The name of a senator who witnessed the signing of the Social Security Act of 1935 was misspelled in a caption Wednesday. He is Sen. Augustine Lonergan.
ARTFUL WORK: The Politics of Social Security Reform By Paul Light. Random House. 255 pp. $17.95; paperback, $8.
SOCIAL SECURITY: Prospects for Real Reform Edited by Peter J. Ferrara Cato Institute. 220 pp. $20; paperback, $8.95.
THE REPORT OF THE COMMITTEE ON ECONOMIC SECURITY OF 1935 and Other Basic Documents Relating to the Development of the Social Security Act: 50th Anniversary Edition National Conference on Social Welfare 288 pp. $35; paperback, $9.95.
FIFTY YEARS ago this month, on August 14, 1935, President Franklin D. Roosevelt signed the most far reaching of all New Deal laws, the Social Security Act. The act established not only old age and survivors insurance, federally-backed unemployment compensation, and aid to dependent children, but the broad ideological proposition that American citizens have a social entitlement to economic security. As the Reagan administration has dismantled one social program after another, Social Security, the most costly, sweeping and overtly socialistic program of them all, has proven to be the best defended. These books, though they have little else in common, explain why.
In 1982, at the height of President Reagan's fiscal counterrevolution, Social Security was in the headlines as an imminent financial catastrophe. Mr. Reagan, politically vulnerable as a sometime opponent of socialized retirement and at loggerheads with Congress over whether to raise Social Security taxes or to cut benefits, appointed the inevitable bipartisan commission. To almost everyone's surprise, and to the deep disappointment of the president's most conservative allies, the commission acted, astutely, to rescue the present program. In doing so, it managed to slaughter several sacred cows, including the dubious propositions that the retirement age could never be raised (it was), and that Social Security benefits would never be taxed (they were), and that indexing was untouchable (it wasn't). Social Security emerged better entrenched and more expensive than ever.
Depending on your viewpoint, this was either one of those Finest Hours when politicians rise above narrow partisan interests, or it was a first-class railroading by not-quite-dead liberals, at Reagan's expense. According to political scientist Paul Light, the 1982-83 rescue of Social Security was possible only because of an unlikely congruence of political interests and some elegant political leadership. As Light recounts the story in Artful Work, President Reagan and the opposition Democrats both needed a genuine solution more than they needed political ammunition to embarrass each other. The risk that the entire program might collapse was too real and too explosive to trifle with.
Light's storytelling talents are not quite in The New Yorker category of legislative saga turned into riveting prose, but the writing is more than serviceable, and the tale is a good one. By 1982, Social Security was in financial trouble because both demographics and economics had defied projections. The ratio of wage earners to retired people was steadily worsening. And since 1972, Social Security benefits had been indexed to inflation, but wages, and hence Social Security taxes, were lagging far behind.
Although a number of ideological conservatives had more radical reforms in mind, in 1981 and 1982 President Reagan dared not do anything to reinforce the suspicion that he intended to dismantle Social Security. All 15 commission members were committed to salvaging the system. Among the Democratic members was former Social Security Commissioner Robert Ball, one of the shrewdest latter-day New Dealers in Washington. Although the commission chairman was economist Alan Greenspan, a Republican, the executive director was Robert Myers, literally one of te designers of the 1935 system.
The commission quickly reached agreement on the magnitude of the problem -- a near-term deficit of about $150-200 billion, and a long-term deficit equal to about 1.8 percent of total payrolls. They also agreed that the gap had to be made up through a combination of benefit cuts and tax increases. In the end, the bargaing was consummated by a "Gang of Nine," with Robert Ball as lead negotiator for the Democrats, and David Stockman for the Republicans. The larger 15-member commission, though it was not the locus of these final negotiations, served as a superb cover.
Light quotes commission chairman Alan Greenspan, "Were we to take any of our solutions and put them in front of Congress, one by one, all would be voted down by very large majorities." Here, in short, was the rare presidential commission that actually did what it set out to do. By ingenious compromise, leadership and political brokering, it solved an intractable problem.
OR DID IT? For a small group of the ideologically faithful, the 1983 rescue only prolonged the problem. One White House Social Security expert kept far away from the Social Security Commission was a young lawyer named Peter Ferrara. Ferrara, unlike the commission, wants to privatize Social Security.
Ferrara, now affliated with the libertarian Cato Institute, contends in this collection of essays that Social Security was a very good deal for the first generation of retirees, but it must be a Ponzi scheme for future generations. This is because Social Security, as a pay-as-you-go system, can maintain benefits only by collecting ever-higher taxes on future wage earners. Ferrara also contends that a privatized retirement system, by accumulating pools of capital and investing them, would produce a far higher real rate of return, as well as more flexibility and freedom for retirees.
Ferrara's reform proposal would gradually supplant Social Security with a "super-IRA." Unlike the current IRA, which allows taxpayers to deduct IRA contributions from taxable income, this one would allow taxpayers to deduct contributions from their taxes. In other words, the government would buy everyone a super-IRA, worth up to 20 percent of Social Security taxes. Social Security benefits would be reduced comensurately.
By assuming a low rate of participation, Ferrara calculates that this would cost the government only about $14 billion a year; but if this nest egg is to be a gift from Uncle Sam almost everybody would take advantage of it, and 20 percent of Social Security taxes are more like $55 billion a year. Ferrara, in effect, is playing the old supply-side game: Promise that a radical tax rebate can be accomplished on the cheap, and later undertake stringent benefit cuts when the projection turns out to be wrong.
There is little prospect of the super-IRA being enacted, because you can play the supply-side game only once. This is hardly the year for a new $50 billion tax loophole. Thanks to the commission, Social Security seems to be in good financial order, at least for the next few decades. Moreover, as a universal program, it is simply too popular to tamper with.
REREADING the 1935 Report of the Committee on Economic Security, which has just been reissued in an anniversary edition along with supporting documents, one appreciates something of the boldness and political astuteness of Social Security's founding fathers (and mothers -- the chairwoman was Labor Secretary Frances Perkins). Although Social Security has required periodic adjustment to reflect changing demographic and economic realities, it is no accident that the program is so popular and that proposals to dismantle it must be camouflaged with fiscal sleight of hand.
In 1934 and 1935, there was a fierce debate within the government over whether Social Security should be a "funded" system: should it accumulate substantial pools of capital on the model of a private annuity? Ultimately, that seemed too socialistic, and Social Security was set up as a pay-as-you-go system, with taxes just adequate to cover benefit payouts. But, to give Ferrara his due, a pay-as-you-go system indeed becomes a less attractive deal for future generations, because it accumulates no savings.
The 1983 rescue was, to be sure, a splendid victory for Ball, Myers, Rep. Claude Pepper and the other liberals whom Ferrara calls the Social Security Old Guard. The system of 1935 has now been overhauled for a few more decades. Yet reading these three diverse books, one is left with the uneasy feeling that Social Security's liberal defenders are playing an uncharacteristically reactive role, while the libertarians are proposing the bold initiatives, however forensically dubious their mathematics or illiberal their objectives.
And one is left wondering what a modernized Social Security system might look like if its repair crew were as bold as its founders. Why, after all, can't Social Security operate as universal public system, and as a source of capital acumulation, too? Other nations, as ideologically diverse as Japan and Sweden, use Social Security precisely for that purpose. However, before we gain glimpses of such a system for the United States, it will be necessary for the conservative moment to pass and for a different brand of liberals to gain a turn at governing. In the meantime, the best that today's liberals can manage is "artful work" to defend the boldness of l935.