How Social Security Was Saved—and Might Be Again
Lost amid the impeachment fight and election contests, an epochal moment in the history of America’s welfare state is coming in 2020: For the first time since 1982, the Social Security Trust Fund will begin to shrink. Rather than lending money to the rest of the government, America’s most venerable spending program will begin to call in its nearly $3 trillion of IOUs. This won’t cause any sort of crisis today, or tomorrow. But it points toward a reckoning that is now just a few political cycles away.
This isn’t “news.” Fewer babies born, retiring Baby Boomers, and longer-living old folks have made it inevitable for some time. But this moment is coming sooner than we thought. As recently as 2010, the Social Security Administration predicted that the Old Age and Survivors Insurance Trust Fund would run surpluses until 2026 and run out only in 2040. Now surpluses are expected to be gone in 2020, and depletion is expected in 2034. Because Social Security runs on its own account by law, at that point, if no adjustments are made, benefits would have to immediately shrink by one quarter to align revenues and payments. Given the popularity of Social Security with the American public, such a drastic cut is almost impossible to imagine—but, then again, so is a deal that would fix things.
The sheer insanity of our present political moment is only part of what makes it so hard to see the way forward. A lot of it is just the nature of the problem itself. Ever since Jude Wanniski offered his “Two Santa Claus” theory back in 1976, Democrats have reliably opposed benefit cuts and Republicans tax increases. That makes it awfully difficult to solve public financing problems where the obvious solution is a combination of benefit cuts and tax increases, a description to which a large part of our welfare state now answers. Frugality and foresight are not qualities our political regime produces in abundance, to put it gently. And so the prospects for reform seem bleak.
Not-so-ancient history offers some hope, however. With an unpopular and stubborn GOP president, a Republican-controlled Senate, and a Democratic House led by a hard-charging partisan, our political class managed the feat of saving Social Security in 1983. They cut benefits, raised taxes, and put the program on sound financial footing for decades—a virtual eternity in political time. The story of their success tells us much about what will be needed to save Social Security again, and why Congress will need to get its act together to shepherd any deal through to political legitimacy.
The first big attempt at fixing Social Security was a flop. From 1950 until 1970, Congress had gleefully reserved for itself the privilege of making cost-of-living adjustments (COLAs) to the program’s benefits, the better to take credit for bigger checks arriving in the mail. By the early 1970s, this task had all the joy sucked out of it by rising expectations, rising inflation, and the nation’s increasingly precarious fiscal situation. In response, Congress put COLAs on autopilot in 1972, indexing them to inflation. Unfortunately, the trajectory they chose was unsustainable, and by mid-decade, the program was expected to eat through its then-modest trust fund soon and face ever-larger deficits later.
With their party newly in control of the White House, Democrats pushed through a fix in 1977 based mostly on tax increases scheduled to take effect in the 1980s. President Jimmy Carter praised Congress’s “sound judgment and political courage in restoring the social security system to a sound basis” and said that the system would be on firm footing through 2030. In fact, the tax increases scheduled were too little, too late. Both short- and long-term crises loomed again by the 1980 election. With the GOP ousting Carter and taking control of the Senate for the first time since 1954, a divided government would have to figure things out.
The new Congress tried to proceed in the textbook manner of regular order. In the House Ways and Means Committee, a serious bipartisan plan was crafted by the chairman of the Subcommittee on Social Security, J.J. Pickle (D-TX), and the full committee’s ranking Republican member, Barber Conable (R-NY), who would later become the president of the World Bank. Their bill was voted down by the full committee 14-18, and there didn’t appear to be any other immediate way forward. Apparently, some sort of unconventional path would be necessary to fashion a compromise capable of garnering bipartisan support.
President Ronald Reagan had made noises about fixing Social Security during his 1980 run, but his administration’s early efforts were lacking. As part of his zealous charge to balance the budget, Reagan’s Office of Management and Budget director, David Stockman, proposed significant cuts to benefits, to take effect immediately. As congressional Republicans were quick to point out, this was essentially an invitation to political harakiri, and they wanted no part in it. By September 1981, Reagan was on the defensive. In an attempt to reset the conversation, he announced his intention to create a commission to solve the problem. In December 1981, the commission was officially launched with 15 members, five each appointed by the President, Senate Majority Leader Howard Baker, and Speaker of the House Tip O’Neill.
