Presentation: Unfiltered: Two Visions for Social Security’s Future

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

 Thank you.