The politics of reforming social security

Political Science Quarterly

Volumn 113, Issue 2, 1998, Pages 213-240

  Arnold, R Douglas ^a  

^a NONE

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EID: 0039496539     PISSN: 00323195     EISSN: None     Source Type: Journal    
DOI: 10.2307/2657854     Document Type: Article

References (79)

1. See R. Douglas Arnold, Congress and the Bureaucracy: A Theory of Influence (New Haven: Yale University Press, 1979), 165-206.
2. For an excellent account, see Richard Himelfarb, Catastrophic Politics: The Rise and Fall of the Medicare Catastrophic Coverage Act of 1988 (University Park: Pennsylvania State University Press, 1995).
3. Advisory Council on Social Security, Report of the 1994-1996 Advisory Council: Reports of the Technical Panels (Washington, DC: U.S. Government Printing Office [GPO], 1997), 287.
4. On how the electoral connection shapes legislators' voting decisions, see David R. Mayhew, Congress: The Electoral Connection (New Haven: Yale University Press, 1974): John W. Kingdon, Congressmen's Voting Decisions, 3rd ed. (Ann Arbor: University of Michigan Press, 1989); and R. Douglas Arnold. The Logic of Congressional Action (New Haven: Yale University Press. 1990).
5. On how the electoral connection shapes legislators' voting decisions, see David R. Mayhew, Congress: The Electoral Connection (New Haven: Yale University Press, 1974): John W. Kingdon, Congressmen's Voting Decisions, 3rd ed. (Ann Arbor: University of Michigan Press, 1989); and R. Douglas Arnold. The Logic of Congressional Action (New Haven: Yale University Press. 1990).
6. On how the electoral connection shapes legislators' voting decisions, see David R. Mayhew, Congress: The Electoral Connection (New Haven: Yale University Press, 1974): John W. Kingdon, Congressmen's Voting Decisions, 3rd ed. (Ann Arbor: University of Michigan Press, 1989); and R. Douglas Arnold. The Logic of Congressional Action (New Haven: Yale University Press. 1990).
7. For a summary of Social Security legislation, 1935 to 1977, see Martha Derthick, Policymaking for Social Security (Washington, DC: Brookings Institution, 1979), 429-432.
8. For the story of the 1983 reform, see Paul Light, Still Artful Work: The Continuing Politics of Social Security Reform, 2nd ed. (New York: McGraw-Hill, 1995).
9. Two years ago, when the Advisory Council on Social Security was preparing its recommendations, the projected date of insolvency was 2029. For the most recent projections, see Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, The 1998 Annual Report (Washington, DC: GPO, 1998), 4.
10. On the various approaches to reforming Social Security, see Peter Diamond, "Proposals to Restructure Social Security," Journal of Economic Perspectives 10 (Summer 1996): 67-88; Edward M. Gramlich, "Different Approaches for Dealing with Social Security," Journal of Economic Perspectives 10 (Summer 1996): 55-66.
11. On the various approaches to reforming Social Security, see Peter Diamond, "Proposals to Restructure Social Security," Journal of Economic Perspectives 10 (Summer 1996): 67-88; Edward M. Gramlich, "Different Approaches for Dealing with Social Security," Journal of Economic Perspectives 10 (Summer 1996): 55-66.
12. See Advisory Council on Social Security, Report of the 1994-1996 Advisory Council: Findings and Recommendations (Washington, DC: GPO, 1997).
13. For a useful table summarizing the elements of seven plans, see Employee Benefit Research Institute, "Keeping Track of Social Security Reform Proposals: A Summary," EBRI Notes 17 (November 1996): 1-8.