The members were a mix of legislators and heavy-hitting outsiders, including industry and labor leaders. Several of the legislators were natural dealmakers, including Conable and Senators Bob Dole (R-KS), Bob Heinz (R-PA), and Daniel Patrick Moynihan (D-NY). Others, however, were appointed precisely because of their credibility as hardliners, including Rep. Bill Archer (R-TX) and Senator William Armstrong (R-CO) on the conservative side, and Rep. Claude Pepper (D-FL) on the liberal side.
Pepper, whose role would be pivotal, was an unusual character. Born in 1900 in Alabama, the Florida transplant operated a hat-cleaning business and worked in steel mills in his youth. But he went on to establish himself as a Harvard-trained, silver-tongued lawyer. He won a special election for a U.S. Senate seat in 1936, at the tender age of 36, and became an ardent New Dealer and champion of Lend-Lease assistance to the Allies. Then, in 1950, the proud liberal lost to a primary challenger who attacked him as “Red Pepper,” soft on communism and race issues. After spending a decade practicing law and running a failed campaign to return to the Senate in 1958, he decided to return to national politics via a new House seat for Miami-Dade created in 1962. There he remained ensconced until his death in 1989, gradually becoming one of the more senior members in the lower chamber. From his youthful days in the Florida state Legislature, Pepper had been an advocate of the interests of the elderly. In the 1970s—in his own 70s—he championed the creation of the House Select Committee on Aging, of which he became chairman in 1977. By the time of his appointment to the Social Security Commission in late 1981, he was a vigorous 81—an old man who had been defending old people’s benefits since their creation in America. Clearly, the Commission would not be producing a dressed-up version of Stockman’s benefit-cut plan on his watch.
It would be pleasant if all that was needed to produce a deal was to toss such actors into a pot and stir, with a compromise emerging as a smooth blend of all the important interests through the magic of open deliberation. If that was the experience, it would suggest a rather straightforward recipe for solving the nation’s entitlement spending problems.
That is, more or less, the interpretation of events offered by the chairman of Reagan’s commission, Alan Greenspan, who in 1981 was an economic consultant well-connected within Republican circles. By that point in his life, he had been a professional jazz clarinetist, a devotee of Ayn Rand, and chairman of the Council of Economic Advisors; only later would he become “The Maestro” credited with producing a decade-long economic boom. In his own memoir, Greenspan gives just a couple pages to the Social Security Commission. He recalls it as “a virtuoso demonstration of how to get things done in Washington” and specially credits his own key negotiating precepts: limit the problem, agree to numerical dimensions, “bring everyone along,” and commit to defend the compromise that emerges. Perhaps a bit more involved than “add the right people and then stir,” but pretty simple.
What Greenspan’s terse account leaves out is the fact that the commission was ready to close up shop in late 1982 without having agreed to any kind of solution at all. As recounted by political scientist Paul Light, who was embedded in Conable’s office throughout the process, the 15 members of the Greenspan Commission plus Stockman and Reagan’s staff Secretary, Dick Darman, assembled to seek a compromise as the Gang of Seventeen. That turned out to be too unwieldy a gang, including too many members pulling too strongly in opposite directions.
Nor did the 1982 midterm election season make things any easier. Though voters were surely eager to see a deal concluded before the imminent delay or reduction of benefit checks, their champions on both sides dug into their respective trenches with their campaign rhetoric. As Conable remembered it, Pepper was especially strident, campaigning in more than 40 House races and insisting that there was nothing really wrong with Social Security. After GOP losses in the 1982 midterms, Dole was instructing his fellow Republicans to hold back and seek another way forward. A series of televised hearings in November 1982 were not entirely fruitless, yielding unanimous agreement on reasonable targets, but pointed to no actual solution.
A final push involved a reduction in gang size—from 17 to nine, with no staff involved. Nine was a small enough number to allow absolute secrecy in negotiations, as well as an intimate setting, in the home of Reagan’s chief of staff, James Baker. Most importantly, the hardliners on both sides, including Pepper, were simply excluded. The key participants in these discussions were Baker, speaking as the trusted envoy of President Reagan, and Robert Ball, longtime veteran of the Social Security Administration and, on the Commission, O’Neill’s most trusted point man. They proved capable of mutual respect and achieved a strong working relationship.
