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Social Security
Plus
A two part plan to
restore Social Security to long-term balance.
[copy will be posted shortly]
Links to
other articles and reviews
Here is the link for the Century Foundation article. www.tcf.org/Publications/RetirementSecurity/ballplan.pdf
Mark Leff in the Journal of American
History: (You will have
to log in at the history cooperative site to read the complete
review.)
www.historycooperative.org/cgi-bin/justtop.cgi?act=justtop&url=http://www.historycooperative.org/journals/jah/92.1/br_124.html
Mel Dubofsky in the American Historical
Review : (You will have
to log in at the history cooperative site to read the complete
review.)
www.historycooperative.org/cgi-bin/justtop.cgi?act=justtop&url=http://www.historycooperative.org/journals/ahr/110.3/br_79.html
Brian Balogh in the Political Science
Quarterly: (You will see a permissions paragraph, and then
part of another review, just scroll down to reach the review
of Robert Ball and the Politics of Social
Security.)
www.psqonline.org/cgi-bin/99_article.cgi?byear=2005&bmonth=spring&a=br29free&format=view
Rosemary Stevens in the Bulletin of
the History of Medicine. The site is www.press.jhu.edu/journals/bulletin_of_the_history_of_medicine/index.html
More about
Robert Ball
The history web site of the Social Security
Administration contains a wealth of information about Robert
Ball, including a lengthy oral interview of Robert Ball conducted
by SSA historian Larry DeWitt. http://www.ssa.gov/history/bobball.html
(if our link doesn't
work, paste into your url window directly.)
Robert Ball was closely associated with
three key amendments to the Social Security. The 1950 legislation
expanded coverage and raised benefit levels, bringing Social
Security to parity with welfare and establishing it as America's
largest and most popular social welfare program. The 1972 amendments
featured a twenty percent increase in benefit levels and the
beginnings of benefits indexed to the rate of inflation. Ball
also played a key role in the 1983 rescue legislation.
For more information:
1950 Amendments: www.ssa.gov/history/1950amend.html
1972 Amendments: www.ssa.gov/history/1972amend.html
1983 Amendments: www.ssa.gov/history/1983amend2.html
The Current
Debate
The Bush White House position: www.whitehouse.gov/infocus/social-security/
President Bush's 2001 report on Social
Security: www.ssa.gov/history/reports/pcsss/reports.html
The National Academy of Social Insurance,
which Robert Ball helped to found, monitors and reports on the
debate from a nonpartisan perspective: www.nasi.org/
The Center on Budget & Policy Priorities
has tended to oppose the President's social security initiatives::
http://www.cbpp.org/pubs/socsec.htm (if our link doesn't work, paste into
your url window directly.)
Good information related to the financial
status of Social Security can be found at the following places:
www.ssa.gov/history/trustchart.html
http://www.ssa.gov/history/tftable.html
The Four
Historical Misunderstandings About Social Security
By Edward Berkowitz
Mr. Berkowitz is a professor
of history and public policy and public administration at George
Washington University. A paperback edition of his book, Robert Ball and the Politics of Social
Security, was published this
summer, 2005, by the University of Wisconsin Press. This article
was delivered as a talk to members of Congress in mid-May, 2005.
It was one of a number of talks being sponsored by the American
Historical Association as part of the National History Center's
Congressional Breakfast Seminar Series.
"Everyone concedes that Social Security
is important. Senator Robert Dole once said that it overwhelmed
all domestic priorities.
It is important in part because it is so large. It started from
scratch in 1935 and grew to be a program that collected money
from 154 million people and paid more than $470 billion to 47
million people in 2003.
And it is important because it comes bundled with so many features.
It is a program for people of all ages because it includes survivors
benefits, which started in 1939, disability benefits, which started
in 1956, and it is closely tied to Medicare which started in
1965. And it has built-in protection against inflation, since
benefit levels rise with the CPI. It is also an important anti-poverty
program, because of these features and also because it has a
benefit formula that is tilted in favor of lower-income workers.
For such a large, diverse, and apparently popular program, it
has been the subject of a number of historical misunderstandings.
Historical Misunderstandings
In the first place, the program was not always large, popular,
or the third rail of politics.
When it was created in 1935, it was not particularly popular.
That is because it covered only industrial and commercial workers
on regular payrolls or about half of the labor force. So if you
were a congressman from rural Texas in a district with farmers
and a few businessmen who owned their own fertilizer or tractor
stores, then essentially no one in your district was paying into
Social Security or expecting to receive benefits.
If you were a congressmen from Chicago, most of the people in
your district were likely to participate in Social Security.
But they faced a hard road. They were expected to pay Social
Security taxes beginning in January 1937 but not to receive Social
Security benefits until 1942. That meant five years of paying
in without getting anything back at a time when no one had ever
gotten anything back from the program, except for lump sum death
benefits.
And it meant that money was being taken out of circulation in
the midst of a deflationary depression to pay for Social Security
taxes, helping to create the so-called Roosevelt recession in
1937.
It is not surprising then that many congressmen, Republicans
and Democrats, wanted to vote against Social Security in 1935.
But they didn't for two reasons. One was that Social Security
was a priority item for the Roosevelt administration in 1935
and FDR was very popular and still in his first term. The other
was that the bill was actually an omnibus bill that came bundled
with many items, other than old-age insurance. Most of these
items were federal grants that would bring money into many congressional
districts. Hence, congressmen voted for the bill in order to
get those other benefits.
Between 1935 and 1950, old age assistance—welfare payments
to the elderly who could prove they were poor that were administered
by the states with federal matching grants—reached more
people and paid higher benefits than did Social Security. Congress
rescinded Social Security tax increases in the forties and actually
decreased the range of covered occupations.
In the second place, Social Security has not been antithetical
to the development of private accounts.
