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Social Security: What Is At Stake? Why Now?

For the second time in little over a year, the Obama Administration has made a pre-emptive offer to change the formula for adjusting Social Security's Cost of Living Adjustment formula as part of a "Grand Bargain." What is at stake?
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WASHINGTON, DC - DECEMBER 19: U.S. President Barack Obama speaks on ongoing 'fiscal cliff' negotiations with Republican members of Congress following an announcement on gun reform in the Brady Press Briefing Room of the White House December 19, 2012 in Washington, DC. President Obama announced that he is making an administration-wide effort to solve gun violence and has tapped Vice President Biden to lead the effort in the wake of the Sandy Hook Elementary School shooting in Newtown, Connecticut. (Photo by Win McNamee/Getty Images)
WASHINGTON, DC - DECEMBER 19: U.S. President Barack Obama speaks on ongoing 'fiscal cliff' negotiations with Republican members of Congress following an announcement on gun reform in the Brady Press Briefing Room of the White House December 19, 2012 in Washington, DC. President Obama announced that he is making an administration-wide effort to solve gun violence and has tapped Vice President Biden to lead the effort in the wake of the Sandy Hook Elementary School shooting in Newtown, Connecticut. (Photo by Win McNamee/Getty Images)

In the midst of the manufactured pseudo-crisis known as the "Fiscal Cliff," Social Security has, yet again, been placed on the chopping block. For the second time in little over a year, the Obama Administration has made a preemptive offer to change the formula for adjusting Social Security's Cost of Living Adjustment formula (COLAs) as part of a "Grand Bargain." The tendency among reporters has been to highlight the day-to-day political posturing of the major parties and politicians. However, a broader perspective is needed to understand the players, the trajectory of their ideas and their agendas. What is at stake? Of perhaps even more importance, why is this issue being raised now? After all, Social Security is budgeted separately from the federal budget and for that reason has literally no impact on the federal deficit of today, next year, the year after, or the year after that.

A brief history may illuminate these questions. Perhaps it is obvious, but Social Security was, and continues to be, an affront to Wall Street and "free market" economists (which includes most Republican economists and all Democratic Party economists working at the Treasury and the Federal Reserve, although their tone changes dramatically when large banks are on the brink of failure). There are three broad reasons for this deep-seated loathing.

First, Social Security is a wildly successful and well-managed government retirement program. For that reason alone it must go. Ridding the nation of Social Security will reduce the chances that its ongoing and visible success will cause the electorate to question the "free market" ideology that government can do nothing right.

Second, the FICA taxes levied each month on every working American represent "the mother of all financial flows." But, alas, these flows are not being managed, or steered toward, by Wall Street brokers! In the event that these flows were to be redirected toward private Wall Street brokerages, insurance companies, and banks, there would be a personal account in the name of each and every American. Just imagine the fees that could be earned by managing accounts, "advising" payees, and switching between asset classes (and more fees for switching back again). Naturally, the people overseeing the brokers managing these individual accounts will need their fees; firms will need dividends; bosses need bonuses; and so on and so forth.

A third affront is that the Social Security Administration already manages individual accounts in each of our names for a mere fraction of what Wall Street routinely charges its customers (its costs are about 0.7 percent to 0.8 percent of payouts, or less than 1/30th the fees routinely charged by private insurers.) So, in the event of a full or partial privatization, we can be assured of worse service for a higher charge. Sound familiar? It recalls one of recent trends in Cable TV, credit card fees, deregulated electricity and sundry bank fees: higher charges for reduced service.

