February 6, 2011 would have been President Reagan’s 100th birthday. I would like to remember Reagan in my own way, as the biggest cutter of Social Security benefits we’ve seen to date.
Everyone has been talking about cutting Social Security being a major agenda item for the new 112th Congress. The Republicans think they see their chance to do real damage to this program, and the Democrats seem unwilling to do much to stop them. But many of these same people seem to view this as unprecedented. That is not the case. Social Security has been cut before, and quite sharply. The most extensive cuts occurred occurred during President Reagan’s first term, which coincided with the 97th and the 98th Congresses.
In the 97th Congress, the Senate consisted of 53 Republicans, 46 Democrats, and 1 Independent, who caucused with the Democrats. The House consisted of 244 Democrats and 191 Republicans.
In the 98th Congress, the Senate consisted of 55 Republicans and 45 Democrats. The House consisted of 272 Democrats and 163 Republicans.
Thus, for President Reagan to get his Social Security cuts passed required approval of the Democratic-controlled House of Representatives, which he got. Compare that with the current 112th Congress, where the House is dominated by Republicans and the Senate is barely Democratic. Tax and budget legislation always begins in the House. The 1981 and 1983 Democrats took the President’s proposals and created the legislation. This time, it will be the Republicans who will have the power to create Social Security legislation, which it seems reasonably certain that they will. Whether the Senate will agree to stop it, or the President will agree to veto it is anybody’s guess.
I want to discuss three separate legislative changes which had the result of cutting Social Security, all enacted during the 97th and 98th Congresses, and signed by President Reagan.
The Omnibus Budget Reconciliation Act for Fiscal Year 1982 (P.L. 97-35)
In May, 1981, just 4 months after he was inaugurated, President Reagan began his assault on Social Security. His administration sent a legislative proposal to Congress which contained 12 provisions eliminating or cutting-back on various Social Security benefits and 10 provisions making cuts in Medicare. Congress included many of these cuts its Omnibus Budget Reconciliation Act of 1981, which was passed and signed into law in July 1981 as P.L. 97-35. The part of the law which pertained to SSA is referred to as the 1981 Amendments.
Eliminated Student Benefits for College Students
Beginning in 1965, Social Security had paid Student Benefits to children of retired, disabled, or deceased workers who were over age 18 but under age 22, and who were full time students. This was specifically meant to help these children to pay for college. Benefits were paid only for months during which the students were in full-time attendance (FTA). In other words, if the student was in FTA from September through June, no benefits were payable for July and August.
This is how the 1981 Amendments dealt with post-secondary student benefits.
Benefits paid to post-secondary students ages 18-21 were to be phased out. This applied to current post-secondary students, or those entering post-secondary school before May, 1982. No benefits were payable to students entering post-secondary school in May, 1982 or later.
The phase-out was to be completed by April, 1985. During the phase-out, no benefits were to be paid to students for May through August, 1982 through 1984. Benefits paid to students were decreased to 75% of the April, 1982 amount from September, 1982 through April, 1983; to 50% of the April, 1982 amount from September, 1983 through April, 1984; and to 25% of the April, 1982 amount from September, 1984 through April, 1985, the last month for which Student Benefits were to be paid. Phase-out students did not receive annual Cost of Living Allowances (COLAs.)
Benefits to elementary and/or secondary school students older than 18 were to end in August 1982. This was later amended. The current rule is that benefits to these students will continue past age 18 as long as the student is in FTA at an elementary or secondary school and end with the month that the student graduates or the month prior to the month in which the student attains age 19.
Oddly enough, one of the Catfood Commission’s recommendations was to restore student benefits for college students, though the cost of this expansion would be covered by other, more severe cuts.
Restricted Eligibility For Young Widows/Widowers, Divorced Widows/Widowers, and Wives/Husbands
Three classes of beneficiaries must have an eligible child of the beneficiary or the deceased worker in his or her care to be eligible for benefits. These three classes of beneficiaries are:
1. Widows/widowers under age 60 or under age 50 and disabled, or
2. Divorced widows/widowers under age 60 or under age 50 and disabled, or
3. Wives/husbands under age 62.
Up until the 1981 Amendments, the eligible child had to be under age 18 or age 18 or older and disabled. P.L. 97-35 reduced this to an eligible child under age 16 or age 16 or older and disabled, thus ending these three classes of benefits two years earlier than before.