In 1935 an issue arose in which Senator Clark of Missouri proposed
that employers who already offered pensions to their employees
which were as good as or better than Social Security could opt
out of the program. His amendment passed the Senate but was removed
in conference after a great deal of discussion. So unlike workers
compensation an employer could not self-insure for Social Security.
But, contrary to what you might expect, private accounts actually
grew after the passage of Social Security. The program provided
a base for private pensions on which companies could build. Social
Security made people security conscious. The passage of survivors
benefits did not thwart but rather aided the life insurance business.
When large pension programs started in the automobile, steel
and other industries at the end of the forties, that actually
provided the impetus for the expansion of Social Security in
1950 that, for the first time, brought the program to parity
with welfare. And, of course, health insurance became a largely
private endeavor, despite the Social Security Act and even Medicare
created a market for what were called Medi-gap policies.
In the third place, the issue of Social Security surpluses has
come up before in the history of Social Security.
At first, large surpluses arose in the Social Security accounts
because many people were paying and almost no one was receiving
benefits. Such surpluses have always been controversial, because
people wonder about where their money is going. If it is spent
on current items, how can it later be used to pay Social Security
benefits? As journalist Mark Sullivan wrote, money collected
in Social Security taxes "may be spent for any legal purpose
under the sun and in practice they are now being used to help
the Government's current bills." He wrote in the 1930s but
could as easily be writing today.
Members of Congress reacted to large Social Security surpluses
by spending them and by reducing tax rates. They spent it through
starting regular benefits early and by providing family and survivors
benefits. They reduced taxes by not allowing the tax increases
scheduled in the law to go into effect.
Eventually, surpluses were reduced and something like a reasonable
contingency reserve was established. This system operated between
1950 and 1972, the years in which Social Security enjoyed the
most success. Something called the level wage hypothesis provided
the dynamic for benefit increases in 1952, 1954, 1958, 1965,
and 1967. The official predictions would call for wages to remain
level. When in fact they rose, that provided an unexpected surplus
that Congress could spend on raising benefit levels without raising
taxes.
In the fourth place, Social Security has faced previous crises
and surmounted them.
The first crisis was the battle with welfare that threatened
to make Social Security irrelevant. Solved in 1950 with coverage
extension and benefit increases.
The second crisis was that the growth of the economy in the fifties
and sixties threatened to make Social Security benefits fall
far below the standard of living. Solved in 1972 by changing
the actuarial assumptions and indexing Social Security to the
rate of inflation.
The third crisis came with the slow down of the seventies. The
program was tied to employment, which determined how many people
were paying in and to inflation which determined the amount of
money being paid out. Stagflation thus posed a crisis. Congress
reacted by raising Social Security taxes in 1977. But the second
oil shock of the decade posed further problems. Congress reacted
by creating the 1983 amendments.
The 1983 amendments were remarkable. In the past, Social Security
policy was made by the Social Security Administration and the
tax committees in Congress, with some input from organized labor
and business organizations like the National Association of Manufacturers.
It was a closely held enterprise, with bureaucrats in SSA designing
legislation and even writing congressional reports, and legislation
being formulated in the House Ways and Means Committee and debated
under a closed rule.
But in the seventies that system broke down. Ways and Means began
to get subcommittees, including a subcommittee on Social Security.
The president became more involved as Social Security became
an important national issue. SSA itself became a much less cohesive
bureaucracy. Two people essentially ran SSA between 1937 and
1973. But after that Social Security commissioners came and went
with rapidity.
So in 1981 there was a new exercise. President Reagan, the Speaker
of the House, and the Majority Leader in the Senate all cooperated
in naming people to a Social Security commission, which included
powerful members of Congress and representatives of the key interest
groups. These people bargained over the amount of money that
was needed to keep Social Security solvent. Then the group dissolved
into confidential private negotiations between White House staffers,
such as James Baker, and key Democrats, such as Senator Moynihan.
The Republicans agreed not to challenge the basic design of Social
Security. No private accounts, in other words. The Democrats
agreed to make cuts in Social Security. The two sides negotiated
with a score card that showed how much money would be saved by
doing a particular thing. In the end, they agreed to a six month
delay in the cost of living adjustment and other changes that
assured Social Security's solvency.
The Present Controversy
If that happened in 1983, what has caused the present problem?
It is not the retirement of the baby boom. We have known about
that for a long time and it has already been factored in. Instead,
the problem has to do with actuarial assumptions related to real
wage rates in the future and disability rates in the future.
There is an irony here because the 1983 amendments had helped
to create a large surplus in the program, so people are talking
about a long-run deficit at a time when there was a short-term
surplus.
So far, we have not seen a repeat of 1982, with people calmly
taking out score cards and making political bargains over how
to restore long-term solvency to the program.
In part, the program has suffered from its success. Sold as an
insurance program, people now point to the low returns that generation
x and yers will get on their Social Security taxes. The trust
fund makes the long-term deficit visible. No one is talking about
a long-term deficit in the education programs for example. So,
as part of an ambitious second term agenda, President Bush has
decided to take on what David Stockman has called the fortress
of the welfare state. He would like to convert the program into
one that deflects a portion of Social Security taxes into private
accounts.
There are two parts to this campaign. One is to convince America
that Social Security is going bankrupt. If that is the case,
then its chief beneficial attribute—defined benefits—are
not going to be worth much. Two is to say that, if that is the
case, then the only way out of the dilemma is to let workers
invest in private accounts which because of their high rates
of interest will make up the shortfall.
But of course that represents a fundamental change in Social
Security.
There are problems associated with it. Second term initiatives
often fail, as in the court packing plan in 1936.
It is a costly proposal, because the president has already said
that people who are older than 55 will keep their benefits. So
there has to be enough money in the system to take care of them
and also to allow people to start investing in private accounts.
So it will be a more expensive proposition than simply fixing
the system we already have in the style of 1983.
