The People's Pension: The Struggle to Defend Social Security Since Reagan

By Eric Laursen

The People's Pension covers a period of Social Security history that no one else has covered, let alone in so much depth, and it presents a unique interpretation of why the politics of Social Security have played out as they have since the Reagan years.

Slated to release in April 2012, The People's Pension will make its appearance in the midst of the presidential primaries, when Social Security will undoubtedly be a major issue. The fate of Social Security has been in question for years now, and with the recent threat that checks might not be going out in August, the fear of scrapping the program altogether seems increasingly plausible.

Written in a clear, accessible style, The People's Pension will be of interest to every working American who worries about their future with Social Security, as well as political or social policy analysts and scholars, anarchists and left libertarians, grassroots activists, labor organizers, progressive lawmakers committed to defending Social Security, anyone interested in the history of the U.S. from the Reagan era on, and conservative and center-right opponents of Social Security.

• Language: English
• Publisher: AK Press
• Release date: May 29, 2012
• ISBN: 9781849351089

Eric Laursen

Eric Laursen is an independent journalist, historian, and activist. He is the author of The People’s Pension, The Duty to Stand Aside, and The Operating System. His work has appeared in a wide variety of publications, including In These Times, The Nation, and The Arkansas Review. He lives in Buckland, Massachusetts.

Book preview

Part I

Social Security and the Reagan Revolution

(1981–83)

Chapter 1

A New Deal

The next few years will see a massive battle of conservatives and liberals to determine who governs the nation for the next three decades—and we’ve got a head start of years on them.

—Richard Viguerie, 1981[1]

The war against Social Security didn’t start with a privatization proposal. It began when the program found itself squeezed between two conflicting goals of the new Reagan administration: cutting taxes and cutting the deficit.

The 1980 election was a stunning Republican victory in nearly every way, the party’s most successful since 1952. Not only did Reagan roundly defeat Carter, but conservatives seized effective control of Congress. Reagan’s party captured 53 Senate seats for a slim majority and picked up 34 seats in the House, raising their delegation to 192 versus 242 Democrats and one independent. But the Democratic delegation was transformed as well. Forty conservative, mostly southern, members quickly organized themselves into the Democratic Conservative Forum, soon nicknamed the Boll Weevils, and demanded better committee assignments and more influence from Speaker Tip O’Neill. They also sent clear signals that they would be willing to work with the Reagan White House.

Reagan’s political advisors sensed that the American voter had genuinely rejected the traditional Democratic leadership. In the past decade, the country had fallen into a seemingly intractable funk engendered by a series of crises: the end of the over-stimulated Vietnam War economy, two severe oil crises, the collapse of the international currency management system and the decline of the dollar, and inflation that pushed into the double digits.

One consequence was that Social Security benefits payments, which had been indexed to inflation early in the decade, exploded, and the program began to run deficits for the first time in its history. Meanwhile, unemployment was stubbornly high through much of the decade, wage growth and productivity were down, and nothing the philosophically different Ford and Carter administrations did seemed to relieve the problems. The result bewildered most economists, who tagged it stagflation.

Reagan had promised to end this cycle. He also promised to balance the budget by eliminating government waste. But he hadn’t specified where he expected to find the savings. He didn’t have an economic plan, either. If the new administration wanted to enact a conservative New Deal, it would have to act fast. By late February, when he was scheduled to deliver his State of the Union address, and in the first few weeks thereafter, when the president traditionally sent the budget to Congress, Reagan would have to develop a fully thought-out economic package that he could sell on Capitol Hill. He had less than four months to go.

5.%20Reagan%20and%20Stockman%20with%20jellybeans.tif

President Reagan passes a jar of jellybeans to budget director David Stockman, February 11, 1981. A few months later, Stockman sold Reagan on a bold—and disastrous—attempt to slash Social Security benefits and hobble the program's growth.

The Reagan team began hearing from a loose team of conservative ideologues who thought they had the answer: an economist from the University of California at San Diego named Arthur Laffer; a Wall Street Journal editorial writer named Jude Wanniski; Rep. David Stockman, a second-term House member from Indiana; and their senior partner, Rep. Jack Kemp, former pro football star and five-term House member from western New York State. For several years these crusaders had been refining and promoting supply-side economics, a stripped-down version of classical free-market theory and a kind of shock therapy that advocated the aggressive use of tax cuts and business ­incentives to encourage economic growth and job creation.

Government spending designed to stimulate demand was a waste of money, the supply-siders argued, because it drew too much credit and capital away from the private sector. Once the tax cuts they advocated were in place, boosting the supply of capital available to investors and entrepreneurs, demand would surely follow. Inflation would subside too, because the new growth would increase the supply of goods and services available. Longer-term, the supply-siders also favored a hard-money policy that would permanently wipe out inflation by moving the globe toward a single currency standard: preferably the dollar and preferably backed by gold.

Of the four revolutionaries behind this stern prescription, only one, a buccaneering journalist, wasn’t drawing a public salary, and only one was a trained economist. Each had his own ideas about which part of supply-sideism was most important, and this would become increasingly apparent as they began to collect real power in their hands. Laffer and Wanniski … sometimes argued that tax cuts would pay for themselves, Stockman later wrote. They implied the Treasury would take in more taxes after the cuts than before. I never bought that literally and didn’t think they did, either. I put it down to salesmanship.[2]

Stockman himself was a precocious young go-getter, one of the many drawn to Washington out of college or graduate school by the prospect of being near the center of power. But he was an unusually earnest example of the type, having bounced from neo-Marxist anti-Vietnam War activist to Harvard Divinity School student to speech writer for another midwesterner, Rep. John Anderson, a fiscally conservative Republican from Illinois. Along the way, Stockman had picked up a reputation as a wunderkind. He had also become a passionate ultra-free marketeer who naturally gravitated toward Kemp after he was himself elected to Congress in 1976.

But he also understood that a course of their brand of economic policy was liable to balloon the federal deficit, at least in the early years. Mustering enough cuts in government operations to prevent that would have hurt millions of people in the short run, Stockman realized. It required abruptly severing the umbilical cords of dependency that ran from Washington to every nook and cranny of the nation. It required the ruthless dispensation of short-run pain in the name of long-term gain.

