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  As of this writing, it’s way too early to evaluate Obama’s record. However, it’s clear that he was too trusting of Congress’s ability to handle the stimulus bill, the fiscal 2009 budget, and health care reform. He must exert more presidential leadership and provide more specifics on what he is for and against on these types of major issues.

  Barack Obama will be leading our government until at least 2013, and it’s up to us to monitor his policies during these crucial years. I hope this monitoring will come from all parts of the political spectrum, and in particular from the real world outside of Washington, D.C. I hope you now have some ideas of how to measure the administration’s progress. Most of all, I hope and pray that President Obama will take the actions necessary to turn things around.

  Five

  SAVE SOCIAL

  SECURITY FIRST

  We have to do something to save Social Security. You’ve heard that before. When we talk about our government’s financial problems in this country, we never (well, unless you’re me) shout, “Save our fiscal integrity!” We speak in terms of the government programs that serve us, and in that lot Social Security is an evergreen. In fact, calls to save Social Security have become a dangerous political cliché—dangerous because you hear these alarms so often that it’s hard to take them seriously; it’s the political equivalent of crying wolf. Prophets of doom can rant all they want, but retired Americans don’t really believe their Social Security checks will stop coming, and if you’re not yet retired, I’ll bet you don’t spend a lot of time awake at night worrying about getting that check when your time comes. (That may not be true for some young people, who are beginning to worry—unnecessarily, I think—that Social Security will not be there when they retire.) Social Security is arguably the most successful federal program, and the Social Security Administration is one of the most effective agencies in our government. In fact, it regularly receives customer satisfaction ratings that rival top private-sector service companies. In spite of its growing burdens, Social Security is actually in the best shape of the major social programs I’ll write about in this book.

  That’s why I am analyzing it first. For the next few years, Social Security is fine; but if we take seriously our stewardship responsibility for the Americans who come after us—a key principle of this book—Social Security is already setting off alarm signals. We can be as complacent as we want to be, but the unfunded obligations are mounting and somebody someday will have to pay the price. I’ve noted that the disability program is already in a negative cash flow position and the retirement and survivors income program is expected to have a negative cash flow in 2010–11. If we keep on doing nothing until the trust funds that finance the program run dry in 2037, monthly benefits will have to be cut about 24 percent across the board, and the cuts will get deeper after that.

  It’s easy to see what’s wrong with the program, and the fixes are commonsense and obvious—no problem for anybody in the sensible center. Social Security is a test case of how well we Americans can face facts and address large, known, and growing problems before a crisis reaches our doorstep. Reforming it would demonstrate that we have finally recognized we can’t get something for nothing. I know the issues well, having served as a trustee of Social Security and Medicare from 1990 to 1995. We can make Social Security so secure that you will never have to hear that old cliché again.

  You and I have to do our part by acknowledging realities: Number one, we’re living longer, our economy has changed, and Social Security should be adjusted accordingly. Number two, we have to save more ourselves to help secure our own retirement, especially if we don’t want to work longer.

  Let’s take a few minutes to look at the scope and history of our Social Security problem. Then I’ll outline a reform program that will ensure Social Security’s promises are matched by enough funds to make good on them.

  ROOSEVELT’S MODEST DESIGN

  Our government retirement benefits have European roots. The first social insurance pension system emerged in Germany in the 1870s, the creation of Chancellor Otto von Bismarck, who was the kind of brilliant politician who could make a liberal political promise that was fiscally conservative. Bismarck saw his society changing to the detriment of Germany’s senior citizens. The industrial revolution had eliminated some of the manual jobs that had previously provided their livelihood. In response, Bismarck promised a modest state pension to Germans who lived to age seventy (later dropped to sixty-five). At the time, the average life expectancy of Germans was fifty-five. As a result, very few people received the benefit, and those who did generally were unemployable and needed the money.

  Fast-forward to 1935 and you come to the inception of the Social Security program in the United States. President Roosevelt faced a different social problem. America was still in the grips of a depression; unemployment levels were very high, as were poverty rates among senior citizens. As one of his key New Deal initiatives, Roosevelt decided to provide a safety net for people who weren’t able to support themselves, using Bismarck’s system as one model.

  This safety net—Social Security—actually includes two programs. The larger, the better known, and the one that serves as the primary focus of this chapter is the retirement and survivors income program. It provides retirement income to eligible participants and, after they pass away, to their dependents. There is also a disability income program to help those who lose their ability to work before reaching retirement age.

  Social Security was never intended to be the sole source of income for retirees and the disabled. Like the foundation of a house, it was designed to serve merely as the base of a secure retirement, supplemented by employer-sponsored pension and disability programs as well as personal savings.