On the other hand, private pensions have changed. What were once
plans to pay guaranteed benefits to people have now become defined
contribution plans. This reflects a world in which people change
jobs frequently and in essence carry their retirement plan around
with them. The president's Social Security reform would make
Social Security more compatible with this sort of arrangement.
I don't know what will happen. But I do know as a historian that
presidential social welfare initiatives almost always have consequences.
President Nixon tried to pass major welfare reform and failed
but we did come away with a major new welfare program, in the
form of Supplemental Security Income. President Clinton tried
to pass national health insurance and failed but we did come
away with major expansions in Medicaid and major reforms of Medicare.
So, in a similar sense, I know that the president's proposals
will have consequences. I think it is fair to say that history
teaches me that, just as it does that Senator Dole was right
when he said that Social Security overwhelms all domestic priorities."
Ed Berkowitz
in the media
Ed Berkowitz on the Kojo Nnamdi Show www.wamu.org/programs/kn/04/08/17.php
(Scroll down to Tuesday,
13:32, History of Socal Security. You can choose to listen to
this interview.)
Ed Berkowitz on Fresh Air with Terry
Gross www.npr.org/templates/story/story.php?storyId=4517872 (You can choose to listen to this interview.)
Edward
Berkowitz: Proposed Major Overhauls of Social Programs Usually
Fail, in the San Jose Mercury News (3-13-05)
[Mr. Berkowitz teaches
history and public policy at George Washington University. A
paperback edition of his biography of former Social Security
Commissioner Robert Ball was published in the summer of 2005
by the University of Wisconsin Press.]
"Though they sometimes have led to more modest reforms,
high-profile domestic initiatives have not fared well in the
past 35 years. President Nixon failed at welfare reform, and
Congress rejected President Clinton's ambitious national health
insurance program.
Nor is the record of politicians who have proposed major changes
in Social Security particularly encouraging to Bush.
Alfred Landon, the Republican candidate in 1936, lost in a landslide,
in part because he called Social Security ``unjust, unworkable,
stupidly drafted and wastefully financed.''
Barry Goldwater, who raised the possibility of making Social
Security a voluntary program for workers and employers in the
1964 election, suffered a similarly humiliating defeat.
When President Reagan learned of the possibility of reducing
early retirement benefits, he endorsed the idea, saying, ``I've
been warning since 1964 that Social Security was heading toward
bankruptcy.'' The Republican-controlled Senate promptly passed
a unanimous resolution condemning the proposal.
In the initial going, Bush is finding that Democrats and Republicans
alike appear reluctant to make changes in a 70-year-old program
that in 2003 collected money from 154 million people and paid
more than $470 billion to 47 million. It is a program with many
attractive features, such as a benefits formula under which poorer
people get a higher rate of return on their contributions than
richer people, yet it also ensures that people who contribute
more receive more from the program.
Such features as survivors' benefits that go to the dependents
of workers who die before retirement, and disability benefits
for certain people forced to drop out of the labor force, reinforce
this blend of adequacy and equity.
Given the program's widespread support, Bush understands that
changing it is politically delicate. Yet, in fact, Social Security
has been widely debated in the past. Looking back, we can see
its history has three distinct eras.
From 1935 to 1950, the program covered only about half of the
people in the labor force. In 1950, more than twice as many people
were on the state welfare rolls as were receiving retirement
benefits from the federal government under Social Security. The
average monthly welfare benefit was $42 in 1949; the average
Social Security benefit was $25.
Between 1950 and 1972, the program enjoyed considerable success.
Rising wages and low unemployment meant that more money flowed
into the Social Security coffers, so Congress could raise benefits
without substantial increases in the payroll tax rates. As an
adviser to President Johnson noted, economic growth produced
the "miracle'' that made it possible to expand the system
without raising the tax rate or ``impairing the actuarial soundness
of the system.''
But in 1972 Congress changed this congenial system. In a sweeping
action, it raised Social Security benefits by a whopping 20 percent
and introduced a feature that would raise future benefit levels
by the rate of inflation, a feature known as the COLA, or cost
of living adjustment. In 1973 Congress passed one more traditional
benefit increase, and then the COLAs took over.
As it happened, the introduction of this new system coincided
with major economic disruptions—high unemployment, galloping
inflation and rising disability rates. That meant fewer people
were paying into the program, yet the amount being paid out was
increasing because of the COLAs and the rise in the disability
rolls. In June 1974 the Social Security Administration announced
a "long-range actuarial imbalance.'' The Social Security
financing issue had arrived.
Conservatives took aim. As Treasury Secretary William Simon told
President Ford at the end of 1975, Social Security had come under
``persistent attack in the news media for its inequities, its
financial uncertainties and its complexities.'' Suddenly features
that had been extolled in the golden period from 1950 to 1972
came to be viewed more critically. Did the program treat women
fairly? Did the program's problems stem from the way it mixed
welfare and insurance elements?
Although President Carter did his best to shore things up in
1977, problems reappeared as the economy once again disintegrated.
During Ronald Reagan's first year in office, in 1981, the possibility
existed that the program would be unable to pay full benefits
by the middle of 1983. That situation spawned a crisis that,
despite efforts by both sides to exploit the situation for political
benefit, forced Congress to act.
The result was 1983 legislation in which both sides made sacrifices
in the interest of saving and strengthening the program. Democrats
agreed to a six-month delay in the cost of living adjustments.
Republicans agreed to let Social Security's basic structure remain
in place and to stop harping on the program's long-term insolvency.
The 1983 amendments, enthusiastically signed by President Reagan,
converted him from a critic to a supporter of Social Security.
In a sense, he now owned a piece of it. For a time, Social Security
financing was taken off the table.
A little more than a decade later, however, government officials
reported that, once again, the program faced a long-term deficit.
The deficit did not stem from the costs that would be imposed
by the retirement of most of the baby boom generation from 2015
to 2022; that had already been figured into the calculations
in 1983. Instead, more complicated factors, such as assumptions
about lower real wages and higher disability rates in the future,
produced the projected deficit.
