The backroom shenanigans that saved Social Security in 1983 — and why we can’t rely on them again.
The French people have been in the streets fighting over pensions for months now. Over a million people came out on January 19 to protest President Emmanuel Macron’s proposal to increase the full retirement age from 62 to 64. The battle reached a new milestone when the change officially became law last week. It’s set to start being implemented in September, though opponents have vowed to keep fighting.
Could France’s eruption be a portent of things to come here in the US?
As President Joe Biden and Congress barrel toward a debt ceiling showdown, the future of America’s entitlement programs has emerged as a potential subject in negotiations. And while Americans might not take to the street in such numbers or ferocity, any talk of a cut in benefits or increase in retirement age here in the US would likely be met by a chorus of protest.
It would not be the first time policymakers have had to reckon with major changes to Social Security. Forty years ago, Congress and President Ronald Reagan negotiated a suite of reforms that fixed a program on the brink of crisis — and did so partly by raising the retirement age. It was an unpopular bill at the time, but its passage, and the conditions that led to it, may hold some useful insights for our current predicament.
The 1983 reforms are a common touchstone in US debates over the program today. Some House Republicans reportedly want to pair an increase in the debt ceiling with the passage of the Bipartisan Social Security Commission Act, a bill from Reps. Tom Cole (R-OK) and Jake LaTurner (R-KS) that would create a bipartisan panel with both Senate and House members “to ensure that Social Security is fully funded for decades to come.” The commission would be “modeled after the 1983 Social Security Commission,” the authors say.
The White House has decried such a commission as a “death panel for Medicare and Social Security,” but they may ultimately have no choice but to go along with the idea as debt ceiling talks progress.
The process behind the 1983 reforms, though, was messier than this thumbnail history implies. The actual commission wasn’t the driving force behind the changes: The hard work was done by a small subgroup of five commissioners, conducting secret meetings with coordination from the Reagan White House. They were also operating under very different conditions than those today: Social Security at the time was due to run out of money in a matter of months, whereas the closest insolvency date projected today is 2032, nine years from now.
Most importantly, it was addressing a very different, much shorter-term problem. The challenge facing the US now is much harder to solve and will require much larger adjustments. The 1983 story shows how difficult it can be to even address temporary, imminently solvable problems in the federal government, and how solutions devised largely out of the public eye, without its buy-in, can come to be adopted in the process. It’s a story a bit like France’s — and if France’s experience is any indication, the eventual US reckoning over Social Security could turn rather ugly.
The inflationary origins of the 1983 reform
In the late 1970s and early 1980s, Social Security had an immediate, near-term problem that consumed policymakers’ attention: Slow economic growth and rapid inflation were undermining the program’s revenues and exploding its costs. Policymakers faced a longer-term challenge of how to keep the program afloat when the massive baby boom generation, then in its prime working years, eventually retired — but this issue took a back seat to the immediate crisis.
Due to a complicated mix of factors from loose monetary policy to the deficit-financed war in Vietnam to an OPEC oil embargo driving up fuel costs to shortages of grain, the 1970s were marked by rapid and persistent inflation. This inflation was — unusually — paired with deteriorating growth and surging unemployment. The economic slowdown meant that the total wage base on which Social Security taxes were paid was eroding.
In a fit of unfortunate timing, this was the environment in which Congress decided to first start adjusting Social Security benefits for inflation. In 1972, before the inflation problem really got going, Congress established automatic cost-of-living adjustments (COLAs), a system that still exists and increases current retirees’ checks annually based on the Consumer Price Index, one primary measure of inflation.
This initial attempt was sloppy and led to rising costs, so in 1977, Congress and President Jimmy Carter pushed through amendments that reformed the inflation adjustment and made a number of other changes meant to keep the program solvent.
The cap on earnings subject to the payroll tax — which funds Social Security — would be gradually raised over a few years from $16,500 (about $85,000 today) to $29,700 (about $150,000 today). Congress had already passed increases in the payroll tax rate that would phase in gradually, but the 1977 amendments accelerated and expanded those tax hikes.
