The American Welfare State
Michael B. Katz, University of Pennsylvania
The welfare state is how a society insures against the risks inherent in human life - unemployment, poverty, sickness, and old age - that in one way or another confront everyone. The term welfare state refers to a collection of programmes designed to assure economic security to all citizens by guaranteeing the fundamental necessities of life: food, shelter, medical care, protection in childhood and old age.
In the United States, the welfare state confronts universal problems with a distinctive architecture - much broader and more complex than is usually realised. It is not usefully described as either public or private. Instead, its economy is mixed, and its composition reflects American federalism - the division of powers between the federal government and the states. The American welfare state consists of two main divisions, with subdivisions in each. Each of the subdivisions is rooted in a different location in American history and, to some extent, has followed its own trajectory over time.
The first division is the public welfare state. Its subdivisions are public assistance, social insurance and taxation. Public assistance, the oldest form of 'welfare', consists of means-tested programmes. Its origins lie in the Elizabethan poor laws, which the colonists brought with them in the 17th century. Embodied in 'outdoor relief', aid given to people in their homes rather than in an institution, public assistance has a long and controversial history. Although subject to state law, public assistance, with a few exceptions, was administered locally, usually by counties. In the early 20th century, state governments introduced a new form of public assistance, mothers' pensions, small amounts of money given to a limited number of worthy widows. During the Great Depression of the 1930s, the federal government for the first time introduced two public assistance programmes paid for with matching state-federal funds. They were Old Age Assistance, by far the largest until it was eliminated by the growth of Social Security (discussed below) and Aid to Dependent Children, a federalisation of state mothers' pensions, which became Aid to Families with Dependent Children (AFDC), or what most Americans referred to as 'welfare'. In 1974, Congress bundled public assistance for the indigent elderly, blind, and disabled, into a new programme, Supplemental Security Income. Then, in 1996, Temporary Aid to Needy Families (TANF) replaced AFDC. With TANF, the federal government eliminated the partial entitlement to public assistance, added work requirements, and time-limited benefits. As a result, the size of the welfare rolls - but not the prevalence of poverty - went down.
Social insurance, whose origins lie in 19th-century Europe, is the second subdivision in the American welfare state. Social insurance programmes are not means tested. They provide benefits to everyone who meets certain fixed criteria, such as being 65 years of age. They are based on a rough insurance analogy because potential beneficiaries pay premiums in advance. They have been either state or federal-state programmes. Always much more generous than public assistance, their benefits increased at a more rapid rate over time. The result is that the gap between them and public assistance has progressively widened. The first form of social insurance in the United States was workers' compensation, introduced by most states in the early 20th century. Few states developed old age or unemployment insurance. Federal social insurance emerged in a burst with the Social Security Act of 1935, which introduced a complicated federal-state programme of unemployment insurance and a federal programme of old age insurance known as Social Security. At first these programmes were very restrictive. Social Security excluded agricultural and domestic workers and did not pay benefits, which initially were very low, until 1940. For many years both social insurance and unemployment insurance discriminated against African Americans and women. Although expansions of coverage have greatly improved the situation, in important ways race and gender still stratify both public and private welfare state benefits. Nonetheless, Social Security has been the most effective federal public social programme in American history.
Over time, Social Security's coverage expanded, benefit levels increased, disability benefits were added, and, in the 1970s, benefits were pegged to inflation. In the burst of social spending during the Great Society years from the mid-1960s through the early 1970s, Congress passed a major extension to social insurance: Medicare, health insurance for elderly, along with Medicaid, a medical public assistance programme for the poor. Largely as a result of Social Security's benefits, the elderly, who, as late as 1960, had a poverty rate three times that of any other age group, by the late 1970s were less likely to be poor than any other Americans while Medicare and Medicaid transformed access to medical care for the elderly and poor.
The third division of the public welfare state is taxation. Low-income people receive benefits indirectly through tax credits given to businesses and real estate developers to create jobs and housing. But the most important programme is the Earned Income Tax Credit. Started in 1975, the EITC was expanded greatly under President Bill Clinton in the 1990s. It supplements the income of workers whose earnings fall below a predetermined level. The EITC costs more than AFDC ever did or than TANF does now. It has been effective in boosting people from slightly below the poverty line to just above it.