Amid a general sense that the program could never be fixed, new
discussions began. The roaring stock market of the 1990s legitimized
the notion of increasing the returns on Social Security taxes
by investing some of the money in the stock market, perhaps through
private accounts.
Bush, one of the proponents of those private accounts, faces
a situation much different from what Reagan faced in 1983. For
Reagan the problem was immediate; there was little time to re-examine
Social Security's philosophical foundations and make substantial
changes. Bush does not have the same time constraints, and he
seeks nothing less than a fundamental change in Social Security.
In fact, Bush wants to convince younger Americans that Social
Security will not be there for them when they retire....
Editor's Note Mr. Berkowitz ends his piece by noting that
even when major overhauls of social programs fail, some changes
are usually made. After Clinton's health care plan failed, Medicaid
was substantially expanded to help the poor gain greater access
to medical care. "
News Coverage
about Robert Ball and the Politics of Social Security
Robert Ball, Social Security Warrior,
Readies for New Battle, Dec. 14
(Bloomberg)
"Robert Ball remembers when, as U.S. commissioner of Social
Security, he became so alarmed at a political deal involving
health-care legislation that he went to the White House to warn
President John F. Kennedy.
``I said, `If this passes, it will be chaotic,''' Ball recalls
of that 1963 meeting. ``Kennedy leaned over and patted me on
the knee, and said, `Bob, let's have a little chaos.'''
For more than half a century, Ball has been at the center of
every major battle over Social Security. Now, President George
W. Bush and Republicans in Congress are planning the most radical
changes in the program's 69-year history, proposing to allow
younger workers to divert some of their taxes into private savings
accounts. And Ball, at age 90, is strapping on the armor once
again to defend the program he began working for 65 years ago.
Ball contends that Bush and his allies are overstating the extent
of Social Security's fiscal problems in order to justify changes
that will unravel a safety net that has kept millions of elderly
people out of poverty and that will explode the federal budget
deficit. He argues that Social Security, which its trustees said
in March faces a $3.7 trillion funding gap over the next 75 years,
can be shored up with relatively minor tax increases and benefit
cuts.
"There's nothing about the present situation that is any
more dangerous than it was'' when the program was thought to
be in jeopardy in years past, Ball says. ``There are lots of
ways to fix it other than privatization.''
Hidden Agenda?
Says Alan Blinder, a former vice chairman of the Federal Reserve
and critic of private accounts: ``The true agenda here, I think,
is to put a very big camel's nose under the tent. You start with
partial privatization, and in a generation's time you have no
Social Security system. The agenda is to go back to the 1920s.''
Ball, who was Social Security commissioner from 1962 to 1973,
has a unique perspective on the issue, says Edward Berkowitz,
a George Washington University professor who wrote the 2003 book Robert Ball and the Politics of Social
Security.
Ball joined the Social Security Administration in 1939, only
four years after President Franklin D. Roosevelt created it.
He was the staff director of the advisory panel that recommended
changes that saved the program in 1950 by extending benefits
to farm workers and other groups not covered, Berkowitz says.
In 1956, Ball helped encourage Congress to create Social Security
disability insurance over the opposition of President Dwight
Eisenhower. That health-care bill he fretted over with Kennedy
became, two years later, Medicare, the health-insurance program
for the elderly that fell under Social Security's jurisdiction
until 1977.
Looming Bankruptcy
He has worked with Republicans as well as Democrats. In 1972,
as commissioner under President Richard Nixon, he brokered a
deal with Republicans to index Social Security benefits to the
rate of inflation; in 1983, he sat on a commission along with
Alan Greenspan, among others, that was set up by President Ronald
Reagan to recommend ways to close a funding gap.
Today's Republicans, including Bush and allies such as Senator
Lindsey Graham, a South Carolina Republican, argue that the current
crisis is far graver. Without major changes, they say, Social
Security—which last year doled out $470 billion in benefits
to one in six Americans—will go broke, because it can't
handle the impending retirement of the U.S. ``Baby Boom'' generation,
the 76 million Americans born between 1946 and 1964.
`Have to Be Alarmed'
The system uses payroll tax dollars from current workers to fund
benefits for current retirees. In 1937, there were 40 workers
for every retiree; by 2030, that ratio will drop to 2.1 workers
per beneficiary. Spending on Social Security, now at about 4.4
percent of gross domestic product, will increase to more than
6 percent by 2030, according to the Congressional Budget Office,
Congress's nonpartisan research arm.
Graham, a sponsor of one private-account bill in the Senate,
argues that preserving the current program is not an option.
``You have to be alarmed,'' Graham says. While the number of
beneficiaries will surge by 65 percent from 2011 to 2030, the
number of workers paying into the system will grow by 8 percent,
he says. "It's going to go bankrupt.''
Employees and employers each currently pay a payroll tax of 6.2
percent of the first $87,900 earned, while the self-employed
pay 12.4 percent. Graham's proposal would allow workers to divert
4 percentage points of their taxes to private accounts. According
to both Graham's plan and one advanced by a 2001 commission appointed
by Bush, workers age 55 and younger would be allowed to participate;
in return, they'd have their government-guaranteed benefits reduced.
Transition Cost
Since current retirees depend on the same tax dollars that would
flow to private accounts, the government would have to fill the
gap during the transition—a cost that the Congressional
Budget Office puts at $1 trillion to $2 trillion over 10 years.
Graham said in a Dec. 8 interview that a payroll tax increase
might be needed for high-income earners, in order to win support
from Democrats and allay their concerns about the transition
costs. Bush, though, rejected the idea of a tax increase on Dec.
9, leaving benefit cuts, government borrowing and possibly raising
the ceiling on the amount of income subject to Social Security
payroll tax as the only ways to make up the shortfall.
