Sunday, May 8, 2011

President #7: Jimmy Carter (1977-1981)

How did the simultaneous spikes in unemployment and inflation affect your approach to Social Security reform? How did you work to improve the solvency of the system?

Upon assuming the presidency in 1977, I was presented with a dismal fiscal prognosis from the Board of Trustees of the Social Security Trust Funds. Their report indicated that the short-term stressors of unprecedented unemployment and inflation in the late 1970s had come together to pose a significant threat to the solvency of Social Security.
[1] High unemployment had cut short the revenues of the system while high inflation had increased the benefits being paid out, so much so that from 1975-1977, outlays exceeded receipts. Letting present trends continue, the Old Age and Survivors Insurance (OASI) fund would run out by 1983.[2]

These short-term challenges were only exacerbated by a longer-term solvency problem due in part to decreasing birthrates and increasing life expectancies, and in part to a flaw in the COLA formula as it was adopted in 1972.
[3]

To face both of these problems, I proposed a solution I believed to be capable of fixing Social Security through the end of the 20th century. My proposal was aimed at preventing defaults on the OASI trust fund, bringing revenues and expenditures into balance by 1978 and maintaining them there, setting aside reserves to protect the system from short-term shocks like those we were currently facing, reviewing the current structure of Social Security, and making whatever reforms necessary to preserving the integrity through the end of the 20th century.
[4]

More specifically, I suggested a counter-cyclical revenue stream to be set aside to offset the impact of recessions on Social Security, removing the employer wage-base ceiling, increasing the payroll tax base, fixing the flaw in the COLA formula, eliminating gender discrimination in benefits, increasing the tax rate on self-employed Americans, and moving up already-scheduled tax hikes.
[5]

These suggestions were made to both houses of Congress in 1977 amidst a tide of public distrust of government’s ability to enact meaningful legislation. And for a time, it seemed as though this distrust would fester: both the House and the Senate offered alternative versions of my proposal that added significantly to the tax burden of all to provide more benefits for the few.
[6]

Nonetheless, we were able to negotiate a sound agreement that reaffirmed the pact that had been made to the elderly and future generations since the time of FDR. The legislation ultimately increases tax burdens while avoiding the lowest-income families. It increases tax payments for the wealthiest Americans. It eliminates gender discrimination. And it eases the earnings test, allowing more elderly workers to continue working and earn more benefits. We believed this legislation would guarantee solvency until 2030. Finally, it was reached in a spirit of bipartisan compromise that represents our commitment to making Social Security work, no matter what.[7] However, as early as 1978, member of Congress were focusing on short-term reduction in the payroll tax, perhaps foreshadowing the difficulties to come.[8]

Editor's Note

President Carter faced one of the most difficult scenarios in recent American history in stagflation, or the combination of high-unemployment and high inflation that had no historical precedent before the 1970s. His efforts to reform Social Security were constrained by these massive, short-term shocks, that proved that the system as it was was not invulnerable to economic conditions. In many ways, this period demonstrated that larger-scale reform would be required to increase Social Security solvency in light of not only the long-term population shift, but also the possiblity of economic fluctuations.

Carter's situation all but required him to control costs and impose a short-term solution; most experts believed that a fiscal crisis was right around the corner and action was required in the next few years. It also forced him to consider potential cuts of benefits and tax hikes that are difficult to sell throughout the history of Social Security. At this point, the program is hallowed turf in American social policy, and any cuts are at this point considered unnacceptable.

Carter's belief that the compromise he reached with Congress was a long-term solution failed to realize the extent of the problem of changing demographics. He also failed to take into account the massive spending by the government during the 1970s build-up during the Cold War against and the difficulty of keeping political hands off of a program surplus when yearly deficits continue.
[9] That he had truly met bi-partisan compromise was also likely a matter of overconfidence. His system, set to be "solvent" until 2030, was largely overhauled by the Social Security amendments of 1983.

Ultimately, Carter was faced with difficult external circumstances in that he suffered from a short-term and a long-term problem that he tried to address simultaneously. While his legislation used several important levers of Social Security reform, they eventually fell victim to insolvency and a short-term-minded partisan atmosphere that preferred lower taxes to a long-term solution.


[1] Message to the Congress. May 9, 1977. Social Security System. Retrieved from http://www/ssa/gov/history/carterstmnts.html
[2] Ibid
[3] Ibid
[4] Ibid
[5] Ibid
[6] Letter to Congressional Leaders, December 1, 1977. Social Security Financing Legislation. Retrieved from http://www/ssa/gov/history/carterstmnts.html
[7] Remarks at the Bill Signing Ceremony, December 20, 1977. Social Security Amendments of 1977. Retrieved from http://www/ssa/gov/history/carterstmnts.html
[8] White House Statement, April 10, 1978. Social Security Financing Legislation. Retrieved from http://www/ssa/gov/history/carterstmnts.html
[9] Michael B. Katz, The Price of Citizenship: Redefining the American Welfare State (2001), Ch. 1, pp. 9-32.

3 comments:

  1. Was there a fatal flaw to President Carter's sweeping 1977 Social Security amendments? How could he have taken into account the various historical themes discussed in this blog and improved his reform efforts?

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  2. I appreciate the way this entry touches on the underlying political dynamics of the period, and the constrains that Carter faced. Also useful is the way it emphasizes the difficulty in anticipating how a particular set of reforms will play out, or how they may be altered by later actors.

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  3. One other thing to note is that Carter made the first serious attempt to control Medicare costs, pushing hard for a bill to restrain hospital spending. He came close, but the legislation was defeated by a determined lobbying effort by the industry.

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