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Seeking Middle Ground on Social Security Reform

Hoover Institution Press

Where We Are Today — The Setting for Reform

Perhaps at no time in the past half-century has the debate about social security been so introspective as it is now. Not since the inception of social security in 1935 and the consideration of a welfare-type alternative in 1950 has there been so much of a challenge to the role of government in providing the nation's workers with retirement benefits. The principles of people earning federal "entitlements" by working, of requiring nearly universal worker participation, of compulsorily transferring income from workers to recipients through payroll taxation, and of paying benefits that favor low-wage earners and one-earner couples have remained deeply entrenched footings of the American social security system for nearly 65 years. Surely in a political sense, as measured by public acceptance and apparent opinion, the system has worked. There have been no social security tax revolts, and a whole industry of advocates has emerged to protect the benefits that past taxpayers believe they have earned with their "contributions." When there has been serious talk of cutting federal taxes, it has rarely been about cutting social security's take — even with frequent concerns expressed about its size — and any discourse about social security benefits is more typically about how to increase rather than reduce them.

This is not to suggest that there haven't been many criticisms levied against the system. Few, however, have captured policymakers' attention and tapped public discontent the way a variety of recent reform ideas have. The clash of policy concepts — social insurance versus wealth creation — is pronounced today. Social insurance in the United States was born in the 1930s, as a system that sought to insure society as a whole against poverty in old age — by some accounts, half or more of the aged were then living in some form of "dependency." Social insurance mandates participation while people work; it also dictates coverage of as many as the political system will permit, so that as few as possible will enter their later years dependent on welfare programs and their families. It requires contributions (taxes) but is less concerned about what the individual receives in return and more about the adequacy of the benefits it affords in general, the goal being to afford people with a minimal "floor of income protection" when they come to the point where they can no longer work.

Today's ardent proponents of reform see less need for a "governmental hand" and greater opportunities for workers to individually provide for their retirement years and potential disabilities, opportunities that offer greater choice and greater rewards both to individuals and the nation as a whole. This idea evolves in part from the philosophic belief that a system in which individuals are responsible for their own financial well-being would be fairer and, thus, economically beneficial to society as a whole. Proponents contend that the nation is much different today than in the past, with a much advanced financial infrastructure and capacity to sustain a viable individually based system that would be more enduring than a governmentally based income transfer program relying on taxes that may have to rise to unprecedented levels 30 years from now.

President Clinton heightened interest in reform with his last three State of the Union messages, calling particular attention to the system's long-range funding problems. He left the issue largely unattended, but his concerns served to complement a decade of warnings by the system's board of trustees — its presumed financial watchdogs — who routinely since 1989 have forecasted long-range funding shortfalls. They also followed on the heels of warnings and promptings for action by two blue-ribbon commissions, a legislatively mandated advisory council, and a new social security advisory board, all of whom ruminated over the issues during the past six years. Numerous members of Congress too, from both parties, have introduced a wide range of substantive reform bills since the 103rd Congress.

Despite this attention and calls for change, nothing of any notable significance has been done. The most recent Congress — the 106th — opened aggressively on the issue, with H.R. being set aside for President Clinton's anticipated proposal, but it closed on a hollow chord as no meaningful action was taken. The 2000 election campaign certainly kept the issue alive, but even with a change in executive leadership this year, it is not clear that the most relevant factors that thus far have bogged down the process will dissipate. Foremost among these issues is the presence of a tight governing balance in Washington. With the party composition of Congress remaining closely divided, the political setting has not changed. In addition, in contrast to the pressures leading up to past social security reforms, the system is not projected to have any near-term problems, even under adverse assumptions. Thus, no urgency exists.

What, then, will propel policymakers to come together? The last two major reforms of the Social Security system — enacted in 1977 and 1983 — were driven by crises. In both instances, benefits would have had to be suspended or delayed within a few years or even months had Congress not acted. Admittedly, one important factor today is the passing of the 2000 election and the heightened partisanship it imposed on the legislative process. Policymakers now have a new "window of opportunity" in the first session of the 107th Congress and the first year of a new president's term of office.