Peter Diamond, an economist at the Massachusetts Institute of
Technology in Cambridge, Massachusetts, who devised a plan to
shore up Social Security without private accounts, said the transition
costs will swell the national debt and destabilize Social Security.
`Economic Summit'
``You can't talk about transferring general revenue when you've
got debt as far as the eye can see,'' Diamond said. ``You can't
pretend that borrowing several trillion is harmless.''
While Bush hasn't yet revealed specifics of his own plan, it
is likely to resemble Graham's in important respects; even without
a formal proposal on the table, the president will use the "economic
summit'' he is convening at the White House tomorrow and Thursday
to begin building political support for changing the system.
Opponents are mobilizing too, including AARP, based in Washington,
which with more than 35 million members is the largest lobbying
group for retirees, and Democrats such as Representative Robert
Matsui of California, a member of the House Ways and Means Committee.
And then there's Bob Ball. From his home in a retirement community
in Washington's Maryland suburbs, working out of a small office
littered with paper piles and plastered with black-and-white
photos of himself with Presidents Kennedy, Lyndon Johnson and
Jimmy Carter, he is advising Democratic lawmakers and preparing
articles arguing against the Republican plans.
`Bad for Society'
``A system in which part of the benefits depend upon investment
return is a bad idea,'' he says. "It's bad for the individual
involved and it's bad for society.'' Democrats are more likely
to support Bush's proposal if the private accounts are offered
in addition to Social Security, instead of diverting current
tax dollars, he says.
Ball argues that Social Security could remain solvent for the
next 75 years through a combination of steps that don't involve
taking money out of the system.
For instance, he says, Social Security recipients now receive
cost-of-living increases tied to an index that measures changes
in the price of a basket of consumer goods and services without
taking into account the effect of buyers substituting one product
for another when prices increase. Ball advocates tying benefit
increases to an index that takes into account such substitutions,
thus producing lower benefit increases.
Raising the Ceiling
He also advocates raising the ceiling on the amount of income
subject to the payroll tax. The current ceiling covers 85 percent
of all taxable income; he proposes raising the ceiling so it
covers 90 percent.
And he wants to retain the federal estate tax; currently, legislation
passed in 2001 calls for the law to be phased out until 2010,
when it disappears entirely for a year. The tax is supposed to
return in 2011, but Bush is pushing to make the repeal permanent.
Ball says the tax should be kept where it will be at the 2009
level, as laid out in the 2001 legislation.
Leanne Abdnor, a member of Bush's 2001 commission and now president
of For Our Grandchildren, an Alexandria, Virginia-based advocacy
group that supports voluntary personal retirement accounts, disputes
Ball's conclusions.
Private accounts would decrease the risk of seniors slipping
into poverty, she says. She cites one commission proposal that
would guarantee low-wage workers receive benefits keeping them
at least 20 percent above the poverty line. That would lift 700,000
Americans out of impoverishment if enacted today, Abdnor said.
Broken Firewall
Ball also fails to consider that the government will have to
spend $5 trillion over the next seven decades to pay off the
bonds that form the Social Security trust fund, which Congress
has tapped to finance other programs, Abdnor says.
"That's going to have to be paid by income taxes so that
the firewall between income taxes and Social Security is broken,''
Abdnor said. ``We're just waiting to flip the switch.''
While others joust over such issues in public, Ball, as he has
in the past, is likely to do most of his work behind the scenes,
author Berkowitz says. "This administration will come up
with its own plan, and then the question is, who will the Democrats
listen to?'' Berkowitz says. ``He'll be the point man.''
Even at 90, Ball says, he is up to the task. ``I keep thinking
of retiring,'' he says. "And then somebody thinks of a gimmick
I have to defend the program against.''
To contact the reporter on this story:
Heidi Przybyla in Washington at hprzybyla@bloomberg.net.
Peter Grier:
Why Reforming Social Security in 2005 Is Harder than It Was in
1983
Peter Grier, in the Christian Science Monitor (3-11-05)
"Congress begins formal
debate on the retirement system, but a 1983-style deal looks
hard to reach.
On the unseasonably cold morning of April 20, 1983, a coatless
Ronald Reagan sat down on the South Lawn and signed a bill intended
to rescue Social Security from imminent doom.
Neither Republicans nor Demo-crats were
thrilled by everything in the legislation. But by agreeing to
raise both payroll taxes aand the retirement age they refreshed
the government retirement program with a river of new cash. The
compromise, President Reagan said, "is a clear and dramatic
demonstration that our system can still work when men and women
of good will join together to make it work."
Fast forward 22 years. Once again Social
Security and its finances are Washington's Topic A. A 1983-style
signing ceremony seems a distant dream, however. What did that
era have that 2005 hasn't got?
Politics was different then, for one thing.
Powerful figures on both sides of the aisle wanted a deal.
But the biggest change may be the acuteness
of the problem. In 1983, Social Security was set to hit a fiscal
wall within months. Today, the estimated time of arrival of the
program's cash crunch is measured in decades - meaning the urgency
needed to overcome political obstacles may be difficult to summon.
"Today they don't have that deadline.
They're not playing in sudden death overtime,' says Edward Berkowitz,
a professor of history and public policy at George Washington
University. . . .
Prior to settling down to negotiations, Sen. Daniel P. Moynihan
(D) of New York accused Republicans of "terrorizing older
people" with their proposals. GOP Sen. William Armstrong
of Colorado struck back, charging Democrats with "demagoguery."
"It wasn't as easy [to reach a deal]
as people remember it," says Eric Patashnik, a University
of Virginia political scientist.
The root cause of Social Security's problem
was the same then as today: a declining number of tax-paying
workers per retiree, thanks to a growing number of older Americans.
But the added twist of the time was that this problem was turbocharged
by stagflation. Fast-rising prices were making the cost of Social
Security soar, while a stagnant economy meant revenue remained
relatively flat.