14. The Ball, Gramlich, and Weaver-Schieber plans are presented in Advisory Council, Findings and Recommendations. The other two plans are described in Laurence J. Kotlikoff and Jeffrey D. Sachs, "It's High Time to Privatize," The Brookings Review 15 (Summer 1997): 16-22; Laurence J. Kotlikoff and Jeffrey D. Sachs, "The Personal Security System: A Framework for Reforming Social Security" (presented to the Subcommittee on Social Security, House Committee on Ways and Means, Hearings on the Future of Social Security for This Generation and the Next, 105th Congress, 1st sess., 6 March 1997); and Peter J. Ferrara, "A Plan for Privatizing Social Security," The Cato Project on Social Security Privatization (Washington, DC: Cato Institute, 1997).
15. The Ball, Gramlich, and Weaver-Schieber plans are presented in Advisory Council, Findings and Recommendations. The other two plans are described in Laurence J. Kotlikoff and Jeffrey D. Sachs, "It's High Time to Privatize," The Brookings Review 15 (Summer 1997): 16-22; Laurence J. Kotlikoff and Jeffrey D. Sachs, "The Personal Security System: A Framework for Reforming Social Security" (presented to the Subcommittee on Social Security, House Committee on Ways and Means, Hearings on the Future of Social Security for This Generation and the Next, 105th Congress, 1st sess., 6 March 1997); and Peter J. Ferrara, "A Plan for Privatizing Social Security," The Cato Project on Social Security Privatization (Washington, DC: Cato Institute, 1997).
16. The Ball, Gramlich, and Weaver-Schieber plans are presented in Advisory Council, Findings and Recommendations. The other two plans are described in Laurence J. Kotlikoff and Jeffrey D. Sachs, "It's High Time to Privatize," The Brookings Review 15 (Summer 1997): 16-22; Laurence J. Kotlikoff and Jeffrey D. Sachs, "The Personal Security System: A Framework for Reforming Social Security" (presented to the Subcommittee on Social Security, House Committee on Ways and Means, Hearings on the Future of Social Security for This Generation and the Next, 105th Congress, 1st sess., 6 March 1997); and Peter J. Ferrara, "A Plan for Privatizing Social Security," The Cato Project on Social Security Privatization (Washington, DC: Cato Institute, 1997).
17. Robert M. Ball, Edward M. Gramlich, Carolyn L. Weaver, and Sylvester J. Schieber were members of the thirteen-member Advisory Council on Social Security (1994-1996). Laurence J. Kotlikoff is professor of economics at Boston University, Jeffrey Sachs is professor of economics at Harvard University, and Peter J. Ferrara is an associate scholar at the Cato Institute. Members of Congress are Senator Bob Kerrey (D-NE), former Senator Alan K. Simpson (R-WY), Representative John Kasich (R-OH), and Senator Daniel Patrick Moynihan (D-NY).
18. Robert M. Ball, Edward M. Gramlich, Carolyn L. Weaver, and Sylvester J. Schieber were members of the thirteen-member Advisory Council on Social Security (1994-1996). Laurence J. Kotlikoff is professor of economics at Boston University, Jeffrey Sachs is professor of economics at Harvard University, and Peter J. Ferrara is an associate scholar at the Cato Institute. Members of Congress are Senator Bob Kerrey (D-NE), former Senator Alan K. Simpson (R-WY), Representative John Kasich (R-OH), and Senator Daniel Patrick Moynihan (D-NY).
19. The trust fund is currently equal to about 1.7 years of benefit payments. See Board of Trustees, The 1998 Annual Report, 127.
20. Under present law, the trust fund would decline to zero in 2032, whereas under the Ball plan the trust fund would grow to about 4.5 years worth of benefits and then stabilize around that level. A fund of this magnitude could provide investment earnings equivalent to what an additional 2 percent payroll tax would supply. See Advisory Council, Findings and Recommendations, 172, 184.
21. See David Cutler, "Reexamining the Three-Legged Stool" in Peter Diamond, David Lindeman, and Howard Young, eds., Social Security: What Role for the Future? (Washington, DC: Brookings Institution, 1996).