The hope in Congress was that these changes would be enough to shore up the program for a long time. After the amendments were enacted, Social Security’s chief actuary put out a report finding that revenues would exceed costs from 1980 until at least the year 2010.
But this projection turned out to be completely wrong. The 1977 amendments were based on assumptions about growth and inflation that turned out to be way off.
In their history of the program, Sylvester Schieber and John Shoven compared the assumptions of the 1977 Social Security trustees’ report with what actually happened. Inflation turned out to be higher and wage growth much lower:
“The system’s finances,” Schieber and Shoven note, “depended on wages going up faster than prices by about 2.5 percent per year.” But they did not do that. Real wages were falling — wages were going up slower than prices, about 4.9 percentage points slower in 1980.
This was not a program that could last until 2010 unaltered.
The Reagan fumble
Enter Ronald Reagan, who had long been a skeptic, at best, of Social Security.
A Barry Goldwater supporter in 1964, he embraced Goldwater’s plan to make the program voluntary. This contributed to Reagan’s defeat in the 1976 GOP presidential primary, where President Gerald Ford used the remarks to beat back Reagan’s challenge by portraying him as too extreme to win a general election, and forced Reagan to moderate his stance somewhat.
But in 1980, Reagan did win a general election, by a landslide — and with Social Security set to be insolvent in a couple of years, he was ready to take his shot at the program.
In May 1981, he proposed a massive suite of cuts, especially for those who claimed benefits at age 62, which was the majority of recipients at that time. The reaction from the American Association of Retired People (AARP) and the labor unions was furious and it became clear the plan was dead-on-arrival in Congress. The Senate voted 96-0 to condemn attempts to “precipitously and unfairly penalize early retirees.”
“The thing that really prompted the ‘83 [reforms] was that Ronald Reagan made a big mistake, in proposing huge reductions in Social Security benefits and implementing those cuts too soon on individuals that were about to retire,” Wendell Primus, a veteran Democratic staffer who was then working for House Ways and Means chair Dan Rostenkowski (D-IL), told me. “He didn’t make many mistakes in 1981. That was a big mistake, and he had to recover.”
Once his proposed reforms were dead, Reagan needed some other way to deal with the impending shortfall in the program. So in September, Reagan announced he would outsource the task to that most common of Washington entities: a bipartisan commission. He picked former Ford administration chief economist Alan Greenspan as its chair in December. While a respected voice in Republican circles, Greenspan was hardly the household name he’d become when Reagan appointed him as Fed chair in 1987.
Under Greenspan, there would be 14 additional members, four appointed by Reagan, five by Senate Majority Leader Howard Baker (R-TN), and five by House Speaker Tip O’Neill (D-MA).
The commission within the commission
In 1982, the Commission got to work — and per member Robert Ball’s very specialized memoir, The Greenspan Commission: What Really Happened, it stalled out almost immediately.
On the left, Rep. Claude Pepper (D-FL), the octogenarian chair of the House Committee on Aging, was opposed to any benefit cuts. On the opposite side, a conservative bloc led by Sen. William Armstrong (R-CO) was holding firm against any tax increases. The commission was supposed to adjourn with a solution at the end of 1982, but begged for and received multiple extensions.
Things started moving when the talks left the formal commission and started happening behind closed doors. Ball, who had administered Social Security for over a decade and was effectively Speaker O’Neill’s proxy on the commission, held a secret meeting in December with White House aide Dick Darman.
While Reagan was strongly opposed to raising taxes, Darman told Ball, he was open to trading tax hikes in the near-term for longer-term benefit cuts.
Then, on January 3, 1983, Sen. Bob Dole (R-KS), the chair of the Senate Finance Committee and a commission member, published a well-timed op-ed in the New York Times arguing that “through a combination of relatively modest steps, including some acceleration of already scheduled taxes and some reduction in the rate of future benefit increases, the system can be saved.”