The Reagan administration was relatively
eager to address the problem. However, a presidential trial balloon
proposing deep cuts in benefits for early retirees proved highly
unpopular—so much so that it was repudiated by the GOP-controlled
Senate by a vote of 96-0.
Burned, the Reagan team handed Social Security
off to a 15-member presidential commission headed by economist
Alan Greenspan, who is today the chairman of the Federal Reserve.
The commission itself remained deadlocked
through much of 1982. But eventually an inner group of negotiators,
meeting in secrecy under White House auspices, helped craft a
deal. Previously scheduled payroll-tax increases would be rolled
forward, among other things. The age for full retirement benefits
would be pushed back from 65 to 67.
One lesson here, say historians,
is that a few people of will and knowledge can overcome a larger
atmosphere of partisanship and mistrust. The commission included
such prominent Republicans as Senate Finance Committee chairman
and presidential aspirant Sen. Bob Dole of Kansas, and Democrats
such as Robert Ball, a longtime commissioner of Social Security.
A core group from both parties knew they had little choice but
to hammer out a compromise—and they did.
"It was a high point of almost all
of these peoples' careers," says Dr. Berkowitz of George
Washington University.
But this statesmanship was powered by panic,
in a sense. Both sides concluded that without action by early
1983 Social Security would have started to run a slight deficit
by midsummer. Back then, the system had not piled up a large
trust fund surplus - meaning there was a possibility that payments
to seniors would be disrupted.
From this may come a second lesson: You
need a consensus about what's broken before you can argue about
the repairs. Today Republicans generally describe the situation
as a crisis requiring urgent action. Democrats say it's not that
bad, and add that personal accounts are irrelevant to the issue
of program solvency, anyway. "In 1983 there was a bipartisan
agreement on the problem. Right now we don't see that,"
says Dr. Patashnik of the University of Virginia...."
The Los Angeles Times reports on Robert Ball and the politics
of social security. (This link requires you to register with
The Los Angeles Times, registration is free.) http://www.latimes.com/news/printedition/la-na-bobball30may30,1,4270501,full.story?ctrack=1&cset=true
Robert Ball
on the Current Crisis
How to fix Social Security? It doesn't
have to be hard.
By Robert M. Ball
"Federal Reserve Board Chairman Alan Greenspan's call for
a reduction in Social Security benefits came as Aging Today
was working on the "Forum" essay that follows with
Robert M. Ball, who was Commissioner of Social Security under
Presidents Kennedy, Johnson and Nixon. Ball, the founding chair
of the National Academy of Social Insurance in Washington, D.C.,
challenges many of the notions underlying arguments for major
Social Security reforms. His latest book is Insuring the
Essentials: Bob Ball on Social Security (New York City:
Century Foundation Press, 2000). Now age 90, he is the subject
of a new biography, Robert Ball and the Politics of Social
Security, by Edward D. Berkowitz
(Madison: University of Wisconsin Press, 2004).
Millions wrongly believe
Social Security needs a radical overhaul.
In this commentary, Ball explains that
the program's projected long-term shortfall partly stems from
the unexpectedly rapid rise in earnings by upper-income Americans
compared with lower-income workers. He also recommends adjustments
in the Consumer Price Index and dedication of a revised estate
tax to Social Security. Perhaps most surprising, Ball calls for
a flexible new approach to Social Security's customary 75-year
projections, which would avoid "bogus crises" that
erupt from time to time when the Social Security trustees report
shortfalls in the program's long-range balance.
Things were relatively quiet on the Social Security front in
2003, largely because lawmakers were busy with Medicare. The
Administration, however, has made clear its intention to include
Social Security reform-meaning partial privatization-in the 2004
presidential campaign, and now Alan Greenspan, chairman of the
Federal Reserve Board, is calling for benefit reductions. The
program will remain vulnerable to such calls for "reform"
and benefit reductions as long as it is said to be facing a major
long-term deficit for which there appears to be no politically
viable solution. So it's urgent for Social Security defenders
to come up with a plan to meet the program obligations-a plan
capable of attracting broad public support. What is not widely
understood is that major changes are unnecessary. A few sensible
steps, desirable in themselves, will do the job.
The Social Security Trustees Report for 2003 shows a 75-year
deficit equal to less than 2% (1.92%) of the payrolls covered
by the program. In other words, to bring income and outgo into
balance over 75 years would require either additional income
or benefit cuts equivalent to about a 1 percentage point increase
each in the payroll tax rate for employers and employees. Although
the 1 percentage point increase each in the contribution rate
makes the size of the deficit clear, there are much better ways
to accomplish the goal of long-range balance.
RESTORING COVERAGE
Instead of raising the payroll tax rate, I propose that Social
Security go back to covering 90% of all earnings from workers
included in the system. This was the level of coverage Congress
set the last time it considered the matter in 1983. However,
today only about 85% of earnings—not 90%—are taxed
and credited to workers' accounts for benefit purposes. Consequently,
15% of earnings, not 10%, are escaping Social Security taxation.
This result is not due to a policy decision—it is solely
because over the last two decades, earnings at higher levels
have increased at a faster rate than earnings at lower levels.
Here is how the system works and why payroll taxes don't apply
to 100% of income covered by Social Security: A benefit credit
is established for every dollar on which a worker must make a
contribution, but there is a cutoff point each year ($87,000
in 2003) beyond which a worker is not required to contribute
and for which no benefit credits are established. This cutoff
amount, which rises each year in accordance with the growth in
average wage levels, was established because most people would
find it inappropriate in a social insurance system to pay the
very high benefits that would result from crediting million-dollar-plus
salaries for benefit purposes. At the same time, it would seem
unfair—and fundamentally change the nature of Social Security—to
require contributions without granting benefit credits. A major
part of the Social Security shortfall is due to the fact that
a higher and higher proportion of earnings is escaping Social
Security taxation.
