Social Security deal of 1983 was a punt

The Holy Grail of politics is a ‘grand bargain’ on Social Security in which both parties agree to a mix of benefit cuts and revenue increases that will stabilize the system for the foreseeable future.
Pundits and politicians point to the negotiations which saved Social Security in 1983 as a model of success to imitate.  Obama even invoked the memory of 1983 Reform during the 2012 Presidential Debates.
“Social Security is going to have to be tweaked the way it was by Ronald Reagan and Speaker -- Democratic Speaker Tip O'Neill.”
The story goes that elected leaders put principle over ideology. Bipartisan compromise produced the additional revenue and benefit reductions necessary for the system to not only to survive, but build a $2.7 trillion surplus in the process. It is a wonderful story.
The problem, of course, with this narrative is reality. The 1983 reform of Social Security largely shifted the burden of Social Security from one generation to the next with the consequences falling heavily on late-boomers and those that followed. The Republicans and Democrats came together in a bipartisan effort to kick-the-can.

This legislation wasn’t a hard-choice politically because the consequences were phased-in such that the group most affected were non-voters.  The largest tax increases and the maximum benefit cuts targeted people who were 11 and younger at the time. The political calculus behind the bipartisan compromise is simple: 11 year-olds can’t vote.

The reform contained many changes, but three of these changes accounted for roughly 75 percent of the solution. All of the money-makers disproportionally targeted future generations.
The most favorable change for Social Security was the taxation of benefits. This revision helped the system because the tax revenue collected by the IRS on Social Security benefits was returned to Social Security. The law approximated a means-tested claw-back of benefits by the system from people with “other substantial income”.

This aspect of the reform increasingly affects retirees over successive generations because the trigger thresholds are not indexed to inflation.  The Greenspan Commission originally estimated that these rules would affect “10 percent of OASDI beneficiaries”. 30 years later, the Social Security Administration estimates that nearly 40% of beneficiaries pay taxes on their benefits. Separately, actual IRS data shows that 70 percent of tax returns filed in 2012 that include Social Security benefits generate revenue under this provision.

The next largest change increased gradually the normal retirement age for people born after 1937. The people who felt the full impact of these adjustments were 23 and younger at the time.
The final large impact change was the expansion of Social Security’s coverage to new participants. The law required at all “new” federal employees to participate in Social Security. Again, older workers were largely insulated from the change.

While these changes may seem modest, they weren’t.  Data from the Urban Institute shows that the average retiree couple in 1985 enjoyed $3 of expected benefits for every $1 that they contributed. Today, the average retiree expects to lose money on Social Security. So, benefit reductions were more of an option in 1983 because benefits were relatively generous compared to past contributions.
Separately, Congress was able to create benefit cuts in 1983 that cannot be replicated.  In 1983, the system had no means test. The one that was added in 1983 targeted retirees with an income ($25,000) that approximated the median income of a 4 person family.  Today, these rules hit retirees who earn only slightly more than the poverty-line.

Congress’ options have narrowed considerably as the problems in Social Security have worsened.  As Charles Blauhous points out, “In the early 1980s they merely had to get through a relatively small near-term solvency crisis before entering decades of previously-projected surpluses as the baby boomers moved through the workforce.” (emphasis added)  Social Security does not project any surpluses for an indefinite period of time.

Someone turning 66 today expects live long enough to experience substantial benefit reductions.  It is simply delusional to believe that we can protect people who are 46 and older again.  We have to make changes just so that existing retirees can collect their promised benefits – and that assumes favorable economic conditions. It is no longer economically possible to kick the can.

The story of the 1983 agreement on Social Security is one of Irish drinking buddies who found enough common ground in the good of the country to overcome their ideological differences.  The hard reality is that the president and Congress reached a bipartisan agreement that voters would take more from Social Security than it would give to their children.