Inflation is at one of the lowest levels seen in the last half-century. The federal budget is closer to being balanced than in most of the preceding 30 years.
Now is a good time for Congress to take back its historic role of deciding what particular level of Social Security benefits is most fair to all members of society. It should start by ending the automatic annual cost of living adjustment that it implemented in 1972. But taking this step will require exceptional political courage and strong leadership by both the administration and Congress.
Why stop automatically adjusting Social Security payments for inflation? The answer is simple. The current system implicitly assumes that Congress determined a perpetually optimal level of benefits when it last made a discretionary change in benefits some 28 years ago. It also assumes that the Consumer Price Index is a perfect measure to maintain the value of that ideal level of benefits over time. Both assumptions are false.
Determining a level of benefits that is just or fair to society as a whole should take into account many factors. These might include national income and the overall wealth of society, incomes of different age groups of working people paying FICA, and other income Social Security beneficiaries receive.
It could also take into account the actual cost of living for Social Security recipients whose “market basket” of consumption items is often far different from that of society as a whole which is used in computing the CPI.
No economist can devise a schedule of benefits that is objectively fair or just. That is a subjective decision that can only be reached through the political process in a democracy. For the first 34 years of Social Security’s existence, Congress made that decision. Sometimes as much as a decade passed between increases. Others came less than two years apart. But in each case the elected representatives of all U.S. citizens had to stop and consider the question of what was an appropriate level of payments.
Even though the Social Security Act was signed in 1935, the first payments were not made until 1940. From 1940 through 1968, Congress raised nominal benefits six times to a cumulative level of 272 percent of starting levels. This was somewhat more than cumulative inflation of 248 percent over the same period as measured by the CPI.
Then, between 1970 and 1972, in a bidding war between President Nixon and Democratic Congressman Wilbur Mills, benefits were raised another 52 percent. This left them more than 38 percent ahead of cumulative general inflation.
The law authorizing the last increase, in September 1972, also mandated that benefits be linked to the CPI beginning in 1975. One more discretionary increase of 11 percent was made in June of 1974, and indexing took over 12 months later. Since then, increases have been automatic; in June, from 1975 through 1982, and in December, from 1983 through 1999.
The 1970-72 bidding frenzy resulted in a fundamental change in the program from a bare-bones retirement safety net to more generous retirement plan. It was fiscally painless at the time since baby boomers were entering the workforce in droves and even 52 percent increases posed no immediate threat to Social Security Trust funds.
But these increases also gave rise to most of the current preoccupation with the system’s long-term solvency. In the meantime, three decades of new retirees have become accustomed to these payment levels and generally believe that they are only getting back what they paid in.
Actually, current retirees are getting back more, relative to what they paid in, than any other group that preceded them or is likely to follow them. Benefits relative to average per-capita incomes are also higher now than at any time from 1940 through 1970. And the average income of individuals receiving Social Security is now higher than the average income of working people paying into the system. In other words, on average, Social Security now transfers money from poorer people to richer people.
On the other hand, the CPI is a very imperfect measure of changes in the cost of living for the retired. While economists generally believe that the index overestimated increases in prices by ½ to 1 percentage point a year for many years, they also know that many items bought by the elderly have gone up more than the average of items used to compute the general CPI. So the automatic increases decreed in 1972 may not have maintained uniform buying power for the retired.
We are a wealthy nation, and most people in society believe that helping retired and handicapped people enjoy a decent level of living is a proper role of government. I strongly agree with that belief.
But the decision about what levels of federal taxes and federal program benefits are fair is one that needs to be made periodically by our democratic institutions. When Congress and the President assume that a decision made nearly 30 years ago should not ever undergo reexamination in the light of all relevant factors, they are derelict in their duty to all citizens.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.