This suggested to Ball and the Democrats that congressional Republicans were less hostile to Social Security, and less bent on undermining it, than previously thought.
In short order, Ball, Dole, and Sen. Pat Moynihan (D-NY), an idiosyncratic liberal who had nonetheless been a top aide to Richard Nixon, were meeting in private, bringing in Greenspan and Rep. Barber Conable (R-NY). Jim Baker, then Reagan’s chief of staff, agreed to host the five men at his house to hammer out a proposal.
The process involved an almost comical level of subterfuge. Journalists staked out Ball’s house in Alexandria, Virginia; Ball remembers having to call Darman to get the White House to send a car to a road behind his house, sneaking out his back door, and sliding down a snowy hill to meet the car without the press noticing.
By January 15, 1983, the White House and the five-man subgroup of the commission had hammered out a plan that would make Social Security solvent through to the 1990s. They then presented it to the other members of the Commission as a fait accompli.
Mary Falvey, a banker who had written Reagan’s position paper on Social Security during the 1980 campaign and was one of the presidential appointees on the commission, recalls barely being consulted at all during this period.
“I read about [the secret negotiations] in the newspaper,” she told me, bemused. “I thought, Well, maybe it’s because I’m the youngest. Well, maybe it’s because I’m one of only two women. Why did I not even know about this? And then I started calling up the people of like minds to mine, and none of us were included.”
Falvey and other conservatives on the commission felt they’d been pointedly left out in favor of centrists who’d craft a specific kind of deal, with substantial tax increases.
Three conservatives — Sen. William Armstrong (R-CO), Rep. Bill Archer (R-TX), and former Rep. Joe Waggonner (D-LA) — ultimately voted against the plan. Falvey was inclined to do the same, but the Reagan administration prevailed upon her not to. She acquiesced on the condition that she be allowed to write a supplemental statement outlining her problems with the deal, but the degree to which she was lobbied indicated to her that the Reagan administration was completely on-board for the plan.
The fix
Ron Sachs/CNP/Getty Images
You can divide the changes in the 1983 bill that emerged from this process into three rough categories: benefit cuts, tax increases, and coverage extensions.
The last refers to efforts the law made to bring people into the Social Security system who had previously been exempt. Under the law, all new federal employees were required to pay in, whereas previously they were covered under a separate pension system and were typically not required to pay payroll taxes; nonprofits, previously allowed to opt their employees out of Social Security, would now be covered mandatorily.
Per a 2010 analysis by researchers at the National Academy of Social Insurance (NASI), the deal covered Social Security’s near-term shortfall through 44 percent revenue increases, 39 percent benefit reductions, 16 percent changes in coverage, and 1 percent changes outside these categories. This was a pretty even split.
The revenue increases came from hiking taxes on self-employed people (who previously only had to pay a reduced rate compared to the conventionally employed) and accelerating the tax hikes already in law after the 1977 act; the benefit reductions came principally from delaying cost-of-living adjustments by six months (a huge savings during an era of high inflation) and subjecting Social Security benefits to taxes for the 10 percent of recipients with the highest incomes.
Then there was the increase in the retirement age that the 1983 bill codified. In the 1980s, the baby boom generation was actually helping Social Security’s finances: They were aging into their 30s and 40s and beginning to earn more money, which helped the program on the revenue side. But in 2008, the first boomers would be eligible for Social Security and the US was projected to have fewer workers to support each retiree.
Ball notes that the liberals on the panel were somewhat skeptical a shortfall would actually develop — but the Social Security trustees disagreed. In their report, the commissioners acknowledged there would be a long-run gap, and that their proposal only closed two-thirds of it.