To return to the 90% rule of thumb, I propose that when the cutoff
point (usually referred to as the maximum taxable and benefit
base or the maximum earnings base) rises each year to reflect
the growth in average earnings, it be increased slightly—by
2% more than it would have been under current calculations. For
example, the increase in earnings subject to Social Security
taxes from 2002 to 2003 was $2,100; thus, the 2% proposal would
have raised the maximum earnings base another $1,800 (after rounding
required by law).
By adding a 2% increment back each year, Social Security would
be restored to collecting contributions based on 90% of covered
earnings by 2036. This change would increase the contributions
of the 6% of earners who are paid more than the cutoff amount.
These higher-paid earners would receive benefit credits for their
increased contributions, but under Social Security's weighted
benefit formula, additional credits at the higher wage levels
would leave a net gain for the system.
This proposal is not a new policy, but an old one restored. Although
certain to be attacked as a tax increase by those favoring privatization,
it would probably have broad support as the best way to bolster
long-range Social Security financing.
COLA ADUSTMENTS
My second proposal is to change the Consumer Price Index (CPI)
Social Security uses in determining the amount of the Cost of
Living Adjustment (cola) added each year to maintain the purchasing
power of Social Security benefits.
The CPI currently used by Social Security measures changes in
theprice of a standard market basket of goods and services. The
Bureau of Labor Statistics has developed a more accurate CPI
that measures not only price changes for the market basket, but
also the effect of switching one type of purchase for another
as price changes cause people to make substitutions. Adoption
of this improved index would produce slightly lower cola increases
and, thus, somewhat reduce Social Security costs. Improving the
accuracy of the cola is a change that defenders of Social Security
should support on principle, and it is also a change supported
by Alan Greenspan and some other critics of the present law.
There is every reason to move rapidly ahead on this change.
colas have proved vitally important in maintaining the buying
power of Social Security benefits, but they are not intended
to do more than that. colas should be as accurate as possible-in
part so that policymakers can address the question of benefit
levels directly rather than letting inaccuracies in the CPI substitute
for policy decisions. I am opposed to benefit reductions that
go beyond this CPI correction. Social Security benefits are not
too high; they are barely adequate as they are.
These two steps—updating the cutoff maximum for Social Security
contributions and adopting the new CPI—would cut the anticipated
long-range deficit in half-from about 2% of payroll to about
1%. If enacted within the next year or two, these changes would
extend the date when the savings in the Social Security trust
funds would be exhausted from 2042—as is now projected—to
2055. At that point, under present law, Social Security benefits
would be supported only by money being paid in contributions
at that time by current workers and their employers. This amount
would be enough to pay about 70% of the benefits scheduled under
present law. The bottom line, however, is that the two changes
described would keep the program on track for the next half-century-a
reassuring accomplishment in itself.
The Social Security deficit, under the
middle-range assumptions, would be more than halved again-to
only 0.4%-by dedicating a reformed federal estate tax to Social
Security. This change could be accomplished by an estate tax
exempting estates up to $3.5 million, as would be the case in
2009 under present law. At that level, only one-half of one percent
of U.S. estates will be subject to any estate taxes. By closing
the projected deficit to within a half percent, this plan would
restore Social Security financing to well within what the trustees
call close actuarial balance over the customary 75-year period
used to measure the program's long-range solvency. (See "A
Proposal for Progressive Financing" on this page.)
One could argue for financing this cost through general federal
revenues instead of an estate tax. But there are no longer any
general revenues available. All of the many proposals that purport
to solve Social Security's financial problems through schemes
making vague reference to future general revenues don't really
solve anything. The only source of income that should count as
part of a financial solution is a dedicated source not otherwise
available to the federal treasury. Restoration of the estate
tax and its dedication to Social Security is ideal for this purpose.
UNCERTAINTY OF ESTIMATES
Should Social Security go beyond close actuarial balance and
move to exact balance? In other words, what-if anything-should
be done about the 0.4% of payroll deficit shown remaining after
taking the three steps I've described? Keep in mind that the
0.4% deficit shows up under only one of the three official scenarios
made by the Social Security trustees, the middle-range estimates.
Each year, the trustees also develop low-cost and high-cost assumptions-considered
possible but unlikely scenarios-to show the range within which
actual experience can be expected to fall.
| Robert M. Ball,
center, was US Commissioner of Social Security when Medicare
was enacted in 1965. He is shown above holding one of the first
Medicare cards, along with Rep. Cecil King, left, and Sen. Clinton
Anderson, right, chief sponsors of the legislation. |
 |
Under the low-cost scenario, there is no deficit at all over
the next 75 years, even without the changes I am suggesting;
under the high-cost estimates, the proposed changes are not enough
to bring the program into close balance. The one certainty is
the uncertainty of any 75-year forecast. Consider, for instance,
how estimates in 1929 would have looked without any allowances
for the results of the Great Depression and World War II—events
that would have made estimates based on otherwise quite reasonable
assumptions wildly inaccurate.
Our planning needs to recognize that no proposal can guarantee
balance over a 75-year period. To avoid seriously underfunding
the system and putting benefits at risk, or overfinancing it
and thereby shortchanging millions of contributing workers and
employers through needlessly high contribution rates, the approach
should be to adjust the financing of Social Security as cost
and revenue estimates change.
Although over the last 20 years the projected Social Security
deficit has grown with new estimates, we need to keep in mind
that the risk of change is not all in one direction. For example,
the middle-range estimates may prove too pessimistic. One of
the key assumptions governing future costs is the rate of anticipated
increases in productivity. It is not only the ratio of workers
to retirees-of which we are continuously told-that affects Social
Security's future costs, but also how much these workers are
able to produce. As additional investments are added to the mix
of labor and capital that produce our supply of goods and services,
each hour of worker effort (the measure of productivity) produces
more. The present middle-range assumptions concerning the rate
of increase in future productivity are quite conservative in
comparison with what has actually been happening to productivity
recently.