Why not just stick Reagan and O’Neill across the table from each other, then, perhaps flanked by their respective lieutenants? The devil is in the details, and each side’s top man might have missed subtleties just when they mattered most. In the event, the key breakthrough was discovering a provision that both sides could count as a win. Working privately, Ball and Baker discovered that Democrats would regard a move to tax benefits for high earners as a tax increase, while Republicans would regard it as a benefit reduction, which made the change an ideal keystone for a deal that balanced tax increases and budget cuts. Each side could feel it got a bit more than half of the pie. Whatever their golf course rapport may have been, it would have been difficult for Reagan and O’Neill to know how to accommodate each other’s sides in this way, even if their egos had allowed them to do so.
Those egos point to another problem: The president’s and Speaker’s need to be the biggest presence in the room might preclude them from showing the kind of deference to each other, or to powerful interests, necessary to make a deal. Baker and Ball’s main exchange was frequently interrupted when, as Conable described it:
Every hour, Baker would announce that he could not guarantee the president’s support. And one of the Democrats would say they could not guarantee the Speaker’s support. It was a ritual. The Republicans would say, “You have to give us something we can take the President,” and the Democrats would say, “You have to give us something we can take to Claude Pepper.”
The invocation of Pepper, who had been purposefully excluded from the discussions, suggests the sensitivity of the negotiation. The mechanics of working out a deal could be simplified by empowering Baker and Ball to agree upon details—but the struggle was never just to satisfy either of them, or even Reagan and O’Neill. Rather, the task was to adequately represent each important interest in a way that would allow a majority of legislators to consent, even as they lost on some particular point. Had they dispensed with legislators altogether, that might well have been impossible.
To assemble a working majority, ambiguity of authorship was essential. Thanks to Ball and Baker’s work together, the Gang of Nine engineered a solution to avert the short-term crisis and close two-thirds of the long-term shortfall. But they saw no advantage in marketing their deal as the product of super-secret negotiations. Rather, they reassembled the full commission to act as the vehicle, imploring its previously excluded members to support the compromise as the only available means of averting a political catastrophe. Three of the commission’s conservatives balked, insisting that the tax increases included were more than they could take. But with some encouragement from the Speaker and the president, the other 12 members agreed. As Light put it, “The package would be sold as the product of a year-long bipartisan study, not two weeks of secret negotiations.” A myth of a great commission success was ginned up immediately and flowered in the years that followed—indeed, it is sometimes still accepted today.
Among the commission members voting for the package was Pepper, even though some of his red lines had been crossed and he was opposed to taxing benefits at any income level. He was willing to go along, in part, because he had become chairman of the House Rules Committee at the beginning of 1983, and was therefore in a position to structure debate on the package. In conjunction with Ways and Means Chairman Dan Rostenkowski and Speaker O’Neill, Pepper agreed that the commission’s package would be protected from all amendments on the floor except for two: one from Pickle, proposing to substitute an increase in the retirement age for some of the Commission’s favored long-term fixes; and one from Pepper, proposing to instead substitute tax increases imposed beginning in 2010 for the same purpose. In other words, careful management of the legislative process allowed Pepper, the foremost champion of the aged, to be on both sides of the issue: He could be for the package as the only way to save Social Security, even as he went to the mat in an attempt to shift the burdens it imposed away from the elderly and onto the broader society. (Pepper also arranged a meeting in which he was able to chew out Ball for being too accommodating in front of some leaders of the AARP, thereby burnishing his credibility as a die-hard defender of the elderly.)
When Congress was asked to pick between Pickle and Pepper (dutifully dubbed “the battle of the condiments” in the press), a conservative coalition narrowly put Pickle’s amendment over the top, while Pepper’s amendment was resoundingly rejected. The amended package passed the House 282–148, drawing support from the center of each party. The Senate soon followed with its own bill, which easily passed 88–9. The conference bill mostly reflected the House’s choices and was quickly passed through both chambers and signed into law by President Reagan on April 20, 1983. Benefits had been cut, taxes had been raised, and the program had been saved. With an assist from some extramural negotiating, the legislative process had delivered in a way that allowed all sides to share the credit.