22. Advance funding is not logically necessary for privatization. For example, Latvia created a privatized but unfunded pension system. But such hybrid schemes are both rare and difficult to explain to politicians and citizens. On the distinction between privatization and advance funding, see John Geanakoplos, Olivia S. Mitchell, and Stephen P. Zeldes, "Would a Privatized Social Security System Really Pay a Higher Rate of Return?" in R. Douglas Arnold, Michael Graetz, and Alicia H. Munnell, eds., Framing the Social Security Debate: Values, Politics, and Economics (Washington, DC: Brookings Institution, forthcoming).
23. On the economics of advance funding, see Peter Diamond, "Macroeconomic Aspects of Social Security Reform," Brookings Papers on Economic Activity (2, 1997): 1-87.
24. Politicians are not the only people who behave in this fashion. Many consumers use installment debt to maximize current benefits and minimize current costs. Perhaps politicians adopted advance funding for Social Security in the 1930s because advance funding better corresponded with the values of the day, just as the subsequent movement towards pay-as-you-go funding corresponded with the buy-now-pay-later mentality of the 1960s and 1970s.
25. For a superb political analysis of Social Security from 1935 to 1977, see Derthick, Policymaking for Social Security.
26. Ibid., 215.
27. Ibid., 232.
28. The number of workers per beneficiary declined from forty-two in 1945, to seventeen in 1950, nine in 1955, five in 1960, and four in 1965. It reached its current level of 3.3 workers per beneficiary in 1975. See Board of Trustees, The 1998 Annual Report, 122.
29. According to Martha Derthick, "Social Security was presented to the public as a program in which the worker takes care of his own future, gets back at least what he has paid for, and is entitled to get it back as a right." Derthick, Policymaking for Social Security, 289.
30. All of the reform plans recognize the sanctity of these rights. Even the plans that seek to replace the current Social Security system with something completely different recognize that they must provide benefits over the next six or seven decades for all workers and retirees who have been part of the pay-as-you-go system.
31. Recalibrated in terms of taxes, it would require a tax of 1.5 percent of taxable payrolls for about seventy years to eliminate an unfunded liability of $9 trillion. See Advisory Council, Findings and Recommendations, 109.
32. Kotlikoff and Sachs, "It's High Time to Privatize" and "The Personal Security System."
33. Kotlikoff and Sachs note that the poorest senior citizens - those who are totally dependent on Social Security - would be insulated from the new tax, because Social Security benefits would continue to be indexed for price changes. All other senior citizens, however, would suffer declines in their living standards because other forms of retirement income are not indexed. Although Kotlikoff and Sachs argue that compelling senior citizens to pay a share of Social Security's unfunded liability is "intergenerationally equitable," it is not an argument that many elected politicians are likely to find appealing.
34. See Arnold, The Logic of Congressional Action, 45-46.
35. On the effect of Social Security reform on private and national saving, see Eric M. Engen and William G. Gale, "Effects of Social Security Reform on Private and National Saving" in Steven A. Sass and Robert K. Triest, eds., Social Security Reform: Links to Saving, Investment, and Growth (Boston: Federal Reserve Bank of Boston, 1997).
36. For a full theoretical treatment of the issues in this paragraph and the next, see Arnold, The Logic of Congressional Action.
37. See Michael Tanner, "Public Opinion and Social Security Privatization," The Cato Project on Social Security Privatization, (Washington, DC: Cato Institute, 1996), 4-5.
38. Ferrara, "A Plan for Privatizing Social Security," 1.
39. Ibid., 14.
40. It is reminiscent of the magic asterisk in President Ronald Reagan's first budget that also referred to unspecified future expenditure cuts of $60 billion annually. It was far easier to assume that such cuts would be made than to make them. See William Greider, The Education of David Stockman and Other Americans (New York: E. P. Dutton, 1982), 36.
41. Martin Feldstein, "Transition to a Fully Funded Pension System: Five Economic Issues," NBER (National Bureau of Economic Research) Working Paper No. 6149 (1997): 20.
42. Martin Feldstein and Andrew Samwick, "The Transition Path in Privatizing Social Security," NBER Working Paper No. 5761 (1996); Feldstein, "Transition to a Fully Funded Pension System," 11.