Written the better part of a decade later, after Stockman’s own whirlwind career in Washington was over, his words still convey the moralistic fervor and appetite for risk—other people’s—that animated the supply-side revolutionaries at the end of the Carter years. To achieve the tax cuts necessary to make the supply-side game plan succeed, jobs programs would have to be zeroed out, educational subsidies cut, and the whole political maintenance system represented by federal social welfare outlays drastically reduced. Standards for public assistance would have to be calculated according to exacting, abstract principles—not human hard-luck stories. Morality, for Stockman, was defined by economic performance. For example, there would no longer be any right to draw more from the Social Security fund than retirees had actually contributed, which was a lot less than most were currently getting.[3]

Politically, however, the supply-siders knew their opportunity had come. As soon as the election was over, Kemp and Stockman campaigned to get Stockman a position in the Reagan Cabinet. They succeeded, partly on the strength of a memo by Stockman entitled On the Danger of a GOP Economic Dunkirk, which Kemp brought along to a review of economic policy with the president-elect and his advisors in Los Angeles in mid-November. My résumé, as he later called it,[4] laid out the usual supply-side arguments but emphasized the need for spending cuts to balance out the tax cuts. Otherwise, the new administration’s economic package will generate pervasive expectations of a continuing ‘Reagan inflation,’ keeping interest rates high, deadening the housing market, and keeping industry from investing in new production. In other words, more stagflation.[5]

Reagan had used the phrase safety net many times during his campaign, as a sort of mantra to banish the accusations by Carter that he intended to shred Social Security, Medicare, and other important social programs. The phrase was more pregnant with meaning than many listeners may have realized, however. The aim of Social Security’s old-age benefits, for example, was not merely to provide a lifeline for elderly people threatened with destitution, but to guarantee an income adequate to keep the worker living in dignity after retirement. The difference in real life between a handout to keep body and soul together, and a minimal yet reliable reward for a lifetime of work, was inestimable.

Reagan was never asked about his choice of words and once in office, his aides were happy to create the impression that budget cutting would come from eliminating waste, however vaguely defined. Only a few weeks after the election, however, Stockman’s memo was suggesting that the new president ­attack the very thing he had apparently pledged to leave alone.

Recommending that Reagan declare an economic state of emergency and push through a sweeping rescue package as part of a Rooseveltian first hundred days in office, Stockman prescribed cuts to be equally weighted between out-year spending and entitlement authority reductions and cash outlay savings. Included among the possible entitlement authority reductions: $260 billion from Social Security. Thus he called for the legislative committees to address a carefully tailored package of initial entitlement reductions.[6]

Stockman’s prescription might be alarming to Democratic lawmakers and tens of millions of older workers and retirees, but it reassured some of the more traditionalist members of the president’s inner circle, including James Baker III, chief of staff-designate and former campaign manager for George H.W. Bush, who Reagan had made his vice presidential nominee after defeating Bush in the primaries. Bush had once called Reagan’s tax-cut prescriptions voodoo economics. But that was in the past, and Baker was an adept operative who appeared more concerned to protect the president from political missteps than to push any specific economic strategy. Other new members of the team included two economists, Herb Stein and Paul McCracken, both of whom had headed the Council of Economic Advisors under Nixon: traditionalists with no time for radical supply-side prescriptions.

O’Neill decided not to use his prerogative as Speaker of the House to bottle up the president’s agenda in committees, instead promising to allow final floor votes by summer on both his tax and his spending measures. One reason was that the Democratic caucus itself was much more conservative than it had been the last time a Republican occupied the White House. Carter himself had passed a groundbreaking capital gains tax cut in 1978, and Reagan’s tax cut proposals, although more sweeping, looked to many conservative House Democrats like something they would have to support. Knowing that his hold over them was tenuous at best, O’Neill was looking for the opposition to make errors, aide Kirk O’Donnell later said of his boss.[7]

The Reagan team rushed to take advantage. Stockman in particular seized on the very magnitude of the deficit to sell the president on the necessity of cutting government vastly more than Reagan had thought he would have to during his campaign. At a two-hour meeting with the president-elect in January, Stockman told him the budget would have to be cut by around $40 billion.

Do you have any idea what $40 billion means? the budget director asked journalist William Greider a short time later. It means I’ve got to cut the highway program. It means I’ve got to cut milk-price supports. And Social Security student benefits… and on and on. Reagan agreed in principle, seemingly prepared to stretch to the breaking point the definition of the safety net he had promised to protect during his campaign. Over the next few weeks, as Reagan officially entered office, Stockman began his search for the $40 billion. The cuts needed to reach that magic number had to be vetted by the president and his advisors: Baker, presidential counsel Ed Meese, and key Cabinet secretaries.

Up to a point, this could be done without violating conventional wisdom in Washington. During the Ford and Carter administrations, economic thinking had moved significantly to the right. Both of Reagan’s immediate predecessors had boosted military spending, and Carter’s last two budgets were designed to lower the deficit—although he had proposed to do it the conventional way, relying mainly on tax hikes. So it was no surprise when Stockman’s boss pulled defense spending firmly off the table, or that the budget director proposed to stamp out tax loopholes such as tax-exempt industrial development bonds, home-mortgage deductions, the oil-depletion allowance, and other features of the tax code that benefited business. Stockman veered further to the right with a menu of proposed cuts to social welfare programs, centered around such measures as tightening food stamp eligibility, cutting federal aid to education, and zeroing out programs like the Comprehensive Employment and Job Training Act, which he considered to be pure pork.[8]

One of the principal sites of Stockman’s budget demolition, however, was much more sensitive: Social Security. Two elements of the program looked especially cuttable. One was the student benefit. Since 1965, children of deceased workers had been able to continue receiving Social Security survivors’ benefits until age twenty-two if they stayed in school. This helped keep some 772,000 students in college, but it cost $2.4 billion a year. The other target was the minimum monthly benefit, which was designed to reduce paperwork and protect low-income workers who might not have received an adequate income under the regular Social Security formula. It provided payments mostly running $122 per month to some 2 million persons—retirees and surviving spouses—at a total cost of about $1.3 billion a year.

The minimum benefit was controversial, however, because many people who received it hadn’t worked very long under Social Security. For example, about 15% of recipients were what Republican opponents referred to as double dippers, meaning they had only worked a short time in private-sector jobs covered by Social Security and the rest of their careers in government jobs for which they received a pension. It wasn’t fair, critics had been saying for some years, that these people should receive a minimum benefit for which they had no need.

