Welfare State

In recent years the debate over the future of the welfare state in the United States has come to focus on the decision whether or not to partially privatize Social Security. The publication of the 1997 report of the Advisory Council on Social Security, with its proposals to partially privatize Social Security, marked a major shift in thinking about the future of the welfare state. Proposals to partially privatize the core of the welfare state, which had long been advocated by the political right, had moved to the political mainstream. Whereas Social Security had traditionally been a defined benefit program involving substantial redistribution from high-income to low-income workers, partial privatization would reduce the extent of redistribution. This in turn would contribute to greater income inequality among elderly persons and to an increase in the proportion of elderly persons falling below the poverty line.

Whereas the emphasis in the American welfare state has to this point been on social insurance with its emphasis on shared risk and protecting old-age pensions against the effects of inflation and dramatic shifts in financial markets, the privatization alternative calls for shifting the risks (and costs) from the government to the individual and his or her family. Even a partial privatization of Social Security would represent a major shift in the direction of the American welfare state. It would represent a decision to reduce the role of the government in providing social welfare benefits, particularly its role in providing benefits to the working class and the middle class. It would represent a step in the direction of reducing the size of the American welfare state and targeting welfare-state spending on the poor.

The welfare-state contraction evident in the United States in recent years is part of a broader trend that includes most other industrial nations as well, even nations such as Sweden that have much more comprehensive welfare-state programs. Recent cutbacks in state programs for the older population in Germany, the introduction of individual accounts and the partial privatization of pensions in Sweden, and the trend toward greater emphasis on privatization in Britain all reflect the contraction of welfare-state programs that is taking place throughout the world. In most explanations of the welfare-state reform in Western states, changing economic and demographic conditions have received much attention. One fear is that population aging will lead to unacceptably high future pension and health care spending unless changes are made.

The nations of east central Europe and Latin America are developing alternative models of social provision that put greater emphasis on privatized individual accounts and reflect a trend away from traditional social insurance provision. East Asian nations have developed relatively modest welfare-state programs that implicitly assume the emphasis should be on individual and family as opposed to public provision in meeting social welfare needs.