[Congressional Record Volume 149, Number 38 (Monday, March 10, 2003)]
[Senate]
[Pages S3402-S3403]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SOCIAL SECURITY REFORM
Mr. BUNNING. Mr. President, in the upcoming days of the 108th
Congress, this legislative body may be called upon to tackle the very
important and very difficult issue of Social Security reform. As it
currently stands, the Social Security System needs strengthening for
the sake of our children and grandchildren. I recently read an article,
written by Mises Institute Scholar John Attarian, which takes us back
to December 1981, when President Ronald Reagan, alone with House
Speaker Tip O'Neill and Senate Majority Leader Howard Baker, created a
bipartisan commission to study Social Security and recommend reforms.
Alan Greenspan was picked by President Reagan to head-up this
commission. This article will provide my fellow colleagues with
insightful information regarding past experience with Social Security
reform. If we refuse to learn from our previous mistakes and mishaps,
we are doomed to travel down the same erroneous and errant path. We
can't just kick the can down the road. Raising taxes on benefits and
reducing benefits are not an option for Social Security reform.
I ask unanimous consent that the article be printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:
Another Greenspan Social Security Reform?
(By John Attarian)
On Thursday, February 27, Federal Reserve Chairman Alan
Greenspan told the Senate's Special Committee on Aging that
we should tackle Social Security sooner rather than later, so
as to avoid ``abrupt and painful'' revisions of the program
when the baby boomers start retiring. Congress should, he
said, consider things like raising the retirement age and
changing the annual benefit Cost of Living Adjustment (COLA),
before raising the payroll tax, because a payroll tax hike
discourages hiring.
``Early initiatives to address the economic effects of
baby-boom retirements could smooth the transition to a new
balance between workers and retirees. If we delay, the
adjustments could be abrupt and painful,'' Greenspan said. He
added that Congress should consider switching to a lower
inflation rate for the annual COLA, which could save billions
in benefit outlays.
Greenspan's words should set off alarm bells in well-
informed minds. Almost exactly ten years ago, a National
Commission on Social Security Reform headed by Greenspan
proposed a package of benefit cuts and tax increases, which
Congress enacted with little change, and which turned out to
be one of the most oppressive--and underhanded--things
Congress ever did to younger Americans over Social Security.
It also failed to solve Social Security's long-term problems.
background to the greenspan commission
The 1972 amendments to the Social Security Act not only
greatly increased benefits, and created the annual COLA to
increase benefits to compensate for inflation, but included
an overly generous formula for the COLA which in effect
adjusted benefits twice. This plus the inflationary
stagnation of the 1970s created Social Security's first
funding crisis. To cure it, Congress passed in December 1977,
and President Jimmy Carter signed into law, amendments which
both undid the overadjustment of benefits and mandated the
largest tax increase in American history up till them.
Supposedly this would solve the problem permanently.
It didn't. The long-term actuarial deficit fell from a
frightening -8.20 percent of taxable payroll to a still-
troubling -1.46 percent. Moreover, thanks to inflationary
recession, the short-term outlook was calamitous; in 1980,
Social Security's Board of Trustees reported a deficit of
almost $2 billion in 1979, that by 1982 at the latest, Old-
Age and Survivors Insurance (OASI) would be unable to pay
benefits on time, and that by calendar 1985 Social Security's
trust fund would be exhausted.
So in May 1981, Ronald Reagan's Secretary of Health and
Human Services, Richard Schweiker, sent Congress Reagan's
proposals for restoring Social Security's solvency.
Instead of another tax hike, Reagan proposed benefit cuts--
most importantly, cutting early retirement benefits from 80
percent of the full benefit to 55 percent, and increasing the
dollar ``bend points'' in the Average Indexed Monthly Wage
formula, which break up income into intervals upon which
benefit calculations are based), by 50 percent of the average
annual wage increase, not 100 percent.
Reagan walked into a buzz saw. Congressional Democrats,
seniors' groups, Social Security architects such as Wilbur
Cohen, unions, and others blasted him for ``breaking the
social contract,'' and he suffered his first defeat in
Congress. In December 1981, he recommended creation of a
bipartisan commission to study Social Security and recommend
reforms. Reagan picked five members, including economist
Greenspan as chairman; House Speaker Thomas ``Tip'' O'Neill
picked five; and Senate Majority Leader Howard Baker picked
five more. The Greenspan Commission quarrelled bitterly over
what to do, missing its December 1982 deadline, and did not
issue its report until January 15, 1983.
the 1983 social security rescue
It was just in time. Exhaustion of the Old-Age and
Survivors Insurance trust fund was now projected for July
1983, meaning benefit checks wouldn't go out on time. Reagan
and Congress moved fast. The Commission's proposals were
introduced on January 26; both houses of Congress passed the
final version of the rescue legislation on March 25; and
Reagan signed it into law on April 20, 1983.
Supposedly, the Greenspan Commission gave politicians a
political cover enabling them to bite the bullet on Social
Security and even do the unthinkable: cut benefits.