Stockman’s Office of Management and Budget (OMB) team worked at breakneck speed to build agreement within the new administration on a package of cuts. Reagan aimed to propose a series of revisions to the 1982 budget that Carter had submitted in the final weeks of his presidency, and to push resolutions through the House and Senate that would lock these in place.

On February 18, the president went before a joint session of Congress with what he called his Program for Economic Recovery. It called for an across-the-board tax cut of about 30%, with the lowest rates reduced from 14% to 10% and the top rates from 70% to 50%. The tax cuts would be phased in over three years and so were later christened the 10-10-10 scheme. Counterbalancing them would be $41.4 billion in spending reductions for the 1982 fiscal year, $16 billion of these from programs that primarily aided the poor. As a first step, Reagan proposed eighty-three major cuts that would shrink spending by $34.8 billion, most of them amounting to only a few hundred million to 1 or 2 billion dollars each: what Stockman referred to as cats and dogs. Eliminating the minimum Social Security benefit would yield at least $1 billion, while ending the college benefit would knock out $700 million. Tightening requirements for receiving Social Security’s Disability Insurance benefits would eliminate a further $550 million.

Reagan followed up that first request with a second, on March 10, which completed his budget proposals, bringing the total to a net $41.4 billion. Again, the package weighed heavily on social and regulatory programs: the Occupational Safety and Health Administration, much reviled by business, would lose 9,000 of its 70,000 inspectors, for example.

But what made Reagan’s critics take notice was the vagueness of his long-range plans to balance the budget. To compensate for the tax cut, the Reagan blueprint assumed that inflation would go up—even though the administration was supposedly committed to reducing inflation.[9] But even with that, another $29.8 billion of cuts would have to materialize for fiscal 1983, and $44.2 billion more in 1984. Stockman wouldn’t suggest more than vaguely where these reductions, soon derided as the magic asterisk, might come from. That was exactly the idea, according to an OMB aide, who told a journalist that the budget outline was carefully crafted so that no one could identify precisely any of the programs likely to come under the knife.[10] But without more concrete details, Wall Street in particular would have a hard time believing that an end to the cycle of federal deficits was near.

But the Reagan magic was working. In April, after recovering from an assassination attempt and riding a new wave of personal popularity, the president used his first public statement to push for passage of his budget cuts. These were now embodied in a bill cosponsored in the House by Phil Gramm of Texas, one of the most conservative of the House Democrats, and Republican Delbert Latta of Ohio. Gramm-Latta reflected the administration’s proposals almost entirely, having been written at least in part by Gramm’s friend Stockman.[11] It passed the House on May 7 by a lopsided vote of 253 to 176, with 63 Democrats joining a unanimous Republican minority. Five days later, a substantially similar measure passed the Senate, seventy-eight to twenty, including twenty-seven Democrats but with two Republicans opposed.

The two votes marked the first time Congress had ever voted to cut back or eliminate any part of Social Security. As such, they ended an unprecedented, nearly half-century-long period that embraced the establishment and expansion of social insurance and social welfare programs in the U.S. That said, they didn’t even remotely approach the heart of the system. Eliminating the minimum benefit and payments to college-age students affected a combined 2.7 million beneficiaries out of a total of 35 million slated to receive checks in 1982.[12] And neither of these ideas was new, both having been considered by the Ford and Carter administrations when they were struggling with budget deficits in the 1970s. Still, nothing like it had ever happened. Social Security, the heart of the New Deal, was no longer an impregnable citadel. The lack of interest by even Democratic lawmakers in debating the proposed cuts in the early months of Reagan’s first term was remarkable—even more so considering the outrage that would erupt in the months to follow.

In fact, lawmakers and many Washington watchers in the spring of 1981 were wondering why the White House wasn’t more concerned about Social Security as it plotted to remake government. President Reagan’s delay on Social Security has been understandable so far, the New York Times editorialized on May 10. "But his own Administration estimates that the cost of Social Security is now rising by $45,000 a minute. These days, the time for reflection does not come cheap."

Two days later, his big victory with Gramm-Latta still fresh, Reagan would take on Social Security—and confront the first real defeat of his short time in office.

* * *

By 1981, the financial health of the Social Security system had been an issue for almost six years. The trouble started with the program’s last big expansion: the 20%, one-time benefits increase and annual cost-of-living-adjustments that Congress enacted in 1972. Congress had been boosting benefits semi-regularly to keep up with the cost of living for more than a decade. More than anything else, these increases were responsible for the sharp drop in poverty among the elderly. The Nixon administration decided to support the new legislation for two reasons: as economic stimulus during an election year, and to strip the Democrats of the political advantage they always seemed to gain from the ­successive rounds of increases.

Things didn’t go quite as planned. The same year the automatic Cost-of-Living-Adjustments (COLAs) began, 1975, the Social Security trustees surprised many when they reported a looming fiscal crisis. Payouts were exceeding deficits by $1.5 billion on revenues of $50 billion. The trustees predicted that without legislation to provide additional financing, both the Social Security retirement and disability funds will be exhausted soon after 1979.

Longer term, the prospect looked even worse. The 1975 Quadrennial Advisory Council on Social Security warned that the retirement of the baby boom generation of workers, decades in the future, would place intolerable strains on the program’s finances. Fleshing out this analysis, the Senate Finance Committee staff calculated that payroll taxes would have to rise some 20% by 2010 and another 40% by 2050 to keep Social Security solvent.[13]

In reality, the program hadn’t suddenly slid into decrepitude. A quirk in the structure of the new automatic COLA, combined with a severe economic slump, had created a short- to medium-term financing crisis. Other government programs were suffering too. But Social Security’s problems looked worse on paper, partly because the trustees made solvency projections seventy-five years into the future. Estimating the program’s future based on a suddenly deteriorating set of economic indicators was bound to make it look like a monstrous strain on the taxpayer.

