August 29, 2007
By Stuart M. Butler, Ph.D.
Delivered July 26, 2007
While the term "social contract" has not been widely used
in America, the idea of some mutual obligation between society and
the individuals that comprise it is deep-seated in the American
view of society. It is true that America, more than almost any
other country, is based on the idea that individuals should have
the freedom to pursue their individual goals and use their talents
for advancement. Nonetheless, the idea of America also is one of a
society that involves both membership rights and obligations for
This American version of the European idea of social contract
envisions reciprocal obligations.
In the 1930s, the civil society-based social contract was
supplemented significantly with a financial commitment by the
federal government in the form of Social Security, a social
insurance program that linked financial obligations in the form of
payroll taxes to a set of financial benefits paid primarily during
retirement. In the 1960s, of course, this financial social
insurance system was again supplemented with Medicare.
Undermining the Social Contract
Concern about the nature and operation of today's social contract
has grown in recent decades. This is because three broad
developments began to conflict with the traditional American notion
of a social contract.
First, we temporarily abandoned the two-way nature of
mutual obligation in the case of our most basic anti-poverty
programs. In the 1950s and 1960s, the notion of "welfare rights"
took hold, including the notion that financial assistance to the
poor should be a one-way obligation. We saw the results of that in
growing welfare rolls, long-term dependence on poverty programs,
and perverse incentives that exacerbated family collapse and
intergenerational poverty. Fortunately, the work requirements and
limits on the duration of welfare that were put into law in 1996
helped us to begin to put the welfare system back on track.
Second, the growing sense that employers should play a
central role in providing protection against ill health and
retirement costs-a sense encouraged by tax laws and regulations-has
led to employer decisions becoming an increasingly critical element
of the social contract. However, it has become clear that employers
do not have the same "community of interest" with their
employees that other civil society institutions have with
Owners and employees do not typically have a shared interest and
vision of the sort found, for example, among the members of a
church or union. Moreover, there is not the same long-term
connection between the place of employment and a family that
occurs between an individual and other institutions. Thus, it
has become clear that, as a proxy for the wider society and its
obligations, employers are a less appropriate partner to the
We see the results of this today in our increasing concern about
employment-based health coverage. We worry that critical decisions
over choice of plan and availability of care are not in the hands
of families and that employer decisions do not necessarily
reflect the interests of those families.
We have experienced similar worries for many years about the
pensions system. Although the financial security of worker pensions
is entwined with the financial condition of the employer, the
financial interest of the company often conflicts with the
financial security of the worker. When a firm gets into trouble,
not only are the jobs of workers jeopardized, but their
long-term financial security is at risk. One needs only to
think of the Enron collapse to appreciate why putting all of one's
eggs in the employer basket has been such a folly.
Third, we have begun to see the internal
weaknesses and perverse incentives in the American form of
social insurance. As pay-as-you-go social insurance systems mature
in every country, they face a classic problem as the society ages:
The outlays needed to pay for the promised benefits force the
system into structural imbalance and huge unfunded obligations.
In America, this trend has been exacerbated by our political
system, in which interest-group pressures have led to a
widening disconnect between the revenue base for the programs and
the increasingly generous benefits promised by Congress. Worse
still, programs like Social Security and, in particular, Medicare
have steadily come to be viewed as a system of generous benefits to
the middle and upper-income classes rather than as a basic
system of protection against uncertainty and need.
For these reasons, our social insurance programs have slowly
created a massive and immoral shift of wealth and obligation from
today's middle class to future generations. Medicare alone now has
a $32 trillion unfunded obligation-a tab that is being passed to
our children and grandchildren. Medicare and Social Security
together now constitute an unsecured "mortgage" of $170,000 placed
in the crib of every newborn American.
Needed: A Return to First Principles
If we are to restore the American idea of the social contract, we
need to return to the basic principles of mutual obligation
within a framework that is financially responsible and just. This
will involve at least four steps.
First, we must gradually transform our existing social
insurance programs into "true insurance." This means that we should
begin to restrict the availability of benefits in Social Security
and Medicare to those who really need assistance while
strengthening the benefits for those who find the existing
assistance to be insufficient.
This step would return these programs to the basic principles of
the American idea of the social contract, in which we all
contribute as members of society to the protection of ourselves as
individuals through social programs and the assistance is
limited to what is needed to enable a person to return to
independence. Today, Social Security and Medicare violate that
Second, we need to decide as a nation how much of our
resources we are willing to contribute to such programs, given
America's economic resources and the other goals of our society.
