What We Should Have Learned by Now

Friday, April 30, 1999

The history of Social Security legislation may not tell us how to fix the program today, but it can certainly help us to understand approaches that won’t work. History offers two lessons in particular.

LESSON ONE: ATTEMPTS TO BUILD A RESERVE WILL FAIL

From time to time throughout the history of Social Security, certain events—policy decisions, wartime economic conditions, and business-cycle expansions—have created large reserves or projections thereof. Those reserves have generated pressures for greater spending. Congress has invariably responded to this pressure by raising benefits or expanding eligibility.

The original Social Security Act of August 1935 adopted a financing plan under which payroll taxes would initially exceed benefit payments and a large reserve would be built. Interest earned on the reserve would be available to defray the program’s future costs. This seemed at the time like an eminently sensible idea. But within four years this reserve policy collapsed under an avalanche of criticism and rising pressure to expand benefits. The criticism and the pressure came from both sides of the political aisle. By 1939, the sizable reserve that had seemed such a good idea four years earlier had become a political liability. That year, Congress enacted legislation to dissipate the reserve mainly by expanding eligibility and increasing benefits.

Later, during the 1940s, the wartime economy generated a series of annual Social Security surpluses. And, by 1950, the trust fund balance had grown to a level large enough to finance benefit payments for the next decade. What happened? The large balance generated spending pressures. In each election year from 1950 to 1960, Congress raised eligibility or expanded benefits. The benefit increases were large. The Social Security Amendments of 1950–1954 more than doubled the typical recipient’s benefits.

Later still, during the 1960s, the U.S. economy entered into a decade-long period of strong economic growth, fueling large increases in the payroll tax revenues that funded Social Security. Forecasts of the trust fund’s near-term growth during 1965–1973 were consistently the largest in the program’s history. But instead of holding onto the surplus, Congress expanded benefits. In just nine years, 1965–1973, Congress enacted seven across-the-board increases, raising benefits by 83 percent, outstripping inflation by a third. This period of extravagance ended with a 20 percent across-the-board benefit increase. The increase just happened to appear in Social Security checks a mere five weeks before the 1972 elections.

Some observers believe that this time it will be different. Because the enormous future costs of financing the baby boom generation’s benefits are so widely recognized, they argue, Congress will be able to resist the inevitable political pressure to spend any surplus. Yet Social Security’s demographic problem is not new. And, in the past, knowledge of large projected increases in the size of the beneficiary population has done nothing to deter elected officials from spending surplus funds.

LESSON TWO: WE’D BETTER COME UP WITH SOMETHING NEW BECAUSE NOTHING WE’VE TRIED BEFORE HAS WORKED

Twice before Congress has been confronted with the difficult task of addressing financial insolvency: in 1977 and 1983. In 1977, Congress faced projections indicating that the trust fund’s balance would fall to less than one month’s worth of benefits by 1982, and the long-term actuarial balance reached the lowest level in the program’s history. Then, in late 1982, Congress faced a problem that was still more acute: The trust fund balance would be depleted in a matter of months.

In each case, Congress chose the same means of restoring solvency: relying primarily on higher revenues. In 1977, 90 percent of the projected short-term, three-year solution and 70 percent of the improvement in the long-term actuarial balance were achieved by raising revenues. In 1983, the corresponding estimates were 63 percent for the short run and 84 percent for the long run. Given the extraordinary political difficulty of reducing benefit payments, the heavy reliance of enacted legislation on higher revenues in the short run is not surprising. But as we know now, of course, these solutions proved only temporary.


Every time there has been a Social Security surplus, Congress has spent it by increasing benefits.


In any event, the situation facing policymakers in 1999 is radically different from the short-run financial crises of the late 1970s and the early 1980s. This is no short-term crisis. Unless Congress can alter its sixty-year-old pattern of spending Social Security surpluses—and what reason do we have to suspect that it can?—adding revenues will not solve the problem. To the contrary, attempting to add to the reserve will only create political pressure to add to spending.