The private welfare state has two main subdivisions. The first of these consists of charities and social services, which have a long and varied history. Some are very old, stretching far back in American history; others are much newer. Indeed, social services expanded as a result of federal legislation in the 1960s. American governments operate relatively few services themselves. Instead, they run social services by funding private agencies. Contrary to American myths, this private welfare state never has been adequate to relieve the needs of individuals and families without adequate health care, income or housing. In the last few decades, the character of nominally private agencies and social services changed because they began to receive a large share of their budgets from federal, state and local governments. Without government funds, most would close their doors. In effect, they have become government contractors.
The second subdivision in the private welfare state consists of employee benefits. More than six out of ten Americans receive health insurance through their employers. Many receive retirement pensions as well. Although a few businesses and governments provided pensions before the Second World War, employee benefits developed into mass programmes only in the 1940s and 1950s. Fought for by trade unions, they received government sanction from the National Labor Relations Board in 1949. As a result, employers were required to bargain over (though not to provide) employee benefits. Employee benefits fit within the framework of the welfare state because they have been encouraged by the federal government, which allows employers to deduct their cost from taxes, and are regulated by federal legislation. Without them, the public welfare state would have assumed a very different form. In recent decades, the percentage of workers covered by health insurance and retirement benefits has decreased. They pay much more for their health care than in the past and receive it through some variant of managed care. In the private sector, most pensions now require defined contributions, which leave future benefits to the vagaries of individual investment decisions and the market, rather than as in the past offering defined benefits, which guaranteed the income employees were to receive in retirement.
With these employee benefits added to its economy, the US appears less of an international welfare laggard than in most comparisons. When nations are arrayed in a hierarchy according to public social spending, the US and Japan are at the bottom, widely separated from the top. However, when private social welfare is added, the rank order remains the same but the distance is greatly reduced. Adding in benefits distributed through the tax code would shrink it even more. What is unique about the US welfare state is the distinctive way in which it delivers its benefits.
In the 1980s public social policy coalesced around three great objectives that began to redefine the American welfare state. The first objective was the war to end dependence - not only the dependence of young unmarried mothers on welfare, but all forms of dependence on public and private support and on the paternalism of employers. The second objective was to devolve authority, that is, to transfer power from the federal government to the states, from states to counties, and from the public to the private sector. The third was the application of market models to social policy. Everywhere, the market triumphed as the template for a redesigned welfare state. The market was used loosely and often unreflectively as the organisational model toward which public programmes should aspire. That meant an emphasis on competition, privatisation, and a reliance on supply and demand to determine policies and priorities. Examples are the replacement of AFDC with TANF and the shift to managed health care and defined contribution pensions; other examples are found everywhere throughout the public and private welfare states.
None of the forces redefining the welfare state originated in the 1980s, but in those years they burst through older tendencies in public policy and joined to form a powerful and largely bipartisan tide that pushed back most public and private benefits. As a result, with only a few exceptions, political arguments about the welfare state now revolve more around details than great principles. An exception was the battle over the future of Medicare and Social Security which escalated during the administration of President George W. Bush. Conservatives wanted to move both programmes toward privatisation, which would fundamentally change the model on which they were built, but massive public opposition prevented Bush's plans for Social Security from reaching the floor of Congress, although with Medicare, Bush had partial success. On 8 December 2003, he signed the controversial Medicare Modernization Act, which introduced a prescription drug benefit known as Medicare Part D.
By 2007, 'living wage' ordinances had passed in many cities; elections in several states showed strong support for an increased minimum wage; the lack of universal and affordable health insurance had become the number one domestic issue; and the presidential campaign of John Edwards had focused national attention on poverty for the first time in decades. These developments held out hope for improving the economic security of the working poor and the accessibility of health care for the non-elderly. But the prospects for a reversal of the trends that had redefined and attenuated the nation's welfare state remained dim.
For more information on the history and architecture of the American welfare state, see the author's books, In the Shadow of the Poorhouse: A Social History of Welfare in America (10th anniversary edition, 1996); The Price of Citizenship: Redefining the American Welfare State (expanded edition, 2008); and, with M. J. Stern, One Nation Divisible: What America Was and What It Is Becoming (2006).