That included Pepper, who quickly spun his outflanking into a victory. In his 1989 memoir, he depicted himself as a constructive and, indeed, pivotal player in the negotiations of the Greenspan Commission. “Given the enormity of the problem, I regard it as miraculous that we succeeded as well as we did, although I was not happy with all of the changes,” he wrote, reiterating his opposition to taxing benefits. He lamented the adoption of the Pickle Amendment, but cheered himself with the prospect of replacing its slow-moving changes before they took effect since there is always another round to look forward to in politics. This is what legislative compromise can do that judicial decisions or executive branch rules cannot: give losers the option to join arms with the winners and share in the victory celebrations today even as they plot a way to rejoin the issue tomorrow.
In fact, Pickle’s slow-moving increases in the retirement age were never repealed; they are still phasing in through 2027. Together with the Baker- and Ball-negotiated elements of the 1983 deal, they have given Social Security a stability unusual in this stormy era of politics. Without the program facing any kind of imminent crisis, all major attempts at altering it have fallen flat—including President George W. Bush’s 2005 effort to give taxpayers individual accounts, which Democrats stopped dead in its tracks without offering any counterproposal.
Although we will shortly begin depleting the Trust Fund, we face no imminent crisis today. Does it follow that what Conable called our “crisis-activated system of government” is incapable of adjusting our course now, even if doing so would be much easier to manage than a solution implemented in the 2030s? Probably! But not certainly, for two main reasons.
First, drawing down the Social Security Trust Fund is essentially equivalent to changing the financing of the program. Since the Trust Fund’s only assets are United States debt, spending down those assets entails the Federal government getting the money somewhere else. But the payroll taxes that have until now sufficed to pay for the program are unlike all the other taxes levied by the government in an important way: They are far more regressive (especially compared to income taxes, the single largest source of revenue). That may seem like an economically perverse feature for a social insurance program, but it was chosen quite deliberately by Franklin D. Roosevelt, who presciently foresaw that a broadly shared burden would be the surest guarantee of the program’s political health. That burden will be less broadly shared in the coming years; put more bluntly, rich people will be paying for proportionately more of Social Security than ever before.
This change could conceivably create room for a political bargain. Rich people, as always, would prefer not to carry the load. Democrats, meanwhile, led by current Chairman of the Social Security Subcommittee of the House Ways and Means Committee John Larson (D-CT), have a bill that would restabilize the program’s long-term finances while simultaneously making benefits more generous for low-income seniors, who depend on them most. The American Enterprise Institute’s Andrew Biggs recently explained how Larson’s willingness to expand the relatively regressive tax burden of payroll taxes might create an opportunity for a bargain if it gave Republicans a way to reduce income tax rates. It’s the kind of artful deal that might make sense in a second Trump term, if only the President could maintain the political will and organizational discipline needed to pull it off.
Second, it is easy to imagine political deadlines as immovable features of the political landscape, but we should remember that they are nearly always elaborate social conventions that matter because the participants decide to make them matter. Most can either be averted through status-quo-extending can-kicking or treated as moments of reckoning. Social Security faced a do-or-die moment in early 1983 largely because Barber Conable decided it should be so. The Senate had advanced a plan in 1982 that would have facilitated internal borrowing between Social Security’s different components for 10 years, thereby alleviating the immediate crunch. Conable used his influence to ensure that this maneuver would only be allowed through the end of 1982 (plus an additional six months in reserves). He bet that Congress was as ready to bite the bullet then as at any time, and it paid off.
If our current crop of legislators were determined to take responsibility, then, they could tweak this or that seemingly-non-salient element of the program and bring on a moment for reform—someone in the Social Security Administration, a successor to Robert Ball, would know how. Doing so would be a gamble, of course, worth taking only if we believe our system would be up to the job of making a deal and selling it to the American people as fair. It’s easy to be jaded—to say that there are no James Bakers, Barber Conables, or even Claude Peppers on the scene any longer. But the moral of the story of 1983 isn’t that it took the efforts of heroic figures to pull a deal off—it’s that, with a bit of ingenuity, our political process can get ideological opponents and political enemies to rally around a workable compromise, even when they have to make real concessions. The 2010s were conspicuously lacking in such compromises. But perhaps a return to normalcy in 2020 is yet in store.
