The Bush administration has hinted that it may support some reduction in future Social Security benefits in order to help finance the estimated multi-trillion dollar transition to a privatized system. Some Republican leaders, such as former House Speaker Newt Gingrich, are warning that this could constitute political suicide for the party. History, however, does not support this assumption.
What I am sure that Gingrich is thinking relates to the 1995 budget debacle, when Republicans were tagged as supporting cuts in Medicare, when in fact they were only restraining the growth of spending. Despite the fact that real per capita benefits would continue to rise — albeit at a slower rate — the idea that Medicare would be decimated took hold in the public. This forced Republicans to backtrack.
So painful was this episode for Republicans that two years ago they supported a massive expansion of Medicare for prescription drugs, just to ensure that everyone understands that they are not cutting Medicare, period. Indeed, the experience has made Republicans phobic about cutting any spending, anywhere.
But the idea that Social Security can never be cut without the party suffering massive voter retaliation is just wrong. There are several occasions when benefits have been cut, and there is little evidence of a voter backlash as a consequence.
One of the largest benefit cuts took place in 1977. It was necessitated by a legislative mistake in 1972. Previously, benefits were not automatically adjusted for inflation once people began receiving them. From time to time, Congress would enact ad hoc benefit increases to compensate for inflation.
Richard Nixon pushed to change this system so that Social Security benefits would automatically be indexed to inflation. He thought that this would slow the growth of Social Security spending, because Congress often went well beyond compensating for inflation when it raised benefits. For example, benefits were increased across the board by 15 percent in 1969, 10 percent in 1971, and another 20 percent in 1972.
Unfortunately, Congress inadvertently over-indexed Social Security to inflation in 1972. As a consequence, real benefits were projected to rise very sharply. An average worker would have seen them rise as a percentage of his last working year’s wages from 44 percent in 1980 to 68 percent by 2050 in the absence of legislative action. A low-income worker would have seen his replacement rate rise from 56 percent to 106 percent and a high-income worker would have seen it go up from 34 percent to 48 percent.
In 1977, Congress changed the law to stabilize replacement rates at 55 percent for low-income workers, 43 percent for average workers, and 29 percent for high-income workers. In the process, this changed the way initial benefits were calculated so that they became indexed to wages rather than prices. Since real wages rise over time, the result was to program into Social Security an increase in real benefits every year for new retirees. One suggestion for permanently fixing the system’s finances is just to keep real benefits from going up by indexing them to prices rather than wages — what experts recommended in 1976, but Congress rejected.
In 1983, Congress enacted another substantial benefit reduction by raising the “normal” retirement age from 65 to 67. This is being phased-in for those born in 1938 or later. Those born between 1943 and 1954 will have to wait until age 66 to draw full benefits and those born in 1960 or later will have to wait until 67.
It is important to remember that neither the Greenspan Commission nor the Reagan administration proposed this benefit cut. It was initiated by Rep. Jake Pickle, Democrat of Texas, who argued that the 1983 Social Security fix failed to deal with the program’s long-term cost and relied instead almost entirely on higher taxes. Remarkably, the House of Representatives, then under Democratic control, bought this argument and enacted the Pickle amendment by a vote of 228 to 202. Later, the Senate agreed to it in conference.
The only meaningful benefit cut recommended by the Greenspan Commission was partial taxation of Social Security benefits. In the final legislation, up to 50 percent of benefits became taxable for couples with incomes above $32,000 in addition to their Social Security benefits. In 1993, Bill Clinton raised this tax. Today, 85 percent of benefits are taxable for couples with incomes at least $44,000 above their benefits. In 2002, the federal government raised $13 billion from taxing Social Security benefits.
None of these very-substantial reductions in Social Security benefits led to an outcry or retaliation against those voting for them. If explained properly, people are willing to accept reductions in future benefits.