Social Security’s troubles, nevertheless, were real. The U.S. faced multiple economic crises in the mid-1970s, all of which hit the program hard. The spiraling cost of the Vietnam War, followed quickly by the oil and gas shortages and price shocks of 1973, caused inflation to skyrocket from a band of 2.2% to 4.5% in the late 1960s to a new range of 5.5% to 11% from 1968 to 1976. Productivity growth, which had increased steadily in the lush decades following World War II, declined to a feeble 1.1% between 1972 and 1978. One result was a strangling of new investment by business and a gradual but severe decline in the stock market that would take a long time to ease. By December 1974, when the benchmark Dow Jones Industrial Average bottomed out, it was worth only a little more than one-third—adjusted for inflation—of its 1965 peak. Seventeen years later, and after a fairly successful run in the 1980s, the Dow was still below its value in 1929, adjusted for inflation.

Of more immediate importance for Social Security, unemployment rose to 9%: by far the highest level since the war. Wages were entering a period of stagnation that would last for twenty years, declining 0.6% over the decade of the 1970s alone. With a shrinking workforce and shrinking corporate profits—except in the energy sector—narrowing the available tax base, the federal budget deficit ballooned from $2 billion in 1974 to $31 billion in 1978.

For Social Security, steeper inflation meant that each year’s COLA must rise faster to preserve the purchasing power of beneficiaries’ checks. Retiree benefit payments soared from $31.1 billion in fiscal 1971 to $71.3 billion in 1977.[14] But the program was also losing money because of unemployment and declining or stagnating wages. Sluggish wages and more workers out of jobs meant less money coming into the system to pay current beneficiaries. As economists and policymakers discovered, it also meant more people applying for disability as a way to shore up their income during the bad times. A record number of new applicants—592,000—filed in 1975, and between 1969 and 1979 ­disability expenditures rose from $2.5 billion a year to $13.7 billion.[15]

Economists were puzzled. Recession, in the American experience, had usually been accompanied by price collapse, not inflation. What if the traditional tools for restarting the economy—lower interest rates and stimulative government spending, including the cushion provided by Social Security, Medicare, and welfare payments—only caused inflation to ratchet up? The supply-siders’ policy prescriptions were meant to address all of these problems at once. But few economists in the Ford and then Carter administrations expected stagflation to last very long. And the 1972 Social Security amendments, which had put the automatic COLAs in place, were written before the new economic picture had fully developed.

That year, the Social Security Administration’s actuaries projected inflation to grow by 15% between 1973 and 1977, versus 12% wage growth, for 3% net inflation. The actual result was a shocking 41% inflation and 1% wage growth.[16] The 1972 amendments called for an automatic benefits increase whenever the Consumer Price Index rose 3% or more. That figure was chosen based on the assumption that wages would rise about 2.25% faster than prices—more or less in keeping with the country’s experience over many decades. Between 1973 and 1977, however, the usual relationship between the two reversed itself and prices exceeded wages by 0.5%. Retirees, the disabled, and survivors began to receive COLAs that pushed up long-term benefits payments much faster than expected.

Traditionally, when Congress had made cost-of-living adjustments in Social Security benefits, it had coupled them so that they applied to both active and retired workers. That meant when retirees received a boost, active workers got a boost in their future benefits as well. So active workers actually received two cost-of-living boosts at the same time for their future benefits: one from the rise in the wages they received from their employers and one from the Social Security program itself. Congress kept this practice in place when it instituted automatic COLAs in 1972.

Coupling remained acceptable as long as inflation was relatively under control. But once it took off, the Social Security actuaries’ projections began to show windfall payments to disabled workers and middle-aged survivors of deceased workers and, over the next few decades, huge, inordinate benefits hikes for future retirees. The trustees’ long-range assumptions suddenly flew off the chart.

This put Social Security in a new and politically precarious spot. Until the economic crises of the 1970s, the program had almost always taken in more money than it paid out. For some years, in fact, Washington had been using it to mask the rising deficits in the overall federal budget. In 1967, at the height of the Vietnam War, a presidential commission recommended that Social Security’s budget, which had always been kept separate, be incorporated into the unified federal budget. President Johnson agreed and the immediate result was a 1969 budget that scored a very slight surplus instead of a deficit. But by the middle of the next decade, Social Security had become a drain. Every year from 1975 until 1982, in fact, it would add to the deficit.[17]

Not all of this was the program’s fault. Changes in America’s wage-earning economy had altered the landscape for a program that based both revenues and benefit payments on wages. At least since the early 1960s, tax-advantaged fringe benefits like health care and private pensions had been eroding the portion of income on which workers paid payroll taxes. By the early 1990s the Social Security tax base—the portion of income upon which payroll taxes were levied—was down 10%, amounting to tens of billions of dollars a year in lost revenues. Implicitly, the federal government was permitting a system to develop that favored private pensions and benefits over Social Security. But this development wasn’t easy to see in the mid-1970s, and with the program no longer playing a helpful fiscal role, attacking it became a lot less politically risky.

Social Security’s traditional champions on Capitol Hill and within the Social Security Administration drew up a menu of changes to address deficiencies in the benefit structure. For instance, workers who spent their entire careers in minimum wage or near-minimum wage jobs found themselves with only meager income from Social Security once they reached retirement age. Women lost benefits when they took time off to raise families during what might have been their best earning years. The 1975 Advisory Council had entertained proposals to address these disadvantages.

But with Social Security seemingly in a fiscal crisis, Washington didn’t want to tackle these problems. High officials in government instead began to speak of drastically cutting back payments, with the minimum monthly benefit coming under particular attack. Caspar Weinberger, President Ford’s Secretary of Health, Education and Welfare—the department that oversaw Social Security—wondered in a memo to his boss whether the so-called minimum benefit is tantamount to welfare under Social Security.[18] Stanford G. Ross, Social Security commissioner in the Carter administration, summed up the new official outlook: The optimistic expansionist philosophy that underlay Social Security planning since World War II has now changed to one of guarded hope that the best of the past can be preserved while the considerable needs of the future are addressed. The next decade, he predicted, would see painful adjustments in which finances and benefits will have to be closely scrutinized and balanced.[19]

That America with an unlimited economic future was giving way to an austere new zero-sum society, was one of the most frequently heard political/economic judgments of the decade. A well-connected Republican running for a House seat in Texas in 1978, for instance, told an audience at the Midland Country Club that Social Security will be bust in ten years unless there are some changes. The solution, said thirty-two-year-old George W. Bush, would be to give people the chance to invest the money the way they feel.[20]

Others, less extreme, at least agreed about the need to cut back benefits and give workers more opportunities to save on their own. In his 1975 State of the Union address, President Ford suggested imposing a 5% ceiling on Social Security benefit increases, although he could get no support for such a measure. But when Jimmy Carter entered the White House two years later, he had a Congress of his own party behind him and was prepared to act.