However, even with this "fresh start," action will have to be swift if the midterm congressional elections of 2002 are not to get in the way. Moreover, it is quite possible that the partisanship of recent years has hardened ideological positions. Advocates of the current system, the liberal camp, like things the way they are. They recognize that there is some underlying discontent stemming from uncertainty about social security's long-range prospects, but by and large they view the system as the centerpiece of their ideological doctrine. From their perspective, they could accept the addition of a little revenue or the trimming of a few benefits (the latter only as a last resort), but not a real "fundamental" change. The "maintain benefits" theme reflected by their faction of the 1994-96 Social Security Advisory Council is the mantra. Determined reform advocates, however, are looking to create a new system, something that is more individually based, less social, and with less governmental involvement. Patterning their proposals after recent changes occurring around the world, reformers see the current U.S. system as out of date and out of touch with modern society.

Led by President Clinton, who sidestepped recommending any structural change, Democrats in the 106th Congress generally (but not exclusively) adhered to the theme that the current system should be preserved. They took the position that with some "general fund" infusions, perhaps accompanied by investment of a portion of the social security trust funds in the stock market, the government would be able to pay the system's promised benefits — that is, its future commitments as prescribed by the "entitlement" rules of current law. Republicans generally wanted to make substantive changes, but despite the introduction of many bills, fear of touching the "third rail of American politics" in a tight election year held them at bay. In the simplest terms, the two parties divided along lines of either (1) "the status quo is just fine" or (2) "it's time for something new."

Not all Democrats wanted to hold still, but these were in the minority. Certainly, Senators John Breaux, Bob Kerrey, Pat Moynihan, and Chuck Robb broke ranks from conventional party thinking with the introduction and co-sponsorship of major reform bills — bills that would have greatly reduced benefits for future recipients and substituted private savings accounts for some part of the system. Senator Breaux remains in the Senate; however, the other three have departed, and it is not clear which, if any, similar-minded Democrats will step up to take their places. From the other side of the aisle, not all Republicans wanted to replace the current system, but those wanting to move forward on the issue were held back, either by their own fear of political repercussions or the reticence of their leadership and caucus.

THE LURE OF "FREE LUNCH"

President George W. Bush and the 107th Congress do have an opportunity to forge alliances, but with no prevailing sense of urgency, the desire to hold or retain control of the Congress with a small majority (by either party) may dampen the prospects for serious action. The campaigns leading up to the 2002 congressional elections leave only a year, perhaps 15 months, to find common ground. Republicans, in particular, are acutely aware of the damage they suffered in 1981 following a failed package of social security changes proposed by the Reagan administration, which by some accounts contributed to a significant loss of Republican House seats in the 1982 elections and again in 1985 when Senate Republicans attempted to scale back cost of living adjustments (COLAs) in federal entitlement programs, including social security. The hesitancy of their leadership team in the 106th Congress to give a "nod" to any substantive measures is testimony to the caution with which they approach social security.

How then could the ideological camps and political parties be brought together next year? If one camp wants no change and the other strives for an entirely new system, where is the middle ground? At least on the surface, Democrats and Republicans appear to be starting from more deeply divided positions than in 1981, when movement toward the last set of reforms began. Moreover, although appearing to want "something" more secure than the current system, the public does not seem to be exhibiting much conviction about where it wants the system to go. Opinion polls emanate both confusion and mixed messages. Liberal leaning pollsters generate evidence that the public likes the current system and does not want benefit cuts or tax increases. Conservative pollsters emphasize apprehension about the system's inability to meet its future commitments and support for individual retirement arrangements. The young seem to want a new system they can call their own, but older segments of the workforce want to preserve the benefits, or "rights" thereto, that they have earned thus far.

