Fixing Social Security

Academy Member R. Douglas Arnold’s new book, Fixing Social Security: The Politics of Reform in a Polarized Age (Princeton University Press, 2022) is both timely and troubling.

It is timely considering the Academy’s planned summer 2022 project on Social Security communications funded by The Buffin Foundation through its Merton Bernstein Internship Program.

It is troubling in that Arnold concludes that it is unlikely that Congress will take action on Social Security until we reach the verge of a crisis, when the Old Age, Survivor, and Disability Insurance (OASDI) Trust Funds approach depletion, which is currently projected to occur in 2034.

Two early chapters focus on the history of Social Security from its enactment in 1935 to the last major piece of legislation in 1983.

Starting in 1981, as a benefit consultant with Buck Consultants, one of the nation’s oldest actuarial consulting firms, I was responsible for drafting the firm’s publications on Social Security and Medicare, aimed primarily at Buck’s client base of employers. The question typically posed was: what is the employer’s stake in these programs – both as a co-funder and as a steward of income and health security for its employees and retirees? One of my assignments was to observe every public meeting of the Greenspan Commission that led to the Social Security Amendments of 1983. In this role, I came to the attention of Mert Bernstein, who later invited me to meet with Robert Ball, Robert Myers, Wilbur Cohen, Elizabeth Wickenden, and other Social Security luminaries to launch our Academy.

Arnold notes in the book’s acknowledgements his service on the Academy’s Study Panel on Social Security Privatization from 1996-1998. He provides invaluable insights into Social Security’s legislative, political, and intergenerational evolution.

• At the core of this historical record is Arnold’s pointed distinction of 1983 as the turning point. Before that, reforms to Social Security were a bipartisan exercise, fulfilling the assumption that this wildly popular program would be supported in perpetuity. Social Security became a “central issue on legislative agendas in 1935, 1939, 1950, 1972, 1977, and 1983 – the major turning points in the program’s history.” (p. 15) For half of Social Security’s history, “roll call voting was a breeze for legislators because they were repeatedly conferring new benefits on their constituents.” (p. 16) “Legislators increased Social Security benefits eleven times between 1950 and 1974.” (p. 30) “Expansion was a bipartisan affair, with Republican and Democratic legislators equally supportive. Indeed, some of the largest benefit increases happened under divided government, as Republican presidents and Democratic Congresses competed to claim credit for their generosity.” (p. 30)
• “When they enacted the Social Security Amendments of 1977, legislators thought they had fixed Social Security for many decades. In fact, the fix lasted three years.” (p. 34)

This period is also marked by bipartisan support for retaining the core structure of the program. For example, “Although President Carter recommended using general revenues to shore up Social Security during recessions, and recommended applying this change retroactively to 1975, legislators rejected his proposal…Carter also recommended making the employer’s share of the payroll tax larger than the worker’s share. Congress rejected this proposal too, retaining parity between workers and their employers.” (p. 33)

The past forty years, however, look very different. While public support remains strong and deep, Congressional action belies that reality.  As Arnold notes, “Legislators have not voted on a single Social Security plan since 1983.” (p. 1) And since only a handful of today’s Members of Congress were in office when major changes were made, most House and Senate Members in office today have never deliberated and voted on such legislation. This gap contributes to a vicious cycle: “Today’s Congress is bereft of legislators with experience bargaining about Social Security. Freed of the need to hammer out compromises about taxes and benefits, today’s legislators stake out increasingly extreme positions.” (p. 13)

The past forty years also represent important shifts in other respects. For example, the Trust Funds were historically a small buffer, never totaling more than a few months of benefits, much like a rainy-day fund. But the 1983 Amendments “created a much larger reserve, both by moderating the growth of benefits and by increasing the growth of revenues.” (p. 3)

• The 1983 Amendments “reflected the fact that strictly pay-as-you-go systems are ill suited to handle demographic booms and busts. The solution was to move toward a modified pay-as-you go system, where some revenues would be salted away to support the retirement of unusually large cohorts.” (p. 3)
• The 1983 Amendments also represented a “stark departure for Congress. Legislators had spent decades expanding Social Security, never once cutting benefits…Finally, benefit reductions took the lead. Net benefit cuts closed 70 percent of the 75-year actuarial shortfall.” (p. 37) While “short-term benefit cuts were roughly equal to short-term tax increases…(o)nly in the long term did beneficiaries bear most costs.” (p. 39)
• Policy changes have “two fundamentally different routes…incremental solutions…and reinventing” the program (p. 6). So-called privatization proposals are examples of the latter approach that favors structural changes.

From a political perspective:

• “Part of the debate about Social Security concerns whether individual responsibility or social insurance offers a better foundation for a public retirement system…The social insurance model suggests that government should play a major role in preparing individuals for retirement…Although Social Security rests firmly on the social insurance model, the strong relationship between years worked and benefits received underscores the importance of individual responsibility.” (p. 62)
• The approach of the1983 Amendments, in which “no group escaped cuts, not even current retirees…(made) elected officials …think of Social Security as the ‘third rail of American politics.’…In short, the politics of Social Security was no longer delightful. It was perilous.” (p. 41)
• Forty-three polls conducted between 1961 and 2018, including the Academy’s two surveys of the U.S. population in 2014 and 2016, show that Social Security remains popular among virtually all groups. The “secret of Social Security’s survival is that it is self-supporting. Once workers contribute to the system throughout their working lives, they expect the program to deliver all promised benefits.” (p. 22) Indeed, “people today are less polarized on Social Security than they were decades ago.” (p. 114) “(T)he notion that the politics of Social Security is fundamentally a zero-sum conflict between makers and takers, workers and retirees, the young and the old, enjoys little empirical support.” (p. 121)
• The principal reason for “fixing Social Security soon is to spread the costs of reform more widely.” Furthermore, once the Trust Funds are empty, “gradualism is not an option.” (p. 12) “Delay has been legislators’ collective choice for more than a quarter century.” (p. 13)
• “When partisan elites polarize, the mass public often follows.” (p. 13) Yet, Social Security legislation is “necessarily a bipartisan affair, requiring the support of a House majority, a Senate supermajority, and the president.” (p. 14)
• Social Security has faced the need for “political equilibrium. Was the program designed so that elected officials would preserve its basic structure? Or were there incentives for legislators to unravel the program’s core features?” (p. 27)

From an intergenerational perspective:

• The enlarged Trust Funds “enhanced intergenerational equity by making boomers part of the solution to their own demographic bulge.” (p. 43)
• “Most workers have parents or grandparents who are already collecting benefits. Moreover, today’s workers are tomorrow’s beneficiaries.” (p. 168)

Arnold also dissects fundamental factors affecting Social Security’s future sustainability, including: mortality, fertility, employment, wage growth, inflation, and immigration. He emphasizes that we are now in a period of time in which annual program revenues will be less than annual benefits, with Trust Fund redemptions covering the shortfall. He adds that Social Security is “one of the most predictable spending programs in the federal budget.” (p.11)

He notes that “the appropriate benchmark for comparison (of the costs of reform proposals) is the nation’s gross domestic product (GDP)… the total pot available for public and private spending.” While current payments to Social Security beneficiaries constitute 5 percent of GDP, the program’s share of GDP is projected to increase to 5.9 percent in 2034. If Congress were to raise revenues to fund all promised benefits, an additional 1.2 percent of GDP annually would be the result. (p. 9)

Arnold’s concluding chapter examines what citizens, interest group leaders, and journalists can do “to fix Social Security now rather than waiting until insolvency nears” (p. 252)

We need to take his advice and begin acting sooner rather than later.