Academic journal article Review of Social Economy

Globalization, Neoliberalism and the Attack on Social Security

Academic journal article Review of Social Economy

Globalization, Neoliberalism and the Attack on Social Security

Article excerpt


Neoliberal political movements advocate privatization of public pension systems. Globalization imposes pressure on nations to conform to neoliberal policy views with respect to the design and structure of social insurance, including public pension systems.

The paper begins with an investigation of the economic, ethical and ideological dimensions of the privatization debates in the U.S.; it argues that privatization advocates may be largely moved by ideology, since the other reasons advanced appear weak or unfounded. The second part discusses the history of Social Security, the purposes for its creation, and some of its economic effects. Differences between public and private pension systems are considered. A brief international comparison of some aspects of public pension system finance and benefit structures is presented.

The final section considers the ethical, macroeconomic and distributional implications of privatization, prefunding and payroll tax funding, and argues for a pay as you go system financed with income taxes. In order to promote equity, economic security, community, and social cohesion, public pension systems should be universal in coverage. In order to reduce the inequality, income insecurity, and aged poverty generated by market economies, public pension systems ought to be progressive: benefit/contribution ratios should be inversely proportional to income, and progressive income taxes should finance the system. To promote economic growth, the systems should be financed on a pay-as-you-go basis, and should not be prefunded except for an emergency reserve. The fiscal policy recommendations partially depend upon the theory developed by Abba Lerner in the 1940s, and recently advanced by Wynne Godley and Randy Wray: Lerner's "principle of functional finance."


We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.

(Franklin Delano Roosevelt, August 14, 1935

(statement at the Social Security Act signing ceremony)

Social Security is social insurance against the general human risk of economic adversity in old age and incapacity to earn a living by employment. Social insurance requires universal participation, in which the premiums of the fortunate pay the claims of the unfortunate.

(James Tobin in Aaron and Shoven (1999: 147)

Conservative, neoliberal, pro-capital or pro-business parties in most of the wealthy nations advocate changes in public pension systems, including at least partial privatization of pension systems and reductions in the state-guaranteed levels of benefits; many also advocate increasing reliance upon private, occupational-based pension systems. Both the World Bank (1994) and OECD (1998) bave supported these policies; Schwarz and Demirguc-Kent (1999) presents a useful summary and overview of such pattems in pension reform around the world. Within the U.S., the movement to privatize Social Security has become more powerful and popular within the past decade, as evidenced by the recent Interim Report of the President's Commission to Strengthen Social Security (July 2001).


"Privatization" in this context means some combination and degree of First, accumulating funds in excess of actuarial expected benefit obligations ("prefunding" the system rather than paying as one goes) and assuming that future benefit levels will be constrained by accumulated funds. Defined contribution pension funds offer no guarantees of the benefits the system will pay: benefits are determined by the accumulated contributions and earnings upon retirement. Although prefunding is analytically distinct from the other dimensions of privatization, since it imposes a constraint on future benefit levels it is useful to consider it as an instrumental part of the process; many privatization advocates consider the transition from a guaranteed benefit "pay-as-you-go" system to prefunding as part of the process. …

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