Social Security Fix Demands Honest Numbers

President Barack Obama pledged to make federal entitlement reform a priority of his domestic agenda. His first step was to convene a fiscal responsibility summit, with hints of more intensive discussions to follow.

Given the recent vast expansion of federal spending, on the eve of an onrushing entitlement spending explosion, this is potentially a praiseworthy -- and highly necessary -- undertaking.

On Social Security, Obama faces a daunting challenge. His two immediate predecessors were stymied in well-intended, well- informed reform efforts. To find a successful precedent for bipartisan cooperation, we must look back to 1983.

The 1983 Social Security rescue has much to teach us. There is a danger that its most relevant lessons are being misremembered, or forgotten altogether.

Why did the 1983 effort succeed? Certainly its bipartisan process played a role. Frustrated in efforts to move his own Social Security proposals -- even with insolvency around the corner -- President Ronald Reagan appointed a commission in an atypical way.

Where some commissions have been formed by party leaders appointing the most intransigent members of their caucuses, the National Commission on Social Security Reform -- better known as the Greenspan Commission, after its chairman, Alan Greenspan -- included Democrats appointed by Republicans, and vice versa. Moreover, the commission had a fine balance between congressional participation (Bob Dole, Pat Moynihan, Claude Pepper) and expert cover (Greenspan, Robert Ball).

Willing to Compromise

The resulting process engaged individuals on both sides who were willing to compromise. A successful process today will need to find a similar sweet spot.

Another lesson of 1983 involves AARP, the advocacy group for the over-50 set. Conventional wisdom today holds that no significant entitlement reform can pass without its support. History shows the opposite: the 1983 reforms were possible only because both parties and both houses of Congress withstood AARP's lobbying against it. Similar courage, lately in short supply, must be summoned today.

For all these procedural triumphs, the 1983 effort almost failed. It required an extension of the commission's deadline and intense last-minute negotiations among senators Dole and Moynihan, a rump group of other commission members, and staff of the Reagan White House, to save the day.

Here lies another critical lesson for today. Even in the most urgent circumstances, it is difficult to broker a compromise between strongly held opposing perspectives. Today we lack even the essential advantage the 1983 negotiators enjoyed: shared analytical clarity on the size and immediacy of Social Security's financing shortfall.

Clarity and Urgency

In the early 1980s, Democrats and Republicans alike understood that Social Security faced a shortfall that was coming fast. Both parties also understood that contemporary workers paid the entire cost of financing benefits for current retirees. There were no impassioned arguments about the Social Security trust funds. In fact, the trustees did not include trust-fund accumulations in their estimates of the program's long-range balance.

Today, we lack shared clarity on the scope of the problem, largely because of the 1983 reforms themselves.

With Baby Boomers now beginning to retire, the era of Social Security surpluses will soon be replaced by growing deficits, starting in 2017. Yet the existence of the Social Security trust funds causes endless arguments about whether problems arise in 2017, when deficits begin, or not until 2041, when the trust funds run out.

Unintended Surpluses

The pattern unleashed by the 1983 reforms -- large annual surpluses, followed by large annual deficits -- is so striking that it is natural for many to assume that it was willful, that negotiators in 1983 thought the trust funds could be built up and used to pre-fund Baby Boomer benefits in the deficit years.

The documentary evidence refutes this. Greenspan Commission Executive Director Robert Myers, in an appendix to the panel's report, wrote that the longstanding intent "is that income and outgo should be approximately equal each year." Congressman Jake Pickle, then-chairman of the House Social Security Subcommittee, wrote in May 1983 that "we would not want to fund our national retirement program other than on a pay-as-you-go basis."

If a large trust fund buildup was not desired, why did the surpluses arise?

Part of the answer is that the Greenspan Commission never produced a complete, fleshed-out plan. Instead, it produced a set of recommendations that would bring Social Security roughly two-thirds of the way toward balance, on average, leaving Congress to choose from options to fill out the remaining third. No one had a whole package to examine until late in the game.

Planning for Worst

The surpluses arose also because the commission, and later Congress's authorizing committees, aimed to ensure near-term solvency under both intermediate projections and a worst-case scenario. Because the worst-case scenario did not come to pass, the margin for error proved an unnecessary cushion.

Given where the 1983 reforms have brought us, how do we replicate its success? One possible course is to scrap the divisive accounting methods that are at the root of today's confusion and return to the methods that both parties were willing to use in 1983. 

Advocates of transparency in government are unlikely to be satisfied by a solution that relies on an accounting method, adopted in 1988, that has drawn just criticism for low-balling Social Security's actual shortfalls. That method makes future deficits appear smaller by discounting them at a rate of interest supposedly being "earned" by the trust funds -- even though those funds have long been spent, not saved.

The 1983 methodology, by contrast, forthrightly measured future Social Security balances as a percentage of future worker wages, and bypassed trust-fund controversies altogether.

Error of 1983

This does not mean that the 1983 methods were perfect. They erred badly by measuring long-term balance only on average, failing to note the reforms would produce huge annual imbalances.

In recent years, the methods of the Social Security Administration's Office of the Actuary have been vastly improved to show annual cash flows as well as long-term averages. Negotiators can and should pursue the goal of eliminating, or at least minimizing, Social Security's future annual shortfalls.

The bottom line: If we want the success of 1983, then we need to look at the problem with the clear eyes of 1983. That means acknowledging the size and immediacy of the coming shortfalls and rejecting accounting practices that obscure them. As the 1983 effort's unique success -- and near-failure -- shows, this level of clarity is our only hope.

(Charles P. Blahous, a senior fellow at the Hudson Institute, formerly served as executive director of President George W. Bush's Commission to Strengthen Social Security. This material has been condensed from a draft chapter of his forthcoming book, "Social Security: The Unfinished Work.")