Restricted Eligibility to Lump Sum Death Payments
The Lump Sum Death Payment (LSDP) was created in essentially its current form in 1940, at the same time that survivor benefits were created. Prior to this, there had been a payment with the same name, but it was a one time payment, essentially a settlement, to the survivors of a deceased worker who died before he became eligible for any benefits. Before 1940, the LSDP was not specifically meant for burial expenses. Beginning in 1940, the LSDP was payable in this order:
1. A widow, who was not entitled to widow’s benefits, or to
2. A surviving child or surviving children, equally divided, who were not entitled to surviving child’s benefits, or to
3. A family member who had paid for the deceased number holder’s burial, or to
4. The funeral home.
The amount of the LSDP was defined as 6 times the Primary Insurance Amount (PIA), the monthly amount payable to a beneficiary at age 65. In 1940, the average LSDP payment was $145.79. An average new car that year cost about $700.00.
In the 1950 Amendments, the requirement that the widow or child/children not be entitled to survivor’s benefits was lifted. The 1950 Amendments also gave a large increase to Social Security benefits, the first increase since 1940. In order to hold the maximum LSDP at approximately the existing level, it was redefined from 6 times the PIA down to 3 times the PIA. The average LSDP in 1950 was $147.81.
The 1954 Amendments set a cap on LSDP of $255.00. The maximum PIA had reached $85.00 in 1952 and by 1954 exceeded this amount, which meant that some LSDPs could exceed $255. Congress determined that $255 was an appropriate maximum amount for LSDP. It was never raised.
So, the statutory cap on the LSDP has been in place since 1954. However, most people did not receive the maximum payment in 1954, and the average LSDP payment that year was only $207.86.
By 1974 the lowest possible PIA had reached $85, and hence the lowest possible LSDP available under the computation formula also reached $255. Thus the cap on the LSDP at $255 also effectively became the floor under the benefit.
The 1981 Amendments made a major change to the LSDP. Since then, the only people eligible for the LSDP are a spouse who was living with the worker at the time of his death, or a spouse or child who is receiving monthly benefits on the worker’s record. Non-entitled children, relatives who paid the burial expenses, and funeral homes were no longer eligible. Since the majority of beneficiaries are not married when they die, nor have any eligible children, the LSDP was largely eliminated by the 1981 Amendments.
One of the other things P.L. 97-35 did was to change the dates of the US government’s fiscal year from July to the following June to October to the following September. This began in FY82, which ran from July 1982 through September 1983. This was the basis for one of the changes in the 1983 Amendments.
The 1983 Amendments
Not happy just with just these cuts, President Reagan convened a commission, much like the recently deceased Catfood Commission, which was headed by Alan Greenspan. It was officially called the “National Commission on Social Security Reform.” and was informally known as the “Greenspan Commission.” This commission came up with a series of proposals which were sent to Congress in early 1983. They were signed into law as P.L. 98-21 in April, 1983. This law is referred to as “The 1983 Amendments.”
Mandated coverage for the following workers:
1. Federal employees hired on or after January 1, 1984;
2. Current employees of the legislative branch not participating in the Civil Service Retirement System on December 31, 1983;
3. All Members of Congress, the President and the Vice-President, Federal judges, and other executive-level political appointees of the Federal Government, effective January 1, 1984.
4. All employees of tax-exempt nonprofit organizations as of January 1, 1984. This was amended later in the same Congress (by P.L. 98-369 – see below) to permit a church (or qualified church-controlled organization) to elect to have services performed by its employees excluded from coverage by SSA coverage if that church stated that it was opposed for religious reasons to the payment of Social Security taxes. It applied to services performed after December 31, 1983. (This sounds dangerously close to violating the ‘Establishment Clause’ of the First Amendment to me. I wonder if it has ever been tested in court.)
5. Prohibited States from terminating Social Security coverage for State and local employees.
Permanently Delayed COLAs
The 1983 Amendments delayed the June 1983 (paid on July 3, 1983) COLA until December 1983 (paid on January 3, 1984 checks.) Provided that all future COLAs were to be paid in January rather than July of each year. (A permanent 6 month delay.)
Modified Rules on the Government Pension Offset
The 1983 Amendments modified the rules of the Government Pension Offset (GPO). This provision, introduced in 1977, reduced spouse’s and widow’s/widower’s Social Security benefits in some cases. GPO applies to individuals who are eligible to both a pension from non-covered employment and spouse’s or widow’s/widower’s benefits. This was primarily intended as a measure against government workers at all levels, because nearly all other recipients of pensions were also covered by Social Security.