While the Democrats had seemed poised, post-Watergate, to dominate Washington again, the party was moving in a new direction ideologically. Carter, the former Georgia governor, was elected as an outsider, willing to question Washington orthodoxy and averse to being seen as just another tax-and-spend Democrat. He had also campaigned as an opponent of any increase in payroll taxes.

Four months after entering office in 1977, President Carter unveiled a set of restructuring proposals for Social Security. One of these would completely remove the earnings test—the ceiling on earnings subject to the employer’s half of the payroll tax. Another would increase the portion paid by employees. The president asked for an acceleration of payroll tax rate hikes that were already scheduled and higher taxes for self-employed persons. As a stopgap to tide the program over until these revenue-boosting measures kicked in, he also proposed that some general revenues—from federal income taxes—be transferred into the Social Security trust funds.

Republican lawmakers fought Carter on lifting the ceiling on employers’ contribution to payroll taxes and pushed their own proposal to raise the amount of earnings that retirees could make before their monthly benefits were reduced. By December, however, the legislative process was complete and Carter signed the Social Security amendments of 1977 into law five days before Christmas.

The measure gave him most of what he had requested. It increased payroll tax rates for Social Security and Medicare very slightly in 1979 and 1980 and more significantly thereafter. The ultimate tax rate for the two programs together would be 7.65% each for workers and their employers, to be achieved in 1990, instead of the 7.45% previously scheduled for 2011. The bill didn’t remove the earnings ceiling but increased it to $22,900 in 1979, $25,900 in 1980, and $29,700 in 1981, with automatic increases thereafter so that benefits would stay abreast of wage increases and help retirees’ standard of living keep up with current workers’.

That was on the revenue-raising side. As for benefits, the 1977 Amendments changed the formula for workers who reached age sixty-two or became disabled in 1979 or later and for dependents of workers who died during that period. Coupling was ended, and initial benefits for future retirees from then on would be indexed strictly to the growth in their own wages, not to current retirees’ COLAs as well.[21] The new formula was calculated to lower Social Security payouts by reducing the income replacement rate by 5% from where it was previously projected to be in 1979, correcting the indexing mistake of 1972.[22] To please the Republican minority, the bill also lowered the age at which the earnings test no longer applied, from seventy-two to seventy, beginning in 1982: a change that would benefit mainly upper-income retirees.

At the bill signing, Carter waxed enthusiastic, saying that the 1977 Amendments will guarantee that from 1980 to the year 2030, the Social Security funds will be sound and praised the new law as the most important Social Security legislation since the program was established. At least two points made the new law less than an outstanding success, however.

First was the creation of the notch babies. Congress had decided not to penalize those retirees—roughly, those who were born between 1911 and 1916—who had begun receiving benefits indexed to the Consumer Price Index under the 1972 law. Instead, under the new rules, the next cohort of retirees—those born between 1917 and 1922—would have their benefits reduced an average of 20% compared with the previous one, although gradually, over five years. The cohort following them would see an immediate reduction.

The result was that retirees who were born, say, in the first days of 1917 could end up enjoying a much lower initial benefit from Social Security than others fortunate enough to have been born only a few days earlier: but on the right side of New Year’s. The notch babies’ dilemma very much depended on where the eye of the beholder was directed. It wasn’t so much that the 1917–22 cohort were being penalized as that the previous cohort were getting a break. And while some 6 million people could be identified as notch babies, the only ones who incurred the penalty were those who worked well past age sixty-two at high earnings levels.[23]

Nevertheless, what could be called, in Washington terms, an entrepreneurial opportunity had been created. Lobbyists and direct-mail entrepreneurs who noticed the notch baby phenomenon in the bill created a cottage industry over the next two decades, soliciting money from the 1917–1922 cohort of retirees to press Washington for redress of the wrong that had been done them.[24]

More urgently, the 1977 amendments were built on another set of forecasts that went wrong. Government economists, it seems, had still not yet stopped the wild economic swings of the 1970s. Carter’s claim that Social Security was sound for another fifty years depended on predictions by the program’s trustees that inflation would rise a cumulative 28.2% from 1977 to 1982, while real wages would increase 12.9% and the unemployment rate would hover around 5.9%. In reality, inflation more than doubled the trustees’ estimate, reaching 60%; real wages declined 6.9%; and the unemployment rate hit a cumulative 6.7%.[25] Meanwhile, the beneficiary population was expanding fast: from 16.8 million recipients in 1962 to 31.9 million in 1982. Retiree payouts, as a result, continued to balloon, from $71.3 billion in fiscal 1977 to $135.3 billion in fiscal 1982.[26]

There was probably no way the Carter administration or the economists and actuaries at Social Security could have predicted the dire effects of the second oil shock of 1979. While their economic forecasts may have been optimistic, these were based on historical trends, just as they always had been. Everything went along really rather nicely until the body blow that OPEC delivered to the economy, which made everybody’s forecast look optimistic, Henry Aaron, an assistant secretary at the Department of Health, Education and Welfare (HEW) at the time, said later. It wasn’t only the Administration’s problem, it was the problem of private forecasters as well.[27]

Nor did anyone know when Carter appointed Paul Volcker as head of the Federal Reserve Board in August 1979 that he would pursue a stringent deflationary policy that would boost interest rates and squeeze capital out of the markets, sending the economy into a deeper recession. That further depressed payroll tax receipts, upsetting Social Security’s fiscal position even more. Very quickly it became clear that the 1977 Social Security amendments had only bought a bit more time for the program and that at some point early in the following decade, another fix would be needed.

The administration wasn’t averse to tackling the problem again. Carter had been elected as a new Democrat, fiscally responsible and critical of welfare programs. In late 1978, barely a year after the president had declared Social Security sound, his HEW secretary, Joseph Califano, proposed a menu of changes—all benefits cuts—that he said would save some $600 million in costs. These included eliminating the $255 lump-sum burial benefit, tightening disability criteria, and repealing the minimum monthly benefit.