Hence, the opportune political quest of late has been for a "free lunch" scenario — greater retirement security and an adequately financed social security system, all without prescribed benefit cuts or tax increases. Although not promoted as such, "free lunch" was the reform image portrayed by both parties in the 106th Congress. President Clinton called only for using the government's general revenues from looming federal budget surpluses to shore up the system. Except for suggesting that recipients be allowed to work and collect full benefits and that aged survivors be given greater protections and/or larger benefits, he suggested neither future changes in the way benefits are calculated nor any constraints on eligibility. In the year leading up to his announcement of a reform plan, he emphasized and attempted to give credence to demographic projections pointing to an eventual shrinking of the number of workers supporting each recipient. Through a series of "town meeting" forums that President Clinton sponsored in 1998, he repeatedly brought attention to the potential fiscal strains of an aging population and the impending retirement of the post-World War II baby boom generation, of which he is one. However, when the year ended and it was time to put forth changes, he folded. Although not large in scope, the two benefit reforms he offered would actually cost money and, if anything, add to the financing inadequacy reflected in the trustees' projections. There was not even a token benefit cut in his plan. Instead, he took the position that the government should pay down its privately held debt and credit the social security trust funds with savings from having done so. In sum, his solution was to adopt general fund financing of the problem, and in such a way that he would effectively credit the trust funds twice for their impact on the debt. The current law practice already would have credited the trust funds for surplus social security taxes received by the Treasury. The measure would in no way reduce the long-term costs of social security to the government, and although the "transfers" from the government's general fund might improve the public image of the social security ledgers — what its trust funds show — it would not generate additional income for the government. Nothing of value would actually be transferred because it would be a "paper" transaction between government accounts — it wouldn't provide the government with any direct means to meet the IOUs it gave to the trust funds during the earlier years of budget surpluses.

From an economic perspective, the part of the proposal calling for a reduction in the federal debt might appear preferable to consumption-directed tax cuts or new spending, but the plan would do little directly to address the structural turmoil surrounding the social security program. The Clinton administration repeatedly contended, however, that there would be long-term savings to the government from reduction or elimination of interest on the debt, savings that would make it easier for the government to eventually honor the IOUs given to the social security system. In reality, the proposal represented nothing more than current law policy, that is, in the absence of any fiscal policy changes to lower taxes or increase spending, the surplus receipts would automatically go toward retiring the outstanding debt.

The Republicans offered little more. Their congressional leadership brushed off the Clinton proposal as not being meaningful reform, but offered up nothing substantive in its place. What they couldn't ignore, however, was the president's proposition to set the social security portion of the looming budget surpluses aside until the program's problems were addressed. President Clinton had broached this idea in his State of the Union address in 1998, and it rapidly gained momentum. It was a very successful form of posturing, and he incorporated it as the underlying fiscal policy theme in his FY1999, 2000, and 2001 budget submissions to Congress. The message was powerful because for decades the idea that the government was raiding the social security trust funds had been driven home to constituents by one politician after another. Simply stated, the public had been saturated with the notion that the trust funds had been misused. As a result, the president's theme rang true.

For a while, the idea of protecting the social security surpluses took on the aura of real reform and proved to be an effective device for the administration in thwarting the use of a large portion of the next 10 or 15 years' budget surpluses for other purposes, foremost among them being Republican-favored tax cuts. Pollsters serving both sides of the aisle said that "walling off" the social security surpluses had strong appeal with the voters. Not to be outdone, Republicans in Congress responded quickly, trying to portray themselves as the stauncher protectors of the system, with numerous legislative measures to "lock up" the system's share of the looming budget surpluses. They would keep policymakers, whoever they may be, from ever again raiding those funds.

With the focus redrawn, there were no substantive leadership-backed changes brought to the floor and no initiatives to raise social security taxes or cut its future outgo, not even for the creation of Republican-favored "personal" social security retirement accounts. For a brief period in 1999, there was a flurry of interest in a plan offered by Representatives Bill Archer and Clay Shaw, the chairmen of the House Ways and Means Committee and its Subcommittee on Social Security, respectively. Although they never introduced their plan in bill form, they had hoped to rouse support for it from both ideological camps by introducing an individual account component into social security as a means of financing "guaranteed" future social security benefits. Initially anticipating the use of budget surpluses, the plan called for a governmental contribution equal to 2 percent of each worker's pay to be deposited annually by the Treasury Department into personal retirement accounts managed by private investment companies. The companies, in turn, would be required to invest the deposits in portfolios with a mandatory 60/40 investment split between equities and bonds. All covered workers would get an account with no additional contributions required of them, and the eventual annuities would be used (transferred to the social security trust funds) to finance some or all of the cost of each worker's future social security benefits. The sponsors argued that in some cases, albeit rare, workers could be better off than under current law — these being cases where the annuity payable from the account would exceed the worker's or survivor's social security benefit. In effect, the plan would fix the system without raising taxes and without cutting benefits. As with the president's plan, it envisioned no pain.

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Excerpted from Seeking Middle Ground on Social Security Reform by David Koitz. Copyright © 2001 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
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