Rep. Jake Pickle (D-TX), a moderate Democrat and chair of the House Ways and Means subcommittee on Social Security, had a plan to fill the rest of the gap. He wanted to gradually phase in an increase in the full retirement age, from 65 to 67. People would still be able to retire early at 62, but they would bear a bigger penalty. Unlike the Reagan plan, Pickle’s would be phased in very gradually, with the last increase happening in 2022, nearly 40 years later.
Raising the retirement age, to be clear, is essentially an across-the-board benefit cut. Right now, a 62-year-old American woman can expect to live to 84. If her full retirement age moves from 65 to 67, that reduces the number of years she claims benefits from 19 to 17, an over 10 percent cut in her lifetime pension. Same goes if she retires early at 62, or late at 70: as part of increasing the full retirement age, the Pickle amendment increased the penalty for retiring at 62, and decreased the benefits to retiring at 70. The reduction in benefits is even bigger for people with lower life expectancies, who tend to be poorer.
Rep. Pepper reacted furiously to the idea of raising the retirement age, and had his own plan to schedule an increase in payroll taxes for 2015. The Pickle-Pepper debate, Ball recalls, was known as “the battle of the condiments.” The Pickle party prevailed: In a full House vote, a provision phasing in an increase in the retirement age was added. It took effect, and sure enough began phasing in for people turning 62 in the year 2000, with the phase-in ending in 2022 as scheduled.
The public was broadly against these changes. An ABC-Washington Post poll taken after the committee’s recommendations were released in January found that while a majority supported including federal workers and delaying cost-of-living adjustments, they opposed its tax increases, and in general didn’t want to cut benefits either. They disapproved, 56 to 32 percent, of Reagan’s handling of Social Security. A poll in April found that nearly two-thirds of respondents opposed the increase in the retirement age.
But Congress nonetheless passed the bill in record time — less than two months.
If you look at the effect of the 1983 law on the long-term financial balance of Social Security, the relative balance of benefit cuts and tax increases looks very different. The retirement age hike was the single most important provision from this perspective, and it meant that 70 percent of the long-term shortfall would be closed through benefit cuts, and only 10 percent through tax hikes, with the remainder from extending coverage to federal workers, per the NASI study.
What can we learn from the 1983 reforms?
When I asked Social Security experts what we can learn from the 1983 reform process, the reply wasn’t “absolutely nothing.” But it was … close to “absolutely nothing.”
No one I talked to thought the process could be applied cleanly to the vastly more polarized 2023 Congress, and Ball’s memoir is clear that he thought the notion that the Greenspan Commission was a “success” worth emulating was preposterous.
The commission itself, in his view, was a terrible failure. What worked was a small, direct negotiation between the White House and congressional leaders, behind closed doors. Attempts to replicate the commission, in his view, were “a mechanism to generate support for compromises that Democrats should feel no need or inclination to accept.”
More importantly, the challenge confronting Congress on Social Security right now looks little like either of the challenges confronting it in 1983. The inflation of recent years was the highest since the early 1980s, but it has not significantly affected the program’s finances. Inflation is not nearly as high as it was back then, and it’s lasted for less time so far.
For the past decade, the Social Security trustees have always projected that the retirement trust fund will run out of money some year between 2033 and 2035 — “it’s been very stable in that band, despite Covid, despite the inflation of last year,” Laura Haltzel, a Social Security expert and senior fellow at the Century Foundation, told me.
Meanwhile, the challenge in 1983 was temporary: As Ball wrote repeatedly in his memoir, the goal was to “get to the 1990s,” after which the program would be fine for decades as boomers continued to enter their prime working — and tax revenue-generating — years.
You can see this also by comparing the 1982 trustees’ projections for the programs to the just-released ones for 2023. Here’s how annual payroll taxes compared to projected Social Security costs for the 25-year-period from 1982 to 2006, assuming no reforms like those that were eventually enacted:
In 1984, after the old-age trust fund was exhausted, the Social Security trustees projected that tax revenues could cover 92.9 percent of costs; a 7.1 percent across-the-board cut would have closed the gap, as would a 0.42 percentage point increase in both the employee and employer share of payroll taxes. These are major policies, but not exactly earth-shattering ones.
