political Influences

Industrialization and its effects are one reason why many nations have welfare systems. Industrialization produced unprecedented levels of social wealth and improved living standards in the Western  countries over the past century, but it also produced disruption and hardship. Although scholars generally agree that economic change and industrialization provide the preconditions for the social welfare state, they disagree as to why political leaders create and expand welfare.

Presumably, in a democracy, people get what they want from government because elected officials depend on the support of the voters to gain and maintain public office. There are, however, several variations of the democracy-as-cause-of-the- welfare state theme. One  school of thought argues that the industrial working class is the main catalyst.

According to another approach, the proliferation of interest groups in democracies is the most important factor in the creation and expansion of the social welfare state. Still another approach to the subject holds that social welfare is designed by political and business leaders to forestall popular discontent and undermine radical movements for social change.

Social Welfare in the United States 

Types of Programs

The basic distinction among programs is between social insurance and means-tested programs. In social insurance programs, such as Social Security, individuals contribute to an insurance trust fund through a payroll tax on their earnings and receive benefits based on their contributions.

Means-tested programs, such as Aid to Families with Dependent Children (AFDC), distribute benefits on the basis of need to those who can prove that their income is low enough to qualify.

A distinction can also be drawn between social welfare programs that pay people directly (cash transfer programs), such as unemployment insurance, and those that provide a service, such as Medicare (which pays hospitals and physicians on behalf of recipients). 

Finally, a distinction can be drawn between social welfare programs that are administered directly from Washington, DC, and those that are jointly administered by federal and state governments.

Principle Characteristics

A substantial amount of money in the U.S. is spent on social welfare. As a proportion of total federal spending, social welfare reached its peak in 1976, leveled off until the early 1980s, and then declined. The decline reflects the Reagan administration's cutback in means-tested programs such as AFDC, food stamps, and Medicaid, as well as federal grants to the states for employment and training programs.

The lion's share of federal social welfare spending is for social insurance, and its share is growing steadily. Social insurance programs (mainly Social Security and Medicare) accounted for 56.9 percent of federal spending in 1990, up from 44.3 percent in 1960. In contrast, spending for means- tested programs is relatively small and shrinking.

The implications of this pattern are significant. First, most benefits of the American welfare state go not to the poor but to the non-poor. Those who receive the most benefits from social insurance programs are those who were fully employed during their working lives, had the highest incomes, and paid the maximum level of Social Security taxes.

Second, because social insurance benefits go mainly to those who are retired, the elderly fare much better than the young. The poverty rate among the elderly has significantly decreased over the past two decades while the poverty rate among children has risen.

Social Insurance

 Social insurance programs that guard against loss of income because of old age, disability, illness, and unemployment are the largest and most popular parts of the American welfare state. Because benefits are received as a matter of right based on contributions, they are termed entitlement programs.

Components of Social Insurance

Social Security is the largest of the social insurance programs. Insurance premiums to fund Social Security benefits are collected through payroll taxes on employees and employers and deposited in a Social Security Trust fund.

In contrast to private insurance, premiums paid into the fund over a person's lifetime are not sufficient to pay for the level of benefits actually received. The elderly receive more than they actually pay in. Social Security is funded, for the most part, by payroll taxes levied on currently working Americans. Fund reserves are sufficiently high at the present time that there should be no concern of money running out. In fact, funds are so high that it makes the federal budget deficit much smaller than it might otherwise be.

Funded by a special payroll tax on employees and employers, Medicare pays for a substantial portion of the hospital, doctor, and drug costs of retirees and the disabled. Rapidly rising health care costs since 1965 have pushed Medicare outlays to such high levels that efforts to control its cost are today one of the constants of American politics.

Unemployment insurance is administered by the states under federal guidelines. It is financed by federal and state taxes on employers for each of their employees. Because of strict eligibility requirements and limited funds, fewer than half of those unemployed are covered by the program, and the extent of coverage is diminishing year by year.

Does Social Insurance Work?

Social Security works beyond the wildest dreams of its founders. Though benefits do not allow people to live in a luxurious fashion, they provide an income floor for the retired and pay for costly medical services. The improvement in the living standards of the elderly is evident in the decline of the official poverty rate for them.

Despite these successes, many problems remain. For a majority of Americans, FICA and Medicare taxes now take a larger bite from their paychecks than the personal income tax. There is some reason to believe, moreover, that the overall effect of social insurance programs is regressive because it treats the well-off better than the not-so-well- off.

