Conservatives Should Honor Social Security: Echoes

By Amity Shlaes

Not enough trust in government. That's the reason the Tea Party exists. And that lack of trust is what animates Republicans' plans to overhaul entitlements.

Since government is no longer trustworthy, their logic goes, we must make it smaller, and undo all those New Deal and Great Society promises the government can no longer honor.

Consider the Heritage Foundation's new debt-reduction proposal, called "Saving the American Dream." The plan not only rewrites Medicare but chops away at Social Security for good measure. It starts reducing Social Security benefits for senior citizens whose income exceeds $55,000 a year. Those whose incomes are more than $110,000 would see no checks at all. Married couples would no longer receive payments if they jointly earned $165,000 or more.

Such cuts are all part of the great conservative campaign to make the government smaller.

But ending the benefits of the dutiful elderly isn't necessary to make Social Security solvent. One can start to balance Social Security's books by indexing its base pension formula over time to inflation. Raising the retirement age also narrows shortfalls. Bringing in high-earning immigrants would probably do the rest of the job. And voila: Social Security is balanced.

So why would Heritage — and other advocates of conservative entitlement reform, including Tim Pawlenty, a presidential candidate — prefer to gut Social Security rather than make such adjustments?

Partly because of a misplaced distrust in the government's ability to fulfill its obligations.

Social Security is different from other entitlements. In their first great explanatory pamphlet of 1937, the members of the Social Security Board carefully presented the program as insurance, and they wrote in actuarial terminology: "payments are like premiums paid for fire insurance or accident insurance," or "saving for a rainy day."

Americans would pay a portion of their wages into Social Security's trust fund as they worked, helping to provide a safety net for the elderly, and in exchange the government promised to pay them reliable benefits when they retired.

That contract-and-account culture was preserved and promoted down the decades. Most Americans have, over time, considered Social Security a fairly good deal, a contract that was honored. The contractual aspect is important to retirees, especially those who may earn enough to be deemed "affluent" while still counting on Social Security's monthly payments. As Dean Baker and Mark Weisbrot pointed out more than a decade ago in "Social Security: The Phony Crisis," cutting seniors off from Social Security makes no more sense than telling them they are no longer entitled to interest payments on their Treasuries.

The Great Society programs of the 1960s — including Medicare, Medicaid and some expansions of Social Security — had some contractual elements, but they were really more like gifts from the government. Clearly, we can no longer afford those gifts, at least not on the scale to which we've become accustomed. A government that is more worthy of the public trust, and is honest about what it can afford, is one that severely curtails those programs and means-tests them.

To rip out Social Security's contractual element is to make it more like Medicaid and Medicare. That is, to enlarge the problematic entitlement group from the 1960s that we ought to be shrinking. To not pay out promised benefits is to confirm the suspicion that the government really was lying all along. That might be gratifying to die-hard libertarians. But it will prove especially bitter to those thousands of Americans who were counting on getting back the dollars they poured into the program throughout their working lives.

So why don't advocates of true means-testing for Social Security consider limited technical changes to this program and stand by those elements of the contract that remain viable?

One reason is revolutionary zeal: They want to start over, and incremental restructuring isn't dramatic. Another is that phasing out Social Security payments for senior citizens may save the government so many billions that there will be cash on hand to make cuts elsewhere, including, say, to income-tax rates. Lawmakers crave that leeway, which tinkering with age and benefit adjustments alone won't supply.

For all parties involved, the best move is to rebuild trust. Franklin Delano Roosevelt's old Social Security program is the optimal vehicle for such a demonstration. His limited contract reinforced voters' faith in their country, and it helped them all through a difficult time. He was a president of competing impulses, and he said many things about Social Security, but the one thing he emphasized was that he didn't want "a dole" — a permanent welfare program. He also went out of his way to underscore fiscal modesty when he presented his administration's proposal for a Social Security law to Congress:

"It is overwhelmingly important to avoid any danger of permanently discrediting the sound and necessary policy of Federal legislation for economic security by attempting to apply it on too ambitious a scale before actual experience has provided guidance for the permanently safe direction of such efforts," he said in 1935.

To preserve Social Security today, albeit in a limited form, is to signal that the government still wants to honor contracts with citizens. In doing so, it will earn back some of the old faith, the kind that will be necessary to sharply curtail Medicare and Medicaid. People may begin to think their government is being honest with them.

And how unusual is that?

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and a Bloomberg View columnist, oversees the Echoes blog. The opinions expressed are her own.)

© Copyright 2011 Bloomberg

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