Califano, a veteran of the Johnson administration, shared some of his former boss’s forceful style. If you lean on people enough, you get what you want, says one official whose path he crossed on numerous occasions.[28] But Califano’s proposals quickly ran into opposition from traditional champions of Social Security on Capitol Hill and even within the administration itself. On December 22, Califano met with three of the most venerated figures connected with the program to hear their objections.

Wilbur Cohen, sixty-five, long nicknamed Mr. Social Security, was a legendary civil servant who had been HEW secretary under Johnson. Robert M. Ball, sixty-four, had served the SSA in various capacities for years, including as commissioner from 1962 to 1973, under both Democratic and Republican presidents—the longest stint of anyone to head the agency. Both had been instrumental in the creation of Medicare and nearly every improvement in Social Security itself practically since its inception. Rounding out the trio was Nelson Cruikshank, seventy-six, then serving as Carter’s advisor on aging but known in Washington previously as the longtime head of the AFL-CIO’s influential Social Security policy office.

Formerly among the most powerful figures in shaping the future of Social Security, two of the three were now on the outside but still influential and determined to have their way. Cohen said he was ashamed of Califano and his colleagues. You’ll destroy the Social Security program by what you’re doing, he said. You’re trying to dismantle it.[29]

Six days later, the three met with Carter. They denounced the proposed HEW cuts as horrendous. The president listened, but at the end of the meeting, surprised them. According to Cohen, he bent over his chair and said in a questioning but affirmative quiet manner, ‘But Social Security is not sacrosanct.’ It’s likely that no sitting president since the program was created had ever said such a thing, and Carter’s statement left Cohen feeling emotionally exhausted, he later said.[30]

Cohen, Ball, and Cruikshank were shaken but not defeated. They pulled together a coalition of political allies called Save Our Social Security (SOS) to lobby against the cuts. AFL-CIO President Lane Kirkland, United Auto Workers President Douglas Fraser, former House Speaker John McCormack, and former Eisenhower HEW Secretary Arthur Flemming all took prominent roles. SOS went public with a bang when Cohen denounced Califano as the worst secretary in the history of HEW. Cruikshank, despite his post in the Carter White House, testified before the House Select Committee on Aging, calling the HEW proposals a breach of faith between the government and millions of Social Security contributors.[31]

This trio of policymaking veterans found a crucial ally in what was becoming known as the Gray Lobby. Retired Americans came into their own as a conscious political group in the 1960s. From the start, their numbers gave them a loud voice. By the end of the 1970s, Americans older than sixty for the first time outnumbered those under ten and those between eleven and nineteen years of age. But Social Security itself helped create the opportunity for more seniors’ activism, according to political scientist Andrea Louise Campbell. Poor people are generally the least likely to participate in the political process, and Social Security lifted millions of seniors out of poverty, giving them a relatively secure life in old age.[32] As benefits improved, seniors became less dependent on their children and on charity. More elderly of modest means were able to live independently and devote more of their time to community activities and, if they so chose, to political work. At the same time, they came to believe that they could do something about the deficiencies and injustices that remained in their lives.

Seniors were rapidly becoming one of the country’s most dependable and powerful groups of voters. Previously, they had always voted at lower rates than the middle-aged population, the thirty-five to forty-five-year-olds. In the 1980s they reached parity with this group. Between the 1950s and the mid-1990s, however, their participation rate in presidential elections would increase from 73% to 84%, while the middle-aged group held steady at 77% to 78%. Seniors were contributing more to political campaigns as well. Between 1952 and 2000, the proportion of retirees who made contributions would steadily rise from a mere 3% to 14%, while the middle-aged group’s political giving would peak at 13.9% in 1976, then fall back to 8.6% in 1996. And seniors went from being the age group least likely to volunteer for political campaigns in the 1950s to parity with the middle-aged group, which was formerly the most likely to do so.[33]

When the first White House Conference on Aging was called in 1961, seniors were tacitly added to Washington’s roster of so-called special interest groups, along with labor, racial minorities, women, white southerners, and the business and financial establishment. The first of a once-a-decade series of events, the 1961 conference had 3,000 attendees representing almost 300 organizations. A quick glance at the legislative victories that seniors won in the years that followed demonstrates the power they could wield.

In 1965, Medicare was signed into law. That same year the Older Americans Act was passed. It created within HEW the Administration on Aging (AoA), charged with coordinating federal and state programs for the aged. It also funded a host of state-level programs, from nutrition to in-home services to special services targeted at minority and low-income seniors. AoA offices also provided handy local pressure points for senior advocacy groups. Congress greatly expanded AoA programs in 1973, and the House established a Select Committee on Aging in 1974, the same year the Employee Retirement Income Security Act (ERISA) was passed to strengthen private-sector pension protection.[34]

An even bigger landmark was passage of the Age Discrimination in Employment Act in 1967. This initiated a twenty-year succession of amendments that finally outlawed mandatory retirement in the U.S. Not coincidentally, the term ageism was coined in 1968 by gerontologist and psychiatrist Robert N. Butler and swiftly came into common use.[35]

As did the slogan Gray Power.

Bill Arnone, a longtime advocate for Social Security who got his first exposure to elder issues while running a senior center in the Bronx in the 1970s, witnessed the transformation. I saw what it was like for many people living just on Social Security, he recalls. Middle class people became poor in retirement. Arnone helped create one of the first senior action groups at the center. One of their first projects was to send groups of seniors to pharmacies in the area to compare drug prices, then use the local press to publicize the discrepancies. Then they started comparing interest rates offered by their banks.

I realized this is a powerhouse, says Arnone. These were people with knowledge and with time on their hands. Given the opportunity, they knew how to organize and get things done.[36]

This new wave of activism crystallized in an explosion of new seniors’ groups with distinct political agendas, including the Gray Panthers, the National Senior Citizens Law Center, the Older Women’s League, and the National Caucus and Center on the Black Aged. Earlier groups like the American Association of Retired Persons and the labor-funded National Council of Senior Citizens became more politically active as well. The 1971 White House Conference on Aging served as a chance for the Gray Lobby to highlight some of its priorities. Soon, lawmakers began paying closer attention to seniors’ demands. The 1972 Social Security amendments, indexing benefits against inflation, were one product.

When SOS was formed, many of the more politically charged elder advocacy groups jumped on board the effort to defend Social Security, giving a strong grassroots base to what could have been merely a letterhead for Ball, Cohen, and their Washington allies. These eminences were well aware of the power the seniors’ movement brought to the fight: Cruikshank’s position as White House advisor on aging was created in part to reassure elderly voters that the Carter administration was listening to their needs.