The main reason for this is that Social Security benefits are tied to one's lifetime earnings. Another problem is the political tension that seems to be building between the elderly who receive benefits and those who are still working and paying FICA taxes to support the programs. Finally, there is the concern that Medicare, while vastly improving the medical care of the elderly, has introduced significant distortions into the American health care system.

Public Assistance (Welfare)

Public assistance (more commonly known as welfare) accounts for only a small part of the annual federal budget but attracts more popular discontent than virtually anything else the government does. While Social Security and Medicare are politically sacrosanct and largely immune from criticism, welfare is the target of widespread criticism and the subject of numerous reform proposals. A general consensus exists that something is wrong with the way in which we organize public assistance, although no consensus exists on what ought to be done about it.

The Components of Public Assistance

Aid to Families with Dependent Children (AFDC) is the largest and least popular means-tested program. The program distributes cash benefits mainly to poor single-parent households with children. Federal, state, and local governments share control over AFDC, as well as its funding. Each state sets its own standards for need, treatment of recipient income and assets, and benefit levels. Because many Americans believe that undeserving people might be tempted to go on welfare, AFDC is surrounded by mountains of red tape.

Although AFDC grew in the 1960s and 1970s, the program has never amounted to much as a proportion of GNP or in terms of total governmental spending. Nor does it provide much assistance to poor families. In no single year since 1950 has the average annual AFDC family payment exceeded 70 percent of the official poverty line. Even when non-cash programs, such as food stamps and Medicaid, are added, welfare doesn't lift most recipient families above the poverty line.

Food stamps is a program available to all poor Americans below a certain income line. It is similar to AFDC in that food stamp benefit levels are set by the states under general federal guidelines, and states vary substantially in their generosity. The program seems to have made a significant dent in the degree of malnutrition in the United States, even though the average benefit has never exceeded 80 cents per person per meal.

Medicaid is the federal government program which provides matching funds to the states to give medical assistance to indigent citizens. Beyond certain general guidelines, states are free to determine eligibility requirements for acquiring benefits. As states try to contain Medicaid costs in the face of rising taxpayer discontent and budgetary problems, they have made access more difficult. Only about 40 percent of the nation's officially designated poor are covered by Medicaid, leaving the remainder without medical benefits or protection.

There are many other means-tested programs funded by the government. Supplemental Security Income (SSI) is a program which provides cash benefits to the elderly, blind, and disabled poor for whom social insurance programs are insufficient to elevate them above the poverty line.

Housing programs come in a number of forms, including subsidies to states and local communities to build public housing, tax incentives for developers to build in low-income areas, and supplemental rent payments to poor families to help them pay rent.

Job training was a major part of the federal anti-poverty programs during the 1960s and 1970s but was cut back to almost nothing during the 1980s. Head Start, the only widely popular means-tested social welfare program, reaches about 300,000 children per year (roughly 20 percent of those who are technically eligible) in its effort to prepare poor preschool children for entrance into public schools.

The Debate About Welfare

Those who believe in the efficiency and justice of the market and the inevitable inefficiencies and injustices of big government dislike public assistance. They argue that welfare has many ill effects on people in society. They believe that it hurts American economic performance because welfare programs are supported by taxes. They also claim that it undermines the work ethic, encourages family disintegration, and creates a permanent dependent class of people.

Many Americans agree with these characterizations of welfare and its effects. The available research, however, does not support many of them. For instance, social scientists have discovered that most welfare recipients stay on the relief rolls for only short periods of time.

Research also shows that welfare does not contribute to family breakup, illegitimacy, dependency, or a disinclination to work to a very significant extent. Nor is there much evidence that welfare programs have a significant adverse effect on American economic performance, primarily because public assistance is but a drop in the bucket of the federal budget.

Many people who want to see government do more to create an equitable society, without extremes of rich and poor, are just as critical of welfare as conservatives. These critics claim that public assistance does not diminish wealth and income inequality. According to the critics, welfare does not reach enough of the poor. Many eligible poor people do not take advantage of welfare programs. Finally, some observers believe that the real purpose of welfare is social control.

How the American Welfare State is Different

Not all social welfare states are alike. Welfare states range from low-benefit, targeted types at one end of the spectrum to high-benefit, universal types at the other end. The former are called minimal or liberal (in the free market, limited government sense of the word liberal) welfare states. The latter are called developed or social democratic welfare states.

The United States is very close to being at the minimal end of the spectrum. Compared to other welfare states, the U.S. welfare state developed relative late, it is smaller than most, and it covers fewer people than other welfare states. It also is less redistributive, and the elderly do considerably better than the young in the American welfare state.