  Its financing was straightforward. Working Americans would contribute payroll taxes to special trust funds. (These are the “FICA” deductions from your paycheck, the acronym standing for Federal Insurance Contributions Act.) Money from the funds, in turn, would support monthly payments to retirees and disabled workers. This system worked fine in the early years of Social Security. America had a lot more workers than retired people, and the trust funds generated healthy surpluses.

  In those early years, with so many workers contributing, most retirees garnered far more in Social Security benefits than they had ever paid in payroll taxes. The first person to receive Social Security benefits, in 1940, was Ida May Fuller. She paid only about $23 in taxes to the Social Security program, but received approximately $22,000 in benefits during her lifetime. That sounds like a pretty good deal to me. However, now the system has matured, and the ratio of workers to retirees has declined from 16:1 in 1950 to 3.3:1 today. Those deals are gone forever.

  Even from the start, our program was not quite as brilliantly conceived as Bismarck’s. By the time the U.S. Social Security system was established in the summer of 1935, average life expectancy in America was about sixty-five; nonetheless, Washington adopted Germany’s sixty-five, rather than a later age, as the eligibility level for full retirement benefits. That guaranteed the program would enroll a greater percentage of senior citizens than might have been necessary. In addition, the program’s administrators later decided that people could obtain reduced early retirement benefits at age sixty-two, putting even more retirees into the system.

  Problems arose as America’s demographic portrait changed. The surge of baby boomers, born after World War II, had fewer of their own children, and the national workforce began to age. The equation shifted toward fewer workers paying taxes and more retirees receiving benefits. And those benefits kept increasing. In 1950, Congress approved the first cost-of-living adjustment in Social Security to keep the benefits ahead of inflation. In 1972, these so-called COLAs were made automatic, pegged to an index that measured inflation. Unfortunately, these increased benefits were not adequately funded.

  The payroll taxes that finance Social Security are currently 6.2 percent, imposed on both the employee and the employer. The payroll
taxes are levied on each worker’s salary only up to a certain annual dollar amount, usually known as the “wage base cap;” any earnings above this amount are exempt from payroll taxes for Social Security. Just as the COLAs go up automatically, so does the wage cap; in 2009, it rose from $102,000 to $106,800. But, consistent with the story I’m telling throughout this book, the increase in funding does not cover the increase in the cost of benefits—and as you look into the future, the picture gets scarier and scarier.

  ALARM BELLS

  The first real trouble emerged in 1975, when the government realized that within four years it would not be collecting enough payroll taxes to finance Social Security benefits. Congress raised taxes and trimmed benefits enough to hold off disaster. Still, by 1983 the alarm bells were ringing again—the trust funds were running out of money. To put more permanent reforms in place, President Reagan appointed a commission led by Alan Greenspan (before he became chairman of the Federal Reserve). The pressure was on to come up with a rescue plan and for Congress to adopt it—fast. In fact, the combined Social Security trust funds were set to run dry within weeks. If they had gone to zero, the monthly Social Security checks would not have gone out on time. Can you imagine the outcry and the political consequences if tens of millions of Americans had not received their Social Security checks on time? Now that would have been a crisis!

  The commission’s recommendation was essentially an endorsement of a private deal between President Reagan and Speaker of the House Tip O’Neill. Congress voted to tax some Social Security benefits, and to add federal workers to the payroll-tax roster for the first time. The goal was to help ensure that the program could deliver on its promises for the next seventy-five years. (Not that the country will disappear after seventy-five years; that’s simply the time frame Social Security trustees use to measure the long-term health of the system. It covers three generations of Americans as well as the likely life span of all persons currently paying into the system.)

  For the most part, the Greenspan Commission did its job. It prompted Congress and the president to act, and it gave them a political cover to do so. And its recommendations did buy the program time. The commission did not, however, propose one very important yet controversial change: increasing the retirement eligibility age in light of longer life expectancies. It took Representative Jake Pickle (D-TX), chairman of the Social Security subcommittee of the powerful House Ways and Means Committee, to do that. Pickle had the courage to offer an amendment that gradually increased the normal retirement age from sixty-five to sixty-seven. And guess what? His amendment passed. Most members realized that it was the right thing to do even if it wasn’t popular. That was a true victory of courage and leadership—Jake did the right thing even though it might send shock waves through his political career.

  The conventional wisdom is that Social Security is the “third rail” of American politics. The idea is that any elected federal official who seeks to modify the popular program will pay a painful political price—like touching the electrified third rail of a subway system. Well, the third rail did not zap Jake Pickle. He kept his House seat and went on to serve eleven more years, retiring only after he decided he had served long enough. (Jake was one politician who knew when he had served long enough.)