Supposedly, the Greenspan Commission's reforms were a
compromise between the Republicans, who wanted to cut
benefits, and the Democrats, who wanted to raise taxes
instead. Supposedly, they therefore spread the pain widely,
cutting current benefits, raising current and future taxes,
cutting future benefits, and dragging previously exempted
persons into Social Security's revenue pool.
Superficially considered, they did. Current beneficiaries
had their July 1983 COLA delayed six months, until January
1984, and all beneficiaries would have COLAs paid in January
thereafter. For the first time, Social Security benefits were
subject to taxation. Beginning in 1984, up to 50 percent of
Social Security benefits would be included in taxable income
for persons whose sum of adjusted gross income plus taxable
interest income plus one-half of Social Security benefits
exceeded $25,000 for single beneficiaries and $32,000 for
married beneficiaries.
The future tax increases mandated in 1977 were accelerated;
the payroll tax rate increase scheduled for 1985 kicked in in
1984 instead, and part of the 1990 increase went into effect
in 1988. In addition, the self-employment tax rate, which the
1977 law would have increased to 75 percent of the sum of the
employer and employee shares of the Federal Insurance
Contributions Act (FICA) tax, was raised to 100 percent of
this sum.
Many additional categories of employees were brought under
Social Security, including the President, members of
Congress, federal judges, federal employees newly hired on or
after January 1, 1984, and present and future employees of
tax-exempt nonprofit organizations. State and local
government employees, who previously were able to opt out of
Social Security, no longer could as of April 20, 1983.
The retirement age (the age at which one could qualify for
full Social Security benefits) was gradually raised, to reach
sixty-six in 2009 and sixty-seven in 2027. One could still
retire early and start collecting early retirement benefits
at age sixty-two, but the early retirement benefit would be
trimmed from 80 percent of the full benefit in 1983, to 75
percent in 2009 and 70 percent in 2027.
the 1983 rescue unmasked
But although the pain was indeed spread widely, it was
certainly not spread evenly. The distribution of sacrifice
was incredibly lopsided, falling least heavily on current
beneficiaries and most heavily on current taxpayers, future
taxpayers, and future beneficiaries. In other words, the
elderly of 1983 were spared any real hardship, and the bulk
of the burden was put on those who were young in 1983 and of
Americans yet unborn.
In the short-run period of 1983-1989, the majority of the
pain was borne by taxpayers, not current beneficiaries. Using
its intermediate actuarial assumptions, the Office of the
Actuary estimated that the amendments would raise an
additional $39.4 billion in this period from the higher FICA
tax rates, $18.5 billion from the higher self-employment tax
rate, and $21.8 billion form extending Social
[[Page S3403]]
Security coverage to those not then in the system. Total
estimated additional revenues from current and newly-created
taxpayers: $79.7 billion.
The new benefit taxation, which would affect only a
minority of the current beneficiaries--only the richest ten
percent, according to Phillip Longman's 1987 book Born to
Pay: The New Politics of Aging in America--would bring in
another $26.6 billion. The only major hit taken by all the
current beneficiaries, the delay in COLAs, would cut benefits
by $39.4 billion over this six-year period, for total current
beneficiary losses of $66.0 billion.
The inequity was even worse in the long run. In 1983,
Social Security's actuaries put the long-range actuarial
deficit at -2.09 percent of taxable payroll under
intermediate assumptions. Raising the retirement age made the
largest single contribution to eliminating this deficit,
wiping out about a third of it, 0.71 percent of taxable
payroll; and this fell entirely upon future beneficiaries.
Benefit taxation increased the long-term income rate by
0.61 percent of taxable payroll--the second-largest
contribution to erasing the deficit; it fell somewhat on the
(richest) current beneficiaries, but mostly on future ones.
These two measures accounted for 1.32 percent of taxable
payroll, or almost two-thirds of the long-term actuarial
deficit. Most of the rest was eliminated by brining new
people (who would initially participate as taxpayers) under
Social Security (0.38 percent of taxable payroll), and
accelerating the phasing-in of the 1977 tax increase and
increasing the self-employment tax rate (0.22 percent).
It turns out, then, that the allegedly broad sharing of
sacrifice was in fact engineered to injure, and provoke, the
politically powerful current beneficiaries, who with their
allies had routed the Reagan Administration in 1981, the
least, and put the lion's share of the hurt on the young,
including those not even born yet.
Moreover, when we examine how the sacrifice broke down
between benefit cuts and tax increases, we see that the
broad-based rescue was, in reality, disproportionately based
on tax increases. The measures to increase revenues--benefit
taxation, accelerated tax increases, the higher self-
employment tax rate, and augmenting the revenue base with new
participants--reduced the long-term acturial deficit by 1.21
percent of taxable payroll, or almost 58 percent of the
total.
Not only that, the Greesnpan Commission's reforms were shot
through with serpentine underhandedness. For one thing, the
graudal ramping up of the retirement age and cutting of the
early retirement benefit were scheduled so as to bite worst
in 2027, 44 years after enactment--in other words long after
the politicians who had enacted them had left Congress and
were safe from retaliation by angry baby boomers on Election
Day.