Why the American Welfare State Is the Way It Is: Structural and Political Factors
Constitutional Rules

Federalism is one of the reasons why social welfare programs came late to the United States. Until the 1930s, it was not clear where the main responsibility for social welfare was lodged constitutionally. Federalism is also responsible for the incredible administrative complexity of our social welfare state.

Some programs are run as national programs from Washington, DC, some are jointly funded and administered by federal and state governments, and some are mainly local in nature but operate under federal guidelines.

Finally, federalism is also the cause of the great unevenness in program coverage. Rather than a system of universal and  uniform national provision in which all citizens are covered, our system takes into account the needs and interests of each of the states. The result is  great variation in benefits,  eligibility requirements, and rules among states.

Racial and Ethnic Diversity

Many argue that Europe's greater propensity toward welfare states with universal coverage is a result of the ethnic and  racial homogeneity of their societies. In homogeneous societies, the argument goes, voters are willing to support generous welfare programs, because citizens believe that recipients are similar to themselves.

Whether or not this argument is valid, it is apparent that racial and ethnic tensions influence the shape of the American welfare state. Some of the hostility toward public assistance, for example, is probably related to the fact that black Americans make up a disproportionately large share of welfare recipients (even though they remain less than a majority of all recipients).

Political Culture

Almost every aspect of the American political culture works against a generous and comprehensive welfare state. The belief in individualism is especially important. Voters who believe that people should take responsibility for their own lives are not likely to be sympathetic to welfare claims. Antigovernment themes in the culture also play a role. Finally, the American political culture supports more voluntary efforts in welfare matters than other nations do, leaving government with less to do.

Business Power

Business plays a particularly important role in American politics. Almost without exception, the business community opposes the creation of a welfare state along European lines. Business is a voice for low taxes and limited benefits, voluntary efforts over government responsibility, and profit- making welfare providers over government agencies.

Labor Weakness

In general, countries where the working class is well organized and politically powerful are countries with extensive welfare states. Those countries where the working class is not well organized and fails to exercise significant political power have minimal welfare states. The proportion of workers who join labor unions always has been low in the United States when compared with other capitalist countries and is steadily declining.

Interest Groups

Interest groups speak with a strong upper-class accent, over representing business, the well-to-do, and the professions. By and large, these groups are not among those that push for the expansion of the welfare state.

Reforming Social Welfare 

Conservative Proposals

Most conservatives know that a social welfare state of some kind is necessary in the modern world. In their eyes, a proper welfare state would provide no more than a safety net to the deserving poor. It would not intrude on the market, depend on heavy taxation, or act in a paternalistic fashion.

It would depend primarily on social insurance and would try to privatize social services. On those occasions when means- tested programs are unavoidable, recipients would be required to work or enter job training programs. Conservatives believe that the cycle of dependency must be broken and self- sufficiency must be encouraged by forcing recipients to prepare for and to enter the job market.

Liberal Proposals

Many liberals believe that the present American welfare state is fine in principle and laudable in its intentions, but needs some repair work. Their principal focus is on helping the working poor and providing national health insurance. Two-parent, poor families in which one or both parents work are almost entirely left out in the cold in our welfare system.

Liberals want to help this sizable group of Americans with Medicaid coverage, housing subsidies, earned income tax credits, and food assistance so that none of them falls through the safety net, as they now do. There is also a growing consensus among liberals that an equitable and efficient society requires universal health insurance.

Our present health-care system is highly inefficient, costing more than systems in most other industrialized nations and delivering less. There are many proposals around for universal health insurance, though the Canadian system seems to be getting the most attention because of its relatively low cost, its efficiency in delivery of health care services, and its popularity among the Canadian public.

Social Welfare and Democracy

Social Security and public assistance, the main elements of social welfare in the United States, only happened because of strong popular pressures put on political and economic leaders. The nature of the country's welfare state is also attributable to the prominent role played by business, and by interest groups representing the professions and the elderly. It seems that the catalyst for the creation of social welfare programs is provided by the struggle for democracy, while program details are worked out by those who have the resources to be significant players in the political game.

The effects of social welfare on democracy are mixed. Social insurance, especially Social Security and Medicare, have surely enhanced the health and well-being of the elderly and enabled them to become more active citizens. By reducing the level of poverty among the elderly, social insurance reduces income inequality among elderly persons and between the elderly and other groups in American society.

As such, social insurance plays a significant role in enhancing popular sovereignty and political equality in the United States. In contrast, those persons on public assistance are not so fortunate. Most important, welfare does not appear to leave much room for the development of dignity, independence, and self-confidence among recipients that is essential for democratic citizenship.