  Since 1983, other administrations have tried to strengthen Social Security, with less success. In the late 1990s, President Bill Clinton tried the collaborative approach, reaching beyond Washington to educate and engage the American people. He asked the Concord Coalition, a nonprofit group that promotes fiscal responsibility, to hold a series of town hall sessions on reform along with AARP, the leading advocacy organization for people over fifty years old. Concord and AARP teamed up with AmericaSpeaks, a group that organizes town-hall-style meetings on public issues, to conduct several meetings across the country. The sessions were intended to inform people and generate ideas and to help prepare the way for comprehensive Social Security reform. I was asked by Concord and AARP to be the lead “truth teller” and to help make the case for comprehensive Social Security reform.

  We held several major regional forums, each attended by President Clinton or Vice President Al Gore. Then the Clinton-Gore administration sponsored a White House conference on Social Security that drew members of Congress from both major parties as well as representatives from key stakeholder groups, including me. The conference reviewed the results of the outside-the-Beltway effort and reinforced the need for timely reform—or as the Clinton-Gore administration put it, to “Save Social Security First.”

  The Clinton process proved to be very effective. The outside-the-Beltway sessions, combined with the Clinton administration’s quieter inside-the-Beltway efforts, set the stage for comprehensive reform that likely would have involved maintaining a basic benefit program and adding supplemental individual accounts, among other changes. That would have been a huge leap forward for America and a positive legacy for President Clinton.

  There was only one problem, and it was a big one: Monica Lewinsky and the blue dress incident. As Clinton faced scandal and impeachment, he had to spend his political capital on staying in office rather than on reforming Social Security. Despite all our work, there was no change in the status quo. Nonetheless, the process that Clinton and his staff set in motion, both in Washington and around the country, demonstrated the right way to go about achieving comprehensive Social Security and other key reforms. And it showed that Americans are ready to take change seriously if you go about it the right way.

  In 2005, fresh from his reelection victory, President Bush also tried to reform Social Security. Unfortunately, his approach was flawed in at least three ways. First, he did not employ an open and inclusive process like Clinton’s to help write his reform agenda and to build a consensus for timely action. The members appointed to his Social Security Reform Commission were required to agree in advance to support individual retirement accounts for workers in addition to the monthly checks to retirees. These individual accounts were to be an integral part of overall Social Security reform—even if such accounts had to be funded through more federal borrowing. Bush was unable to get any high-level elected Democrats to join him in his reform process. Furthermore, Bush’s outside-the-Beltway public events were largely staged with crowds of screened supporters.

  Second, Bush founded his reform process on the concept of an “ownership society.” That is, he believed that people should have more control over how to invest their government retirement funds. That approach was based largely on his own political philosophy rather than on the needs and interests of Social Security participants themselves. The fact is, most Americans need Social Security, and they have come to rely on their inflation-indexed monthly benefit payment as an essential part of their retirement security plan.

  Bush and his advisers should have studied the hierarchy of needs devised by psychologist Abraham Maslow in the 1940s. Maslow pointed out that the most basic human need is self-preservation—and that is what Social Security is all about. The pinnacle of human need is self-actualization, according to Maslow. Living in America gives us an unparalleled opportunity to reach for that goal on our own.

  Third, Bush’s reform plan would have added more than $1 trillion in additional deficits and debt burdens at the federal level over the short to medium term—this at a time when America had already returned to deficits and increasing debt levels after several years of surpluses and even some reduction in debt.

  Bush’s flawed reform process and plan produced predictable results. After more than two hundred taxpayer-funded public events, about sixty of which either he or Vice President Dick Cheney attended, public support for the president’s reforms had dropped below what it had been before the first event was held. I would call that failing a market test.

  THE TRUST FUND CON

  You could look at each of these reform efforts from a different perspective. For one thing, as Rahm Emanuel so helpfully reminded us, a crisis helps. The reforms of the 1970s and 19
80s worked because Social Security faced imminent crises; in the 1990s and the decade after, no such crises existed. But I look at the record another way. We have shown that we can muster the political will to reform a major social program, if only in a patchwork way. Now it’s time to fix Social Security for good—far beyond the seventy-five-year measure the trustees and accountants use.

  That’s because—I’ll say it again—Social Security is in trouble. According to the Social Security Trustees Report, the Social Security program was in a $7.7 trillion hole as of January 1, 2009. That means Washington would have needed $7.7 trillion on that date, invested at prevailing rates, to deliver for the next seventy-five years on the promises that the federal government has made. But we actually need much more than that to keep Social Security healthy, because it will experience larger and larger deficits both in the near future and beyond the seventy-five-year accounting horizon. As of January 1, 2009, that number—the amount we would need to invest to ensure the sustainability of the program for seventy-five years and beyond—was $15.1 trillion. How much of this huge sum do we have invested in real liquid and transferable assets today—that is, how much in actual money? Zero, zip, cero, nada, nothing!