Today we do not do that. Major entitlement programs, such as
Medicare and Social Security, are open-ended, one-way
commitments in which an individual can legally claim benefits.
They will be paid by society whether or not the individual needs
them and without regard to the financial burden on future
generations. These entitlements automatically preempt
resources for other needs, such as education or defense.
We need instead a budget process that encourages lawmakers
to set priorities and make rational decisions between competing
priorities. To do that, we would have to make a number of changes
in the laws governing the budget process. For example, Members of
Congress today vote on a budget without being forced to
consider any information about the long-term unfunded obligations
that may occur as a result of their decisions and without having to
vote explicitly on raising those obligations. That needs to be
changed, with Members of Congress forced to vote up or down to
authorize any increase in total unfunded obligations.
More broadly, we need to end the special status of entitlement
programs that allows them to preempt all other needs,
replacing open-ended obligations with fixed budgets. To be
sure, it is appropriate to establish long-term budgets for
programs designed to protect individuals, just as many other
industrialized countries do, but these budgets must be real and
limited and established in the context of other goals. And if
spending begins to exceed the budget, then the budget will be
adjusted-in competition with other regular budget goals-as benefits
must be curbed and refocused.
Third, we need to stimulate greater individual
responsibility by encouraging more private savings and insurance
among middle- and upper-income individuals. For the most part,
these individuals should not be relying on social programs except
for unpredictable circumstances so severe that we would not
ordinarily expect an individual to have saved or insured
Fourth, it is time to envision a different role for
employers. A strong and effective social contract requires the
society or subgroup of society within which the mutual obligation
rests to have a common interest as the basis of mutual support. But
the place of employment typically does not exhibit these
characteristics, so we should empower individuals and families
to link the security and provision of health and financial
protections to the civil society institutions with which they
identify most closely.
Individuals and families typically turn to trusted agents to
guide them in making complicated and important decisions. They
choose realtors to help them buy a house, a broker to manage their
investments, or a college counselor to help them pick a
college for their child. In each case, individuals need to be able
to pick the agent with whom they feel most comfortable in
entrusting these decisions.
Employers, however, increasingly are not ideal agents, given the
often clashing interests of employer and employee. They are not a
subset of the wider society that can be a good partner in the
On the other hand, the place of employment is a very practical
location for the financial transactions associated with health
insurance, retirement savings, and other elements of the
financial social contract. Payroll deductions, savings plans,
and premium payments can be accomplished very easily at the place
of work. So a distinction should be made in the future between the
employer's role as a clearinghouse or facilitator for transactions
in the social contract and the employer's role as the
decision-maker or sponsor.
In the future, therefore, it would make sense to retain some of
these practical features associated with the employer while
enabling the individual or family to choose other civil society
institutions as the vehicle for mutual obligation. For instance, a
family might obtain its health insurance through a group formed by
a consortium of churches, which includes the family's own place of
worship, or through the union the family has been a member of for
But to enable this to happen, we must remove the barriers that
stand in its way. In the case of health insurance, the tax code is
the biggest culprit and requires structural reform to enable
families to choose other agents and enroll in
non-employment-based insurance and savings plans without
today's tax penalties. It is important, in other words, to change
the tax code to make it neutral between different civil society
institutions, including employers, as options for individuals and
families to coalesce in obtaining mutual support.
These four steps are among the important actions needed to restore
the American social contract to its original principles as a
bargain between society and the individual. Refashioned in this
way, our American-style social contract would be based more solidly
on institutions that individuals value as integral parts of their
lives, with the government dimension appropriately limited,
sustainable, and more just to future generations.
Stuart M. Butler,
Ph.D., is Vice President for Domestic and Economic Policy
Studies at The Heritage Foundation. This Lecture is based
on remarks delivered at a panel discussion on "A New Social
Contract" hosted by the Hamilton Project and Democracy: A
Journal of Ideas and held at the Johns Hopkins University
School of Advanced International Studies in Washington,
Returning to the principles of mutual obligation within afinancially responsible framework will restore the American socialcontract to its original principles as a bargain between societyand the individual, based more solidly on institutions thatindividuals value as integral parts of their lives, with thegovernment dimension appropriately limited and sustainable, andmore just to future generations.
Stuart M. Butler, Ph.D.
Distinguished Fellow and Director, Center for Policy Innovation
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