43. Martin Feldstein and Andrew Samwick, "The Transition Path in Privatizing Social Security," NBER Working Paper No. 5761 (1996); Feldstein, "Transition to a Fully Funded Pension System," 11.
44. Feldstein, "Transition to a Fully Funded Pension System," 21.
45. Himelfarb, Catastrophic Politics.
46. Derthick, Policymaking for Social Security, 429-431; Board of Trustees, The 1998 Annual Report, 33.
47. Derthick, Policymaking for Social Security, 429-431; Board of Trustees, The 1998 Annual Report, 33.
48. Only four of the twenty tax increases between 1937 and 1990 were as large as 0.5 percentage points (1950, 1954, 1960, 1963). For a list of tax rates by year, see Board of Trustees, The 1998 Annual Report, 33-34.
49. Congress began charging self-employed workers 75 percent of the combined rate, but it allowed the rate to dip as low as 69 percent between 1973 and 1980. Board of Trustees, The 1998 Annual Report, 33.
50. Actually, Congress established parity in tax rates effective 1984, but it also granted self-employed workers an income tax credit to offset part of the increase. The credit was not phased out until 1990. Self-employed workers are currently allowed to deduct the "employers" half of the payroll tax from taxable income, just like any other employer. Of course, this tax deduction is much less valuable than either the original reduced tax rate for self-employed workers or the transitional tax credit. See Congressional Quarterly Almanac, 1983 (Washington, DC: Congressional Quarterly, 1984), 662.
51. Light, Still Artful Work; and Congressional Quarterly Almanac, 658-663.
52. Strictly speaking, legislators voted to accelerate the imposition of tax increases that were originally passed in 1977 and scheduled to be phased-in between 1979 and 1990. Since the acceleration generated about $40 billion in additional revenues, it was a genuine tax increase, even if it did not raise the 1990 rate above what it would have become in the absence of the reform bill. See Light, Still Artful Work, 180.
53. See footnote 40.
54. If the current Social Security system were somehow dissolved and the 6.2 percent payroll tax were transformed into a mandatory 6.2 percent contribution, would citizens across the land celebrate the elimination of a 6.2 percent tax?
55. Advisory Council, Findings and Recommendations, 20, 181-183.
56. The proposal is to increase the benefit computation period from thirty-five to thirty-eight years, which would reduce benefits by an average of 3 percent. Advisory Council, Findings and Recommendations, 25.
57. Although the Ball plan does not explicitly endorse investing in equities, the actuarial projections that compare it with the other two Advisory Council plans assume that 40 percent of the trust fund would be invested in equities by 2015. Without this assumption, the Ball plan would be underfunded and additional tax increases or benefit cuts would be required. See Advisory Council, Findings and Recommendations, 80-86, 166.
58. P. Brett Hammond and Mark J. Warshawsky, "Investing Social Security Funds in Stocks," Benefits Quarterly 13 (3rd Quarter 1997): 52-65.
59. In cases where nonvoting is equivalent to voting on one side or the other, the government could vote its shares neutrally.
60. See Theodore J. Angelis, "Investing Public Money in Private Markets: What are the Right Questions?" and Howell E. Jackson, "Regulatory Problems in Privatizing Social Security," both in Arnold, Graetz, and Munnell, eds., Framing the Social Security Debate. On activism by state and local pension funds, see Roberta Romano, "Public Pension Fund Activism in Corporate Governance Reconsidered," Columbia Law Review 93 (May 1993): 795-853.
61. See Theodore J. Angelis, "Investing Public Money in Private Markets: What are the Right Questions?" and Howell E. Jackson, "Regulatory Problems in Privatizing Social Security," both in Arnold, Graetz, and Munnell, eds., Framing the Social Security Debate. On activism by state and local pension funds, see Roberta Romano, "Public Pension Fund Activism in Corporate Governance Reconsidered," Columbia Law Review 93 (May 1993): 795-853.
