Friday, February 20, 2009

New paper: The 1983 Social Security Reforms: Real and Misremembered Lessons for Today's Leaders

Former White House Social Security guru and current Hudson Institute senior fellow Chuck Blahous has a new paper on the lessons that should be learned from the 1983 Social Security reforms, and some lessons that were learned that probably shouldn't have been. Here's the abstract:

The 1983 Social Security amendments are today often invoked as a process model for conducting politically difficult entitlement reforms. Success in reforming entitlements now depends not only on whether negotiators can summon a similar bipartisan spirit, but also on whether they are willing to define the problem as transparently as negotiators did in 1983, and on whether they avoid analytical shortcomings that have set back subsequent reform efforts.

Social Security reform will always require difficult compromises between individuals with strongly-held opposing views.  Today, negotiators face a daunting additional barrier: fierce disputes about the nature, size and immediacy of the problem to be solved. 

There is today a significant danger of misremembering and misapplying the lessons of 1983.  The 1983 effort succeeded in large part because participants from across the political spectrum had a shared understanding of Social Security's financing shortfall.  Analytical methods were employed that prevented issues such as Trust Fund accounting from injecting confusion and discord into the discussion. 

Ironically, the 1983 amendments themselves, and subsequent accounting changes, have inadvertently destroyed this shared understanding, giving rise to pervasive misimpressions about Social Security's current finances – and about the intended effects of the 1983 reforms themselves.  Specifically, negotiators in 1983 did not intend to run decades of surpluses to amass a large Social Security Trust Fund, nor would they have believed that doing so would effectively pre-fund benefits in deficit years now projected for 2017 and beyond. 

Click here to read the whole paper.

5 comments:

William said...

The 1983 Social Security Amendment was a farce. There was no compromise between generations. All one needs to do is look at the changes made.

Raise the full retirement age from 65 to 67. If SS was in such dire straits why wait decades to begin phasing in the increase? The reason was they chose the start date with a year where most did not vote. If they did not vote, there would be no consequences. Who did this affect? It only affected those who were young and did not vote.

Raise the SS-OASI tax. This was immediate and was not retroactive. Therefore, those who paid too little in the form of taxes during most of their working lives escaped paying their fair share. In fact anyone who was already retired got a bailout from the young.

Raise the SS-OASI Base. This should have been raised years before. The initial premise of being set at 120% of the US Average Wage had good foundation. However, after the 1943 Altmyer testimony, should have been indexed based on the Growth in the US Average Wage. Again, this change was not retroactive and those who were close to retirement escaped the brunt of its impact while those who were already retired got a bailout from the young.

Subject SS-OASI benefits to taxation. This affects everyone who meets the criteria. For those who had been paid benefits in the past, their previous year’s benefits escaped taxation. This affected current as well as future beneficiaries.

In summary the 1983 compromise shifted the cost of SS-OASI problems onto future generations instead of spreading the burden across all generations. Has the 1983 fix been a success, we would not be here discussing SS-OASI. Keep in mind they projected these changes to pay full benefits until only 2064. Therefore, they knew this was not a fix, but only a patch.

Bruce Webb said...

Well that is not my reading not based on the oral history given by Robert Myers, Executive Director of the 1983 Commission. The whole thing is at:
http://www.ssa.gov/history/myersorl.html
and I have excerpted from it at my site Robert Myers and Pre-Funding Social Security Myers may have been the only person to actually attend every meeting and as the former Chief Actuary from 1947-1980 clearly the best informed person in the room. Plus he had control of the files.

His claim is that pre-funding for any particular cohort was not the focus of discussion, instead it was on getting a firm handle on the first ten years (the window for Short Term Actuarial Balance) with at least half an eye on the seventy-five year window (the standard measure for Long Term Actuarial Balance). They were able to conclude that their plan would under the Intermediate sets of assumptions solve the Short Term and ON AVERAGE handle the Long Term.

Judged from that perspective the 1983 compromise was a perfect success. It took Trust Funds that each flirted with Depletion in 1983 and via gradual increases in FICA phased in right up to 1990 were able to hand over to Clinton in 1993 a TF with a ratio right at 100, which is the mandated target.

Social Security has always been a Pay-Go system, the 1983 Reform simply restored SS to that. Plus the idea that this represents some intergenerational equity issue is (sorry Andrew) hooey. The current formula that adjusts benefits to real wage increases means that every generation gets a better real benefit than the ones before it and would even if benefits have to be cut after 2040. In the face of that worrying that retirees before 1990 by some measures got a better ROI is pretty selfish on the part of Gen-X. After all what did those geezers do for us. Oh. Just won a world war for us. Essentially what Pete G. Peterson and crew want us to do is to whine because we paid retirement for the Greatest Generation. The retiree of 1990 was born in 1925 and would have been draft eligible by 1943, just in time to get into the major battles on both fronts.

But I guess Gen-X doesn't have time to read history books.

As to the patch prior to 2003 the Trustees (and hence the Commission only looked at numbers over a 75 year window, they had no real responsibility to worry about any year pat 2058. The notion that we need to address shortfalls over the Infinite Future Horizon being somewhat novel, if the Commission really believed that on average they had fixed it to 2064 they had gone above and beyond the role of duty.

So really I think some people should drop their sense of grievance here. Nobody done you wrong.

Andrew G. Biggs said...

Bruce,

I don't think Chuck's paper disagrees with your interpretation of what was intended regarding the trust fund. He even quotes the interview with Myers saying there was no real goal of prefunding. So I think there's some common ground here.

Chuck Blahous said...

Andrew,

You're correct. Bruce's take on what was intended, and not intended, in 1983 is basically consistent with the detailed descriptions in my paper.

Bruce, I agree with you that Myers is a terrific resource for Social Security policy history. SSA has done a terrific job of compiling oral histories and key policy documents on their marvelous website, but Myers' material really stands out even among these as being especially invaluable.

Best,

Chuck

Bruce Webb said...

Andrew and Chuck my criticism was meant to address William's take and not the paper as such.

Sorry for the confusion.