Meanwhile, once the 1980s were done, the program would be back in full fiscal health. The scheduled 1990 tax hike, plus a declining number of beneficiaries as the smaller Silent Generation born in the 1920s and 1930s retired and the larger generation before them died out, meant that the program would spend the 1990s and 2000s with large surpluses.
“What you had was an economic problem that was going to be short-duration,” Andrew Biggs, a senior fellow at the American Enterprise Institute who worked on George W. Bush’s Social Security reform efforts, told me. “Even if they did nothing, the benefit cuts would’ve lasted six, seven years … At that point, baby boomers are really paying in and you go back into surplus again.”
This is not the situation the program faces now because this is not the demographic situation the US faces now. The surpluses shown above really did arise, and Social Security spent the 1990s and 2000s growing its trust fund using those surpluses.
But starting in 2010, the program’s expenses began exceeding its tax revenue. Since then it has relied on the trust fund to pay benefits.
The Congressional Budget Office projects the OASI fund, which funds old-age benefits, will run out of money in 2032; the Social Security trustees project this will happen in 2033. At that point, the program will only be able to pay out benefits based on the taxes it’s collecting — and it’ll be collecting about 20 percent less in taxes than it’s promising to pay out in benefits.
“The system is, in effect, projected to go off a cliff,” Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities who worked on the 1977 Social Security amendments in the Carter administration, told me. “There’s a much larger deficit in relative terms.”
This is a much worse state of affairs than that of 1983. This is not a temporary blip; the US’s low birth rates have fundamentally altered our demographic balance in a way that will make current taxes inadequate to pay promised benefits for the indefinite future.
“It’s being driven really by a drop in fertility,” Haltzel explained. “We’re just not going to have enough people working and contributing to the system in the future as we are people who are going to be benefiting from the program.”
In 1980, there were about 5.1 Americans aged 20-64 for every person 65 and older. In 2022, there were 3.3, and the ratio is projected to keep falling for the next half-century. When you have fewer workers paying in for each retiree, either those retirees’ benefits are going to have to fall or those workers’ contributions are going to increase.
The future of Social Security
Social Security has more than its share of byzantine terminology and details — trust funds, cost rates, “taxable payroll” — but at bottom it’s a very simple policy issue.
When the system is in shortfall, you can fix that by raising taxes or cutting benefits. There are occasional third options, like expanding who pays into the fund, but the 1983 reforms ate up many of those.
Biggs and other conservatives have plans to scale back benefits by making Social Security more of a flat basic income for the elderly; Haltzel and other liberals tend to argue that the benefit cut-heavy composition of the 1983 reforms means this time we should raise taxes instead.
Some in Congress, like Sen. Bernie Sanders (I-VT) and Rep. John Larson (D-CT), would lean heavily on taxing the rich, namely by subjecting some income above the current $160,200 cap to the 12.4 percent payroll tax; others prefer an across-the-board increase in the payroll tax rate, to save revenue from taxing the rich for other priorities, including those that would benefit the young and the poor.
Which of these options you favor is an inherently political question, and that’s what makes the idea that a bipartisan commission could successfully “fix” Social Security so silly. There’s no technical problem to sort through. It’s entirely a question of values: Should we raise taxes, and whose taxes, or should we cut benefits, and whose benefits?
This is arguably the central political question around which the left-right ideological divide revolves across all subjects, not just Social Security. It’s not something you can shunt to a commission. It’s something Congress and the president — and ultimately the American people — will have to decide.
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By: Dylan Matthews
Title: The bizarre true story of the last time America raised its retirement age
Sourced From: www.vox.com/policy/2023/4/21/23663654/social-security-retirement-age-1983-greenspan-ball
Published Date: Fri, 21 Apr 2023 11:00:00 +0000