And what will Grandma and Grandpa get in exchange for these dramatically enhanced fees? No doubt they will be treated to pleasant conversations with ever-so-personable and caring young brokers working on commission to "churn" portfolios (for fees, of course), or move their victims, err ... customers... into unsuitably risky or otherwise dubious assets that their employers are anxious to shift off their own books. One cringes to contemplate the consequences of such negotiations. We would be pitting smooth-talking salesmen against retirees whose capacity for details can be expected to diminish with advanced age. Neighbors whom you may think of as the charming, if slightly absent-minded elderly couple next door are, to a broker with two kids in college and a mortgage to pay, a "mark." After all, that modest nest egg that they so painstakingly accumulated over a lifetime of hard work is most likely guarded by next to no understanding of financial markets, complex clauses written in legalese, fee structures or hidden risks. In short, the elderly will be easy pickings for Wall Street hustlers, and they know it.

Now, it would be remiss to not point out that, back in the 1930s, a large swath of non-Wall Street American businesses also did not support the creation of Social Security. Ideologies aside, there were two broad reasons for their negative assessment. First, to enhance the public's feeling of "ownership," President Franklin Roosevelt financed the program with a tax on wages, to be shared by employers and their employees. This clearly raised the cost of labor. Ideally, from the business perspective, the entirety of this tax would be shifted onto the shoulders of employees through reduced wages, but in practice such transfers can be tricky. Second, and even worse, when an employee knows that there is a floor under their retirement income, they are more secure and for that reason more free. This new-found freedom may manifest itself in a greater "voice" at work, perhaps by speaking up about unfair labor or safety practices. Alternatively, workers may feel empowered to seek employment opportunities elsewhere, start their own business, or even quit to write the "Great American Novel."

Stated simply, a labor force more confident of its future may be more comfortable taking chances, and for that reason more creative and ambitious. The downside, for employers, is that managing and disciplining such workers can be more complicated. This latter problem is most acute for employers struggling at the margins of an industry because their short-term focus undervalues such qualities. Lagging industry standards in production or sales technology, and barely hanging onto market share, marginal employers are more inclined to pursue profits through longer hours, reduced hourly wages, and by scrimping on health and safety.

As it turned out, Social Security was a great success and, despite more than 10 years of well-financed negative propaganda, the public still overwhelming supports it. One recent study has found that it is keeping 21 million people out of poverty, including 14 million elderly and one million children. This has been accomplished with a minimum of overhead costs and without the intrusiveness and indignity of "means testing." President Dwight Eisenhower once observed that the program was politically untouchable. Referring to political die-hards and holdouts, he observed that "Their number is negligible and they are stupid." Unfortunately, "they" included the managers of General Electric's Department of Public Relations and their paid spokesman, B-List Actor Ronald Reagan.

A recurring theme of Reagan's presentations was that Social Security should be replaced with individualized retirement accounts. While GE fired Reagan for criticizing the Tennessee Valley Authority, and Barry Goldwater failed to win the presidency in 1964, the struggle to privatize Social Security was not over. It was only in remission. American history has amply affirmed that bad ideas backed by large sums of money will return.

And return it did. Despite Ronald Reagan's repeated claim that massively cutting taxes for the wealthy would be self-financing, the early months of his presidential administration were fixated on budget-cutting. A program specifically targeted for cuts was -- unsurprisingly -- Social Security. However, chastened by the memory that his earlier criticisms of Social Security had been a liability during his campaign for the Republican presidential nomination in 1976, Reagan's advisors presented these cuts as programmatic adjustments. They also sought political cover through bi-partisanship. Their initial gambit was to reduce the package offered to early retirees and -- this should sound familiar -- lower the inflation-adjusted value of future benefits by changing the COLA formula. Disconcertingly, from the perspective of the Reagan Administration, citizen groups mobilized quickly and the ensuing "bi-partisan" bill was defeated 86-12 in the Senate. Soon thereafter, the Senate voted on a non-binding resolution against "unfairly penalizing early retirees." It passed 96-0. Reagan's assault on Social Security had stalled.

The Greenspan Commission emerged directly out of this legislative disaster. It began as a strategic retreat for those who had claimed that Social Security was in great peril. It was expected to follow a time-honored tradition by writing a forgettable report. For a variety of reasons, this did not occur. The commission's major contributions were to add to the regressive quality of the overall tax structure by increasing FICA rates, raising the retirement age and firmly establishing the politically charged idea that Social Security and Medicare, uniquely among major U.S. federal programs, must have an assured and dedicated funding stream guaranteeing actuarial solvency for an extended (75 year) horizon.