A business-backed organization, the National Alliance of Senior Citizens, had established itself in 1974 as a right-leaning alternative to the other elder groups, most of which had a more liberal orientation. But the alliance failed to make much of an impression. By far the most visible of the new senior groups, in fact, was the farthest left: the Gray Panthers. Formed in Philadelphia in 1972 by Maggie Kuhn, a visionary retired social researcher with the United Presbyterian Church, the Panthers’ organizers included a number of veterans of the labor struggles of the 1930s, among them some former members of the Communist Party USA.

The Panthers’ philosophy, however, was anti-authoritarian and closer in some respects to that of the anarchist and syndicalist movements that nurtured the concepts of mutual aid and social insurance in the late-19th and early-20th centuries. Initially the Panthers were a decentralized group that delegated power to its local networks and developed a shared leadership arrangement instead of a hierarchical structure. Some of the local networks included clinics and other resources for self-help. The Panthers adopted a broad social and political agenda that included nationalizing transportation and the oil industry, opposing nuclear energy and the concentration of corporate power. From the outset they sought to attract younger members, ensuring a future for the movement after the current generation of organizers was gone.[37]

One of their central demands was that Social Security be improved and strengthened, not cut. Like the Townsend Clubs during the Depression, the Panthers positioned their demands as part of a crusade for social justice. Like other groups that emerged in the 1960s to practice what became known as identity politics, the Panthers understood that they needed to establish a degree of autonomy and control over their lives if they wanted to achieve respect and influence. In advocating health care reform, for example, they insisted that patients must be able to exercise direct control over the programs set up to serve them. The Washington policymaking nexus barely had the conceptual ability to understand this sort of politics.

The Panthers, for their part, only slowly got accustomed to working Capitol Hill and never commanded the numbers that other seniors’ groups did. While the AARP boasted upwards of 30 million members, the Panthers counted only 5,000 to 6,000 at their height. But these were hardcore, committed activists who knew how to stage a public spectacle and were unafraid to embarrass elected officials into taking a stand on issues important to the elderly.

The Panthers were gadflies to keep the older, more established … organizations going toward ever more radical goals, Kuhn said.[38] They quickly gained a reputation as possibly the most uncompromising defenders of Social Security.

These, ironically, were some of the grassroots activists who would prove most valuable to Ball and Cohen, who had spent their careers trying to turn the program into a respectable technocracy removed from the passions of street-level activism. The elderly had already shown their muscle in Washington with the passage of the 1978 Age Discrimination in Employment Act, which banned mandatory retirement at age seventy, and when they lined up with SOS against Califano’s attempt to cut Social Security, the Carter White House had to honor their opposition. The proposals never found a lawmaker to sponsor them and Califano himself was fired in 1979. Thanks in part to the organizing already done by the AARP, the NCSC, the Gray Panthers, and others, SOS would soon count 125 separate groups into its coalition.[39]

Ball and Cohen had won by allying themselves with a rising political movement of the elderly. This marked the beginning of a pattern. Time and again over the next thirty years, whenever Social Security was under attack, grassroots organizers would step in to rescue or provide crucial aid to the insiders who were working the levers behind the scenes to defend it. But inside the Washington establishment, Ball and Cohen were perceived as out of step. Califano complained that Cohen and other traditional defenders of Social Security had lost touch and didn’t understand that they were now living in a time when painful decisions would have to be made about scarce resources. No program, not even this one, could be considered sacred.

Califano himself failed to see the distinction between, on one hand, changing the formula for calculating benefits and raising payroll taxes, and on the other, actually eliminating elements of the program itself. Congress had changed the benefits formula and raised taxes numerous times without any repercussions. In fact, in a poll taken during the debates over what became the 1977 amendments, 56% of respondents said they approved of higher taxes if it would improve the fiscal health of Social Security.[40] But eliminating the minimum benefit and even the burial payment meant removing organs from the body of the program: the first step on what Cohen and others regarded as a slippery slope to eventual dismantlement of Social Security.

Carter did manage to push through one more significant measure related to Social Security, however: A study of disability costs by the SSA’s Office of Assessment in 1979 found in a random sample that in more than 20% of cases, recipients were either ineligible or receiving more money than they were entitled to. Concerned about the explosion of new disability payouts, in 1980 Carter asked from Congress and received a measure requiring the SSA to regularly review the eligibility of all recipients who weren’t permanently disabled.

The review wasn’t scheduled to start until 1982 and wasn’t expected to be much of a money-saver: a mere $10 million over four years, in fact.[41] But it underscored the fact that by the time Carter left office, Washington policymaking on Social Security had already entered a new era of austerity.

Chapter 2

A Despicable Thing

Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are H.L. Hunt and a few other Texas millionaires, and an occasional politician or business man from other areas. Their number is negligible and they are stupid.

—Pres. Dwight D. Eisenhower[1]

The editorial writers at the New York Times who chastised Reagan for failing to address Social Security’s problems in the first months of his term were perhaps unaware that he had begun an attack on one component of the program, Disability Insurance, before he even took office. In December 1980, the congressional General Accounting Office presented to his transition team a report suggesting that as many as 584,000 of Disability Insurance’s 2.9 million recipients might be ineligible, and were costing the government $2 billion a year. This was music to the ears of the Reagan team, who were scrambling for ways to make good on the president-elect’s claim that the budget could be balanced simply by cutting government waste and fraud.

They quickly developed a plan to prioritize the disability review by launching it in spring 1981 instead of on January 1, 1982, as scheduled. They also prepared new estimates of how much could be saved, projecting $3.45 billion in six years: more than thirty-three times what the Social Security Administration had estimated under Carter. The SSA had always done eligibility reviews, but previously conducted only a small number each year—less than 4% of total cases—and generally only when the agency suspected a recipient could probably return to work. But like other parts of the executive branch, the SSA was being given an additional job under Reagan: budget cutting.