A BALANCING RATE
Therefore, instead of adopting a final employee-and-employer
contribution rate that purports to balance long-range income
and outgo over the entire 75-year period exactly, I propose that
Social Security provide for a rate that would be adjusted as
the estimates change. This balancing rate would be based, at
any one time, on the trustees' most current middle-range assumptions,
but it would be clearly understood-and clearly communicated to
the public-that every once in a while this rate would probably
need to be adjusted, up or down. (There is an approximately equal
chance of either, as long-term forecasts change.) The balancing
rate would be a fail-safe provision to take effect automatically
if Congress neglected to adjust revenues and costs to changes
in the estimates.
I propose providing for a balancing rate to become effective
in the year in which Social Security trust funds would otherwise
start to decline. To illustrate: After taking into account the
changes I propose in the maximum earnings base (the cutoff point
to taxing income), the CPI and the dedication of the estate tax,
the trust funds would continue to grow until about 2053, using
the middle-range assumptions. To prevent trust-fund reduction
from starting at that time and to provide for funding for a full
75-year period from now, the program would need to schedule a
balancing rate increase of roughly 0.9 percentage points each
on employers and employees for that year.
Alternatively, Social Security could be financed for the full
75-year period by increasing the contribution rate today by 0.2
percentage points each on employees and employers. But if the
program actually were to start collecting this total increase
of 0.4% of payroll, it might collect more than necessary, overcharging
today's workers. My recommended approach of making prudent adjustments
now and providing for a balancing rate to be scheduled many years
later reduces the possibility of overfinancing while at the same
time guarding against underfunding the system.
THE BOGUS CRISES
This strategy has the added benefit of avoiding periodic false
crises about Social Security finances. Currently, when the Social
Security trustees annually release their latest 75-year estimates,
the media report them as though the middle-range numbers are
exact and immutable rather than as one of three educated guesses
about how the world will look three-quarters of a century from
now. So what is really the trustees' tentative expectation of
a possible distant shortfall becomes a crisis, prompting millions
of Americans to believe, wrongly, that Social Security is on
the brink of collapse and in need of a radical overhaul.
If the program is to avoid such bogus crises, it will be critical
to acknowledge the impossibility of making accurate 75-year estimates-even
while continuing to use long-range forecasting as a tool with
which to responsibly ensure that Social Security is adequately
funded for the long run. The balancing rate designed to keep
the system within close actuarial balance serves this purpose.
Social Security doesn't require reforming because it hasn't failed.
The system that has served so many so well for so long simply
needs some timely maintenance work. Let's get started."
42 to 1,
16 to 1: A note on the misleading use of accurate statistics
"Critics of the present Social Security
system often depict it as doomed by an inescapable demographic
train wreck. In a typical example, New York Times columnist
David Brooks recently described partial privatization of the
system as the only solution to an "otherwise intractable"
problem.
"The outline of the problem is clear,"
Brooks wrote. "When the Social Security program was created,
there were 42 workers for each retiree. Now there are about three
workers per retiree, and in 2030 there will be two."
Such statements, generally unaccompanied
by any attempt at amplification or conext, clearly imply that
a system deigned in and for another era has been overtaken by
overwhelming and unforeseen changes and is therefore unsustainable
in its present form.
In fact, however, the demographic changes
that have been taking place throughout Social Security's history
were anticipated and understood when the program was being established
and have been taken into account in its funding ever since. Those
who base their arguments for partial privatization on the disappearance
of the 42-to-one ratio (or the 16-to-one ratio in 1950, a statistic
often cited by President Bush) are contributing — deliberately
or otherwise — to public confusion about the program's past,
present and future.
To take this ratio-based argument to its
illogical extreme, one could point out when Social Security first
went into effect, in 1937, there were millions of workers
per beneficiary — since, in the beginning, there were zero
beneficiaries. Obviously that ratio was going to change, however,
and Social Security's designers fully anticipated such changes.
Any retirement system that requires contributions
and work under the system as a condition for getting benefits
takes a long time to be very effective. In the early years few
of the elderly will meet the eligibility requirements because
they are already retired and will not work again. Thus, even
by 1950, 13 years after the first contributions began to be paid
into Social Security, only about 15 percent of the elderly were
getting benefits. Gradually, however, ever-higher proportions
of those reaching retirement age were eligible — and now
just about all are.
Social Security was planned for the long
run. It was not expected to do much in the early years (when
there was much greater reliance on the means-tested old age assistance
program) and the early ratios of workers to retirees had little
relevance to the long-range cost estimates. The slow developent
of Social Security toward a universal system has always been
the basis for estimating its costs and determining its contribution
rates. When the system was refinanced in 1983, the assumptions
about the future ratios of workers to retired beneficiaries were
about the same as the assumptions used today, and the cost of
the future changes were fully provided for then — and are
fully provided for now.
The reasons why a long range deficit has
re-emerged since 1983 are related entirely to other factors —
including, among other changes in the forecasting assumptions,
a more pessimistic view of the future performance of the economy
and a greater incidence of disability and related costs than
previously estimated.
Nevertheless, Social Security's financing
problem is frequently described as if it were caused entirely
by the shifting ratio of workers and retirees, and commentators
attempting to make this case frequently confuse the ratios related
to the inherently slow start-up of a contributory system —
the worker-elderly ratios of 16 to one and even 42 to one, which
have nothing at all to do with the future cost of the system
— with the shift from three to one now to two to one in
the future, which is an important aspect of the rising
cost of the system, but one entirely anticipated and provided
for in the 1983 amendments.
The plain fact of the matter is that Social
Security faces an eminently avoidable long-range funding shortfall,
not an inevitable collapse brought about by unmanageable changes
in the historic ratio of workers to beneficiaries. Those who
advance that argument are using an accurate statistic to make
a highly inaccurate charge.
Return to the regular page
for Robert Ball and the Politics of Social
Security.
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