Politicians in favor of Social Security accepted the Commission's report and the ensuing legislation as their concern was to shore up the program politically. The president's advisors accepted the report, as they were anxious to mend the administration's relationship with elderly voters before the 1984 elections. Moreover, they correctly surmised, the campaign against Social Security could be resumed at a latter date in the event that projected revenues from the payroll tax could not, on their own, cover projected expenditures.

As things turned out, we now have a modest shortfall. Why? One reason is the reduction in the payroll tax instituted in 2011 to fight the recession. But to date the sums involved in that tax holiday have not been substantial. The primary reason for the shortfall is that the median American wage, by contrast to productivity, has effectively stagnated since the mid-1970s. Since the so-called "Social Security Trust Fund" is financed out of a tax on wages (as of 2012, wages up to a maximum of $110,100 are subject to tax), and because the wages of most working Americans have largely stagnated for close to three decades, revenue growth has underperformed the expectations of the early 1980s. So, for example, when the minimum wage was raised in 1996, the projected date for the depletion of the "Trust Fund" was moved back by almost four years. Raise wages, and the revenues that can be anticipated from a tax on those wages will also rise. The issue is as simple as that. It is also as complex, as neither major party has taken the problem of wage stagnation seriously.

Dean Baker of the Center for Economic and Policy Research wryly observes that, in contrast to Social Security, no one in Washington is worried that funding for the Pentagon, Homeland Security, sundry wars or the warrantless wiretapping program will soon be exhausted. Yet, by the peculiar accounting applied exclusively and solely to Social Security (and Medicare), these programs are grotesquely insolvent. No "trust fund" or dedicated tax has been established to pre-pay these expenses, and their budgets are set to expire within a year. Yet we do not see grieving editorials proclaiming, "these programs will not be there for our children!" (And if someone does, can we get it in writing?)

While many of us suspected something like this at the time, the Gingrich-Clinton effort to initiate a phased privatization of Social Security began soon after the 1996 election. Their talks and the compromise at which they arrived is now a matter of public record. By contrast to the Reagan era push, the Clinton Administration took a different path. Politically, it presented itself as dedicated to "saving" Social Security. Save it from what? The political machinations of its well-healed opponents? Well, no. Bill Clinton's contented he was going to save Social Security from its looming "insolvency." What followed is nicely summarized in an essential book by Eric Laursen, The People's Pension: The Struggle to Defend Social Security Since Reagan:

An agreement took shape that the president would announce a plan to "save" Social Security in his 1998 State of the Union address. Gingrich would make positive comments and assign Ways and Means to make recommendations as to the details. Both would attempt to keep the issue from coming to a head before the November election, and Clinton would use the interval to build public support by talking up the need for reform [Clinton also agreed to mandatory private accounts for all individuals at an estimated additional cost of $300 -- $600 billion from general funds]. That campaign -- the "National Dialogue on Social Security," it was eventually named -- would culminate in a White House conference after the election, following which the lame-duck Congress would vote on the bipartisan measure that had, presumably, come together by then. (Laursen 2012, p. 346)

To sum up, by late 1997 nothing stood between Social Security and a dream that had eluded Wall Street for almost six decades. Moreover, in a reprise of Nixon-to-China politics, this dream was being bought to fruition by a Wall Street-friendly and newly reelected president from the Democratic Party (This lesson has not escaped Barack Obama's Wall Street donors or his presumptive new Treasury Secretary, Erskine Bowles -- who, let us not forget -- was asked to stay on as Clinton's Chief of Staff for the express purpose of directing the planned "reform" of Social Security). As signs of "the fix" were becoming increasingly visible, and many of us were beginning to despair, Monica Lewinsky burst onto the scene. At the time, she seemed Heaven-sent. Personally, I intend to raise a glass to her when I receive my first Social Security check.