For another, the benefit taxation will hit future
generations far harder than it hit the current beneficiaries
of the 1980s, because the income thresholds which trigger the
taxation, $25,000 and $32,000, were not adjusted for
inflation (and still aren't). This means that over time,
thanks to inflation, more and more beneficiaries will hit
these tax tripwires, just as inflation shoved Americans into
higher tax brackets before income tax indexing was enacted in
1981.
Phillip Longman maintained that of all the features of the
1981 rescue, benefit taxation ``most reduces the benefits
promised to baby boomers and their children.'' While benefit
taxation hit only the richest beneficiaries when enacted,
Longman noted, even with the modest rates of inflation which
the Social Security actuaries' intermediate analysis assumed,
a $25,000 income in 2030 would have less purchasing power
than an income of $4,000 in the mid-1980s! ``So by the time
the baby boomers qualify for Social Security pensions, the
program will be effectively means tested, if it survives at
all. Under current law, i.e., including the 1983 amendments,
only the poorest baby boomers are even promised a fair return
on their contributions to the system.''
How's that for a piece of Byzantine cunning?
Yet for all its heavy burdens, which it imposed with such
inequity and insidiousness, the 1983 rescue of Social
Security turned out to be only temporarily effective. The
1983 Annual Report of Social Security's Board of Trustees
projected long-term actuarial balance for Social Security.
Just five years later, the long-term balance was in deficit
again, -0.58 percent of taxable payroll. In 1993, ten years
after the great rescue legislation, the long-term actuarial
deficit was -1.46 percent. In 1994, thanks to various changes
in actuarial assumptions, the Board of Trustees reported a
deficit of -2,13 percent--worse than the deficit which the
1983 rescue had erased. The long-term actuarial deficit
continued to grow, hitting -2.23 percent of taxable payroll
in the 1997 Annual Report.
An improved economic outlook due to the late-1990s
prosperity and productivity growth led to optimistic revision
of various economic assumptions, and the long-term actuarial
deficit began dropping as a result, to -1.87 percent of
taxable payroll in the 2002 Annual Report. Nevertheless, the
trustees continue to point out that Social Security is not in
long-term close actuarial balance and that corrective action
is necessary.
To sum up, the 1983 rescue legislation embodying the
recommendations of Greenspan's Commission substantially
injured the baby boomers and their younger siblings on the
sly--and it didn't help.
another stealth ``rescue''?
The lurking menace in Greenspan's recent remarks is that he
may be floating a trial balloon for another stealth
``rescue'' of Social Security which pushes the bulk of the
pain into the future and doesn't really accomplish much. It
is almost certain that any trimming of benefits by the
measures Greenspan advocates--raising the retirement age or
shifting to a lower inflation rate for the COLA--would
scrupulously avoid arousing the politically formidable
current elderly, who are not only organized into pressure
groups such as the American Association of Retired Persons
and the Seniors Coalition, but, as is well known, participate
in voting much more heavily than do the young.
Notice that Greenspan wants ``[e]lderly initiatives to
address the economic effects of baby-boom retirements.''
What's significant here is that he says nothing about cutting
current costs, which have exploded to extremely high levels.
Benefit outlays were $141 billion ($386 million a day) in
calendar 1981 and $268.2 billion ($735 million a day) in
calendar 1991, almost double the 1981 figure. In calendar
2001, Social Security paid $431.9 billion in benefits ($1.18
billion a day), over three times the 1981 cost.
Moreover, this mushroom growth will continue even before
the baby boomers swamp Social Security. Under intermediate
actuarial assumptions, benefit outlays are projected at
$546.7 billion ($1.5 billion a day) for calendar 2006, before
any baby boomers retire, and $746.7 billion ($2.05 billion a
day), an increase of 72.9 percent over 2001's figure, for
calendar 2011, when boomer retirements have just begun.
Then, too, just as the Greenspan Commission's 1983 benefit
taxation with trigger income levels unadjusted for inflation
is a stealth means test, tinkering with the price index for
the COLA is itself an intrinsically insidious way to cut
benefits. Rather than cut them directly, it finagles the
arithmetic on which their adjustment for inflation is based.
Finally, fiddling with the inflation rate for the COLA may
in fact not make all that much difference. Buried toward the
end of the February 28 Washington Post piece on Greenspan's
remarks was the interesting news that whereas a 1996
commission found that the Consumer Price Index overstated
inflation by 1.1 percentage points a year, another study done
in 2000 found that improvements in the index made by the
Bureau of Labor Statistics had whittled the overstatement
down to 0.6 percentage points a year, an improvement of
almost 50 percent.
Now, the Social Security actuaries have already factored in
the improvements in the Consumer Price Index. Both the
improvement in the long term actuarial deficit in recent
years and the projected explosion in outlays by 2011 already
take the more-accurate index into account. Which leads one to
wonder just how much we'd really gain by tinkering with the
CPI some more.
So while Greenspan's recent testimony seems like a
courageous and tough-minded warning about Social Security,
under close scrutiny it looks like the makings of another
serpentine but ineffectual attempt to fend off disaster.
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