Unfiltered: Two Visions for Social Security’s Future
An Evolving Debate
Monique Morrissey
Economic Policy Institute
2016 NASI Summer Academy: “Demystifying Social Security”
Barbara Jordan Conference Center, Kaiser Family Foundation, 1330 G St NW
FDR’s Vision Realized in Midst of Great Depression
•Universal social insurance—contributory system, not welfare
• Pay-as-you-go
• Earnings replacement
• Progressive benefit formula
• Family coverage
“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” –President Roosevelt
Inherent Tensions
• Need-based vs. earned benefits
º Right: “socialist”
• Pay-as-you-go vs. advanced contributions
º Right: “Ponzi scheme”
Bipartisan Expansion in Post-WWII “Golden Age”
• Social Security Disability Insurance (1956—Eisenhower)
• Medicare (1965—Johnson)
• SSI and special minimum benefit (1972—Nixon)
Stagflation and Malaise
• Ad-hoc cost-of-living adjustments beginning in 1950s
• Automatic COLA (1972)
º Flawed formula
• Revised COLA decoupled from wage indexation (1977)
º Along with payroll tax increase, intended to provide 50-year balance
Greenspan Commission & 1983 Amendments
• “Balanced” amendments in response to imminent shortfall (despite 1977 amendments)
º 19% benefit cut
• Gradual increase in retirement age (13% across-the-board cut)
• Delayed COLA (1.4% cut)
• Taxing benefit income (5.1% avg. cut for 1960 cohort, more over time)
º Accelerated 0.8% contribution rate increase
• Frequent rate increases 1950-1990, unchanged since
Emergence of a New Conservative Model: 401(k) Plans
• First 401(k) plans introduced in 1982
º Congress did not intend to create a new retirement plan to replace pensions
• Section 401(k) clarified treatment of deferred compensation
º Spread very quickly
• More DC than DB private-sector participants as early as 1984
• More households participating in DC plans by 1992
Emergence of a New Conservative Model: Cato & Heritage Lead the Way
•Peter Ferrara: “Social Security Reform: The Family [Security] Plan” (Heritage Foundation, 1982)
•Stuart Butler & Peter Germanis: “Achieving a ‘Leninist’ Strategy” (Cato Journal , 1983)
º Divide and conquer: reassure beneficiaries and near-retirees
º Divide and conquer: exploit fact that young people have little confidence in the system
º Involve businesses that would gain from managing private accounts
º Dispel “myths” that Social Security is an insurance program financed by contributions providing an earned annuity
º Back-door privatization: embellish IRA system through incremental changes, “making it in practice a small-scale private Social Security”
Emergence of a New Conservative Model: Private Accounts and the “Ownership Society”
• 2001-2002 President Bush’s Commission to Strengthen Social Security
º Former Social Security Trustee Charles Blahous was executive director
º Former Principal Deputy Commissioner Andrew Biggs (AEI) was on staff
º Influential commission members include Democrats Robert Pozen and Olivia Mitchell
• “Ownership Society” also dubbed “YOYO” (Jared Bernstein/President Obama) or “DIY” model
Lean Times and Deficit Hysteria
• The end of 401(k) mania
º Dot-com bubble bursts (2001)
º Financial crisis and Great Recession (2007-2009)
• Pete Peterson & self-styled deficit hawks ascendant despite need for expansionary fiscal policy
• Bowles-Simpson Commission (2010)
º Saved by the Tea Party!
• President Obama includes chained CPI in 2014 Budget (2013)
Shifting the Overton Window
• Front-door privatization defeated, but back-door privatization remains a threat
º Many Democrats (and AARP) profess opposition to private accounts but appear open to benefit cuts while emphasizing need to expand retirement account savings
• Social Security Works (2010-) builds coalition to fight cuts and promote expansion
• Expansion plans start to emerge…
º Commission to Modernize Social Security (2011)
º Senator Harkin’s Rebuild America Act (2012)
º NCPSSM, NOW and IWPR (2012)
Social Security Has Stood the Test of Time
• Support from Americans across political spectrum (NASI surveys)
º Contributory and need-based
• Social insurance is efficient
º Pools risk
º Low overhead
º Markets fail when people are asked to be their own doctors or investment managers
º 401(k)s are a failed experiment and ACA has done more to restrain health costs than “skin in the game,” but privatization remains a core Republican tenet