When originally enacted, the amount of the offset applied against the Social Security benefit was the entire amount of the pension based on non-covered employment. The 1983 Amendments reduced this to 2/3 of the amount of the pension based on non-covered earnings. Either way, the countable amount of the pension based on non-covered earnings generally exceeded the spouse’s or widow’s/widower’s benefit amount, which eliminated their payment.
In 2010, this affected about 516,000 beneficiaries (about 1.6% of all Social Security retirement and survivors beneficiaries.) During the 111th Congress, Representative Howard Berman (D-CA) and Senator Dianne Feinstein (D-CA) introduced legislation which would have repealed GPO, but it did not pass.
Created The Windfall Elimination Provision
The 1983 Amendments created an offset called the Windfall Elimination Provision (WEP). WEP reduces the Social Security benefits of workers who also have pension benefits from employment not covered by Social Security. Its purpose is to remove an advantage or “windfall” these workers would otherwise receive as a result of the method used by Social Security to calculate benefits for workers whose lifetime covered employment is relatively low or of short duration. This will be explained just below. Like GPO, this is primarily aimed at government workers at all levels.
For most Social Security beneficiaries, the Primary Insurance Amount (PIA), which is the amount paid to beneficiaries who have attained full retirement age or who are eligible for SSDI, is determined as follows (slightly simplified):
a. Social Security determines the average indexed monthly earnings (AIME) from the worker’s highest 35 years of work, adjusted for inflation.
b. The AIME has the following formula applied to it (these are 2010 amounts, called “bendpoints”):
* 90% of the first $761 of the AIME, plus
* 32% of the AIME over $761 and through $4,586, plus
* 15% of the AIME over $4,586.
(The 90% bendpoint gives a boost to workers whose covered earnings are relatively low.)
c. The result is the PIA.
This formula is changed for workers who have pension benefits from employment not covered under Social Security. In most cases, the 90% bendpoint is reduced to 40%.
Raised the Full Retirement Age
The 1983 Amendments raised the full retirement age (the age of eligibility for unreduced retirement benefits) in two stages from 65 to 67 by the year 2027. Workers born in 1938 were be the first group affected by the gradual increase. Early retirement benefits would still be available at age 62, but with greater reduction.
One of the Catfood Commission’s proposals is to do this one again. The proposal contained a provision to raise the full retirement age from 67 to 69 and to increase the age for early retirement from 62 to 64.
Counted Part of Social Security Benefits as Taxable Income
Beginning in 1984, taxable income included up to 50% of Social Security benefits for taxpayers whose adjusted gross income (AGI) plus any tax-exempt interest income they had, was combined with 50% of their Social Security benefits. If the total exceeded $25,000 for a single taxpayer or $32,000 for married taxpayers filing jointly, then up to 50% of the Social Security was taxable income.
This was amended in 1993 (by a Democratic President and a Democratic Congress; both houses) to raise the maximum taxable amount of Social Security benefits from 50% to 85%. This applied to taxpayers whose adjusted gross income (AGI) plus any tax-exempt interest income they had, was combined with 50% of their Social Security benefits. If the total exceeded $25,000 for single taxpayers or $32,000 for married taxpayers filing jointly. but was under $34,000 or $44,000 respectively, then up to 50% of the Social Security was taxable. If the total exceeded $34,000 for single taxpayers or $44,000 for married taxpayers filing jointly, then up to 85% of the Social Security was taxable.
Advanced Scheduled Increases in Social Security Tax Rates for Employees
The 1983 Amendments advanced already scheduled increases in Social Security tax rates. The combined Social Security tax rates (which include the Hospital Insurance tax rates) for both employers and employees were increased to 7.0% in 1984, to 7.05% in 1985, to 7.15% in 1986 and 1987, to 7.51% in 1988 and 1989, and to 7.65% in 1990 and thereafter.
In 1980, the combined Social Security tax rate had been 6.13% for both employers and employees. It was increased to 6.65% in 1981 and 6.7% in 1982 and 1983.
The Social Security tax rates for self employed individuals were equal to twice the rates for employees. (In effect they paid both the employee’s share and the employer’s share.) Beginning in 1990, however, self employed individuals were permitted to exempt 1/2 of the Social Security tax they paid from income. This amount was not included in their AGI.
Changed The Rules For The Annual Earnings Test and Delayed Retirement Credit
The 1983 Amendments changed the Annual Earnings Test for beneficiaries age 65 and over so that $1 in benefits will be withheld for each $3 of earnings above the annual exempt amount, beginning in 1990. This was an change from previous rules that required that $1 in benefits be withheld for each $2 of earnings above the annual exempt amount.