62. See Theodore J. Angelis, "Investing Public Money in Private Markets: What are the Right Questions?" and Howell E. Jackson, "Regulatory Problems in Privatizing Social Security," both in Arnold, Graetz, and Munnell, eds., Framing the Social Security Debate. On activism by state and local pension funds, see Roberta Romano, "Public Pension Fund Activism in Corporate Governance Reconsidered," Columbia Law Review 93 (May 1993): 795-853.
63. See Theodore J. Angelis, "Investing Public Money in Private Markets: What are the Right Questions?" and Howell E. Jackson, "Regulatory Problems in Privatizing Social Security," both in Arnold, Graetz, and Munnell, eds., Framing the Social Security Debate. On activism by state and local pension funds, see Roberta Romano, "Public Pension Fund Activism in Corporate Governance Reconsidered," Columbia Law Review 93 (May 1993): 795-853.
64. Advisory Council, Findings and Recommendations, 126-131.
65. On the administrative costs for various type of retirement systems, see Olivia S. Mitchell, "Administrative Costs in Public and Private Retirement Systems," NBER Working Paper No. 5734 (1996).
66. Advisory Council, Findings and Recommendations, 114-117.
67. See James M. Poterba and David A. Wise, "Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement," NBER Working Paper No. 5762 (1996); Employee Benefit Research Institute, "Worker Investment Decisions: An Analysis of Large 401(k) Plan Data," EBRI Issue Brief Number 176 (August 1996); Diamond, "Macroeconomic Aspects of Social Security Reform."
68. See James M. Poterba and David A. Wise, "Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement," NBER Working Paper No. 5762 (1996); Employee Benefit Research Institute, "Worker Investment Decisions: An Analysis of Large 401(k) Plan Data," EBRI Issue Brief Number 176 (August 1996); Diamond, "Macroeconomic Aspects of Social Security Reform."
69. See James M. Poterba and David A. Wise, "Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement," NBER Working Paper No. 5762 (1996); Employee Benefit Research Institute, "Worker Investment Decisions: An Analysis of Large 401(k) Plan Data," EBRI Issue Brief Number 176 (August 1996); Diamond, "Macroeconomic Aspects of Social Security Reform."
70. The philosophical differences are best observed as the proponents of one plan critique another plan. Weaver, Schieber, et al. on the Gramlich plan: "Our first concern is that this option simply contains far more restrictions on workers' choices than we deem necessary or desirable. The option sharply limits workers' investment choices. . . . The plan also forces workers to annuitize their full accumulations at retirement." Gramlich and Twinney on the Weaver-Schieber plan: "The PSA plan permits workers attaining age 62 full access to their accounts that have been accumulated over an entire working career. The government is in effect saying to people that it does not trust them to save for the future when they are younger than 62, so it requires them to hold PSAs. But once these people become 62, they suddenly become wise and responsible, and the government no longer requires them to preserve their assets beyond that date." Advisory Council, Findings and Recommendations, 129, 157.
71. Advisory Council, Findings and Recommendations, 129-131; Diamond, "Macroeconomic Aspects of Social Security Reform."
72. Advisory Council, Findings and Recommendations, 129-131; Diamond, "Macroeconomic Aspects of Social Security Reform."
73. For a discussion of the range of options for dealing with the actuarial imbalance, see Advisory Council, Reports of the Technical Panels, 63-92.
74. Advisory Council, Findings and Recommendations, 231-239.
75. The aim is to pick a set of alternatives that together amount to 2.17 percent of taxable payrolls over the next 75 years (the estimated difference between Social Security's revenues and expenses).
76. On how legislators anticipate future preferences, see Arnold, The Logic of Congressional Action.
77. On 1 April 1998, in the first test of the popularity of this proposal, the Senate adopted, 51-49, a nonbinding resolution calling for dedicating the 1998 budget surplus to establishing Social Security personal retirement accounts. The vote revealed deep partisan divisions. Republicans supported the resolution, 49-6; Democrats opposed it, 43-2.
78. Advisory Council, Reports of the Technical Panels, 66.
79. Board of Trustees, The 1998 Annual Report, 108.