The White House, forced suddenly to scramble for allies, calculated that 1998 would be an inopportune time to (again) throw its liberal base under the bus. Republicans, especially that portion whose support came from fundamentalist Christians and social conservatives, were completely diverted by Lewinsky and her blue dress. The consequence was that Republicans and "centrist" Democrats failed to deliver the greatest single prize in the history of political lobbying. Metaphorically, they dropped the ball on a routine catch that would have ended the game. From a progressive perspective, what unfolded was in equal parts pathetic and delightful. While it was true that the Clinton Administration patched up their relationship with Congressional Republicans sufficiently to enact some remarkably irresponsible legislation, most memorably the repeal of Glass-Steagall and the Commodity Futures Modernization Act, Social Security survived the darkest moment since its inception.

George W. Bush, whose innate intelligence has rarely been overestimated, can be described as a man without guile. After the Republican Party cinched his reelection by unleashing every trick imaginable to throw the vote in the State of Ohio, Bush proclaimed that he had earned a "mandate." Remarkably, this "mandate" authorized a crusade to establish private personalized accounts for every worker on Social Security. Who knew? However, Bush's numerous speeches also revealed that this mandate was somewhat less clear on the future of the financial commitments made to retirees under traditional Social Security, how to meet the substantial expenses of the transition to private accounts, and related issues. In fairness to Bush, his top 10 donors likely shared his interpretation of the election's "mandate" -- as all of them were from the financial services and accounting industries.

To transform this alleged mandate into legislation, Karl Rove dispatched Bush on a 29 states tour to whip up mass support for the partial privatization of Social Security (really -- you can't make this stuff up). Given the time and effort expended, we can only surmise that Rove and Bush were surprised that they didn't carry the day. Worse, from Wall Street's perspective, the Democratic leadership saw a political opportunity in Bush's failing campaign. Neglecting to remind voters of their leadership's recent push for mandatory accounts, the Democrats decided that 2005 would be a good time to "stand on principle" with regard to Social Security. Having narrow political support, and leading an increasingly unpopular war, Bush's effort did not so much end as simply fizzle out.

Which brings us to the present. First, let us drop wishful thinking and begin by recognizing that Barack Obama ascribes to the demonstrably false narrative that "Social Security" is in "crisis." It is something of a credit to Obama's constancy that he has held this (false) belief for some time. Even in the midst of a tight race for the Democratic Party's presidential nomination, only two short years after the embarrassing and highly public failure of George Bush's 29 states road show, Barack Obama was unabashedly reiterating the mantras of the privatizers.

Second, it is now a matter of public record that Obama's "Grand Bargain" of 2011 included an offer to reset Social Security's COLA to a formula that would, by design, reduce the inflation-adjusted value of each month's check. The White House based its offer on the recommendations of the Simpson-Bowles Commission, a group of Republicans and conservative Democrats previously hand-picked by Barack Obama to identify a "bi-partisan solution" to the "crisis" of the federal debt. As this debt can be readily traced to Bush's tax cuts, unfunded and ongoing wars and the financial collapse induced by the weak bank regulation and supervision championed by Presidents Clinton and Bush, it is as yet unclear why pensioners should be the ones asked to sacrifice. But this question has not been answered because it has not been asked.

Nevertheless, 15 years after the Clinton-Gingrich entente, the storm clouds are again ominous. Wall Street lobbyists are (rightfully) confident after their tremendous victory over financial reregulation. Major banks have recently been gifted with the 49 State Mortgage Settlement. And though financial firms and their lobbyists are still engaged in "mop up" actions, such as seeing to the evisceration of as-yet-unwritten rules concerning derivatives and capital requirements, it is unlikely that they have failed to appreciate the political opportunity before them. For the rest of us, the question is: How much of Social Security can survive another "centrist" second-term Democrat with strong political and ideological ties to Wall Street? The answer may come sooner than we think.

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