The 1983 Amendments also increased the delayed retirement credit in gradual steps from 3 percent for workers reaching full benefit retirement age (age 65) before 1990, to 8 percent for workers reaching full benefit retirement age after 2008.
The effect of these two changes, particularly the second one, was to encourage retired beneficiaries to continue working past 65, and to earn amounts sufficient to make them ineligible for retirement benefits.
There were many other changes, primarily of a technical nature, which I will not make you suffer through.
The Deficit Reduction Act of 1984 (P.L. 98-369)
On June 30, 1982 President Reagan signed Executive Order 12369 formally establishing the “President’s Private Sector Survey on Cost Control,” informally known as the “Grace Commission.” This commission was headed by J. Peter Grace, a multimillionaire businessman who was chairman and CEO of W. R. Grace and Company, a diversified conglomerate whose main business was chemicals. In January, 1984 the Grace Commission sent its recommendations for reducing the deficit to the President and Congress.
Congress included some of the Grace Commission’s recommendations in the Deficit Reduction Act of 1984, P.L. 98-369. We will only discuss one change that pertained to Social Security, the expansion of the windfall offset provision.
The concept of “windfall offset” had been in existence since 1981. I was unable to find any reference about the legislative history of this provision prior to P.L. 98-369, but it was clearly in existence then.
The original law pertaining to windfall offset applied to individuals who were eligible for SSI who subsequently became entitled to Social Security benefits based on an application filed after their SSI date of eligibility. If these individuals were due Social Security benefits for a retroactive period which overlapped the period they were already eligible for SSI, then the amount of their retroactive Social Security was to be reduced. This was done by recomputing their SSI, counting the Social Security benefits as having been paid when due. This nearly always resulted in reduced SSI payments. The amount of the reduction was applied to the Social Security retroactive amount as an offset and whatever was left was paid.
P.L. 98-369 made changes to this policy
First, this amendment required a windfall offset reduction of the retroactive SSI payment amount in cases where Social Security benefits for the same period had been paid before the SSI payments. In these cases, like before, the SSI would be recomputed, counting the Social Security benefits as having been paid when due. Like before, this nearly always resulted in reduced SSI payments. The amount of the reduction was applied to the SSI retroactive amount as an offset and whatever was left was paid.
In 1995, this was changed so that windfall offset was always applied to retroactive Social Security benefits.
Secondly, this amendment required offset to be computed and applied to Social Security benefits payable retroactively upon reinstatement following a period of suspension or termination. These retroactive benefits were to be reduced by the amount of SSI payments that would not have been paid, or would not be paid, had the retroactive Social Security benefits benefits been paid in the months they were regularly due. The prior law did not provide for windfall offset in reinstatement cases.
If there was ever any risk that Social Security would be destroyed, it was highest during two periods. In the early 1980s, significant cutting was done, but Congress rejected a lot of the proposals they got from President Reagan and the two commissions. In the early 2000s there was a big push to privatize Social Security. It went nowhere, and the 2008 stock market crash showed everyone how risky this was. Also, to privatize Social Security would involve a huge increase in the deficit, as it would stop or largely reduce Social Security’s revenue stream, which would force SSA to deplete its reserves in just a few years, while there were still millions of beneficiaries to be paid.
There are two ways to deal with Social Security’s funding problem — either raise the revenue or decrease benefits. This Congress will definitely skew toward decreasing benefits. So will Obama. Watch for increasing full retirement age from 67 to 69 (33%), reducing COLAs. either by 0.5% (50%) or using Chained CPI-U instead of CPI-W as the basis for the COLA (33%), and changing how AIMEs and/or PIAs are calculated (anywhere from 17% to 166%, depending on change.)
One revenue increase that could possibly make it through Congress is to raise the covered earnings upon which Social Security taxes are paid from where they are now, $108,600, to about $170,000, which would make 90% of earnings covered. This was FDR’s intent and was was part of the original Social Security law. At present, only about 83% of earnings are covered. This would not be a new tax, it would be a restoration of the original policy (33% to 39%, depending on how it’s phased in.)
In the two preceding paragraphs, percentages in parentheses represent how much of the projected 75 year shortfall would be paid for by these changes. For more information on this, and other possible changes, please see my article “The Future Of Social Security, And What Can Be Done To Save It,” which will be brought forward into this blog shortly.
Something will be done with Social Security. It’s our job to let our elected representatives to know that this program needs to be saved, that the cost of saving it needs to be spread around fairly, and that we are watching them to make sure they put the good of the country ahead of special interests or partisan bickering.