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Another Greenspan Social-Security Reform?/ Artikel mises.org

verfasst von - ELLI -, 07.03.2003, 16:10

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Another
Greenspan Social-Security Reform?
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by John Attarian

[Posted March 7, 2003]

[img][/img] 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 then. 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 quarreled 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 on 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 from extending Social 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 bringing 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, 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
actuarial deficit by 1.21 percent of taxable payroll, or almost 58 percent of
the total.

Not only that, the Greenspan Commission's reforms were shot through with
serpentine underhandedness. For one thing, the gradual 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]arly 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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John Attarian is an independent scholar and writer in Ann
Arbor, Michigan. His outstanding book Social 
Security: False Consciousness and Crisis, which treats the myths and
realities of Social Security in detail, has just been published by Transaction
Publishers.

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Another Greenspan Social-Security Reform?/ Artikel mises.org - - ELLI -, 07.03.2003, 16:10