What had been conceived by Congress in 1980 was deliberate invigoration of a review procedure that had been too feeble to have much effect, writes Social Security historian Martha Derthick. What was set in motion in 1981 was more like a purge.[2]

But Reagan wasn’t eager to take on Social Security directly. Chief of Staff James Baker, concerned it was one of the new president’s big points of vulnerability, felt that part of his job was to distance the president from any suggestion that he might be preparing to slash the program. Even Stockman wanted to keep Social Security off the agenda during the budget cutting negotiations that led up to passage of Gramm-Latta, because he was unsure of his leverage with lawmakers on such as sensitive issue. Of course, he was counting on bringing it into play during round two. The $44 billion we had plugged into the March 10 budget under the line ‘Future savings to be identified,’ he revealed later, was nothing more than a euphemism for ‘We’re going to go after Social Security.’[3]

For the moment, then, the program was off the table. In March, when a group of mostly Republican senators led by Budget Committee chair Pete Domenici of New Mexico and majority leader Howard Baker of Tennessee began to publicly discuss saving $6 billion by cutting COLAs for Social Security and federal pensions, the president went to Baker’s office in the Capitol to discuss it. The meeting included the entire Senate Republican leadership plus the Budget Committee members. It stands as testimony to how far the Republicans had come in believing they could get their way—even on the most popular social program in the country—that nearly to a man, the senators insisted that balancing the budget was impossible without curtailing the entitlement COLAs, as Stockman, who was there, later recalled.

Fellas, I promised I wouldn’t touch Social Security, Reagan responded. We just can’t get suckered into it. The other side’s just waiting to pounce. So let’s put this one behind us and get on with budget cutting. Howard Baker replied, Mr. President, we hear you loud and clear.[4] Later that day, Democratic Sen. Ernest Hollings of South Carolina, the ranking minority member of the Budget Committee and the penny-pinching champion of the COLA cutback idea, who earlier had told Domenici he could get five of the ten Democrats on the Budget Committee to vote for COLA cuts,[5] said, It looks like I can’t get but one vote.[6] Hollings did bring such a measure to the floor of the Senate on April 1, which he said would save $2.6 billion in fiscal 1982, and was defeated, eighty-six to twelve, with lawmakers from both parties citing opposition to any changes in the COLA formula.

Stockman chalked up the senators’ eagerness to carve up Social Security, if it weren’t for Reagan’s opposition, to a desire to use the savings to protect programs of their own. But within a few weeks, and while Gramm-Latta was still being debated, he changed his mind and decided to put together a more drastic Social Security proposal. What pushed him to do so was action in the House Social Security Subcommittee, whose chair, Democrat J.J. Jake Pickle of Texas, introduced a bill to stabilize the program’s finances.

* * *

Because the Carter administration had failed in its 1979 effort to fix Social Security’s fiscal problems entirely through benefit cuts, coming up with a solution was one of the biggest challenges facing Congress in the first year of the Reagan era. More money was going out in benefit payments than was coming in through payroll taxes: $15 billion vs. $10 billion a year. The trust fund for old-age and survivors’ benefits was nearly empty, forcing it to borrow from the trust funds for Disability Insurance and Medicare to make payments.[7]

The centerpiece of Pickle’s plan to restore balance was a gradual increase in the retirement age from sixty-five to sixty-eight, which wouldn’t take effect until 2000–12. It also included a permanent shift in the date when COLAs kicked in, to October 3 from July 3, beginning in 1982. Since regular COLAs produce cumulatively larger benefits, a three month delay would result in permanently lower benefits. That would produce annual savings of $1 billion in fiscal 1983, $1.1 billion in fiscal 1984, and slightly larger savings each year thereafter, helping tide the program over the expected difficult decade. Pickle also called for funding half of Medicare from income tax rather than payroll tax, freeing up more payroll tax revenues to bolster the old-age insurance fund. Lastly, he proposed changes similar to the ones Reagan had made, eliminating the minimum benefit and the student benefit.

The subcommittee quickly approved all of Pickle’s proposals except the COLA shift, which Democratic Rep. Richard A. Gephardt of Missouri called too much political dynamite since the president was on record opposing such a move.[8] But the Pickle bill had the effect of putting the Democrats out in front on an issue that was arguably much more immediately important to most voters than Reagan’s tax and spending cuts: saving Social Security.

Pickle’s bill was of a piece with the incremental approach to Social Security reform that the Carter White House had pursued with the 1977 Amendments, adjusting the rules here and there to find savings but leaving the basic structure of the program alone. This was how most Republican lawmakers expected a deal to be made as well. In early March, Rep. Barber Conable of New York, the ranking Republican member of the Social Security Subcommittee, had introduced another bill to improve the program’s finances incrementally by requiring all 2.8 million federal employees to join Social Security, adding their payroll tax receipts to the pot.

All this put Stockman in an awkward position. The OMB director didn’t want merely to stabilize Social Security: he wanted to milk it for far greater savings in the unified budget by drastically cutting benefits. If Pickle’s bill, now before the Ways and Means Committee, acquired momentum in the House, it could make any Social Security proposals the administration came up with much harder to put across.

On April 10, Stockman set in motion a plan to get more savings. What was to follow, he later wrote, was no less than a frontal assault on the very inner fortress of the American welfare state—the giant Social Security system, on which one seventh of the nation’s populace depended for its well-being.[9] Coming up with an alternative to Pickle’s bill wasn’t just a matter of extending the White House’s budget-cutting exercise. Stockman was determined to go farther than either party had ever gone in overhauling Social Security.

As a supply-side revolutionary, this was what he had come to Washington to do. During his first term in the House in 1975, he had contributed an article entitled The Social Pork Barrel to the Public Interest, a neoconservative magazine that was one of the first to give Wanniski and Laffer a forum for their economic ideas. The article, which attracted considerable attention for Stockman, was a blistering attack on the prevailing liberal faith in meeting unfulfilled ‘human needs’ by means of social welfare programs, denouncing nearly all such programs as corrupt giveaways to political constituencies. He particularly attacked the social insurance concept as a mythology that encouraged the government to hand out benefits through Social Security and Medicare to middle-class workers who could do without them instead of concentrating on low-income populations that really needed the help.[10]

This argument reflected one of the core complaints that conservatives had been making about Social Security ever since the program was enacted. When attacked as heartless scrooges, prepared to let older Americans starve or become a burden on their families, they often argued that they had no problem with the concept of a needs-based welfare system distributing benefits to workers in real distress. What they objected to was a program that provided benefits to everyone based on what they had earned, not on their actual needs. A program such as this, they feared,