The Ugly Truth about Social Security

The shady, fiscally irresponsible history of a hallowed institution facing a crisis-laden future.

Here we go again. The trustees who oversee Social Security’s two trust funds—for retirement payments and for disability benefits—have issued a report saying the funds’ insolvency is approaching faster than previously thought. The disability fund will be depleted by 2016, two years earlier than projected just twelve months ago, while the two funds together will hit insolvency by 2033, three years ahead of the previous projection.

Given the state of the economy, and the state it is likely to be in for some time into the future, these negative revisions are likely to become an intermittent part of the economic landscape. This is ominous, given that Social Security and Medicare represent the largest U.S. public-benefit programs and account for a third of the federal budget.

So perhaps there’s merit in placing the Social Security program into historical and political perspective. To do so is to lay bare a fundamental and ugly reality of that hallowed institution: it represents a failure of American democracy.

Social Security was founded nearly eighty years ago on what was essentially a conservative principle—namely, that benefits should be distributed solely on the basis of the system’s income in the form of payroll taxes paid by workers and their employees. And in the early years, when eligible recipients were relatively few and payroll-tax income far outstripped benefit payments, the program looked brilliantly conceived (and in fact it was). A huge reserve was built up against the day when more and more recipients would go on the rolls.

But then, with all that surplus money in the system, Social Security officials and vote-hungry Washington politicians could not resist expanding benefits. Survivors’ benefits, then disability benefits, then health benefits were added. Some of these benefits were based on need, hence unrelated to contribution levels. And Congress found it couldn’t resist increasing pension levels at election time every two years.

In 1972, all this came to a climax of little notice but profound consequence. In a spasm of congressional generosity, lawmakers raised benefits a whopping 20 percent. But to do so they had to accept a compromise with the Nixon administration, which insisted on tying future benefit increases to the rate of inflation. Nixon argued that, first, it was unfair for benefits to rise faster than the wages of those who paid for the benefits; and, second, since wages in the aggregate always rose faster than prices, his plan would ensure that funds going into the system (tied to wages) would always surpass those going out (tied to prices).

It was a disaster. The economic "stagflation" of the 1970s spawned an ominous new economic phenomenon: Prices far outstripped wages. Social benefits soared—and swamped the flow of money into the system.

Soon the trust funds began to look shaky, and in 1977, Congress responded with a massive increase in payroll taxes. Before the hike in payroll levies, taxes were paid only on the first $16,500 of a worker’s salary; by 1981, the figure was $29,700 and rising to the current $110,000. In 1977, employee and employer each paid a 5.85 percent tax on the wage base; by 1981 it was 6.65 percent and rising to the current 7.65 percent.

These tax increases, pronounced the administration of President Jimmy Carter, would ensure the program’s solvency well into the future. They were wrong. Within just a few years, in no small part because of the economic stagnation that descended upon the country during Carter’s presidency, the program was right back in the same soup—facing almost imminent insolvency.

There ensued a series of developments during the subsequent administration of Ronald Reagan that added up to a political failure to truly fix the system. That’s in part why these trustee warnings now are page-one news (at least in The Wall Street Journal). First, Reagan put forth an ill-conceived proposal that contained enough weaknesses that opposition Democrats were essentially invited to go on the attack. They did so, right up to the 1982 midterm elections, which gave Democrats an additional twenty-six seats in the House—in part because of the Democrats’ relentless warning that Republicans wanted to take away Social Security benefits.

House Speaker Thomas P. ("Tip") O’Neil is credited with leading this attack, but another architect was New York’s Democratic senator Daniel Patrick Moynihan, ranking member of the Senate Social Security subcommittee, who knew very well that the system faced a dire fate unless Congress addressed its solvency very quickly. But he denied it. "We just don’t have a crisis, that’s all," he insisted to a reporter at the time. His aim was to push congressional action beyond the coming election so Democrats could pummel Republicans on the issue. Once past the election, Moynihan (who died in 2003) did a brisk about-face, acknowledged the looming crisis and worked diligently to help solve it. Moynihan was a brilliant and largely honorable senator, but his preelection performance on Social Security was a sad case of irresponsibility.