Social Security
Victory on the budget resolution did not win over the moneymen whose judgments were so crucial to the administration's economic goals. The president might appeal to the public with his call for daring, but bankers, looking at the numbers, were unconvinced. Stockman conceded in his private conversations with William Greider,
that his own original conception—the dramatic political action would somehow alter the marketplace expectations of continuing inflation—had been wrong…. They don't think that it adds up…. I take the performance of the bond market deadly seriously. I think it's the best measure there is. The bond markets represent worldwide psychology, worldwide perception and evaluation of what, on balance, relevant people think about what we're
doing…. It means we're going to have to make chances…. I wouldn't say we are losing. We're still not winning. We're not winning.[73]
The early bond market rally that Stockman had predicted in his Dunkirk memo had not arrived. Interest rates on bonds, after edging slightly downward in January, were slowly climbing.
There was some good news: the economy seemed to head off on a boom in the first quarter, leaping forward at least at a 5 percent annual rate of growth. Perversely, that growth, if anything, raised inflation fears, so the administration had to downplay the good news to maintain the sense of urgency needed to justify that "something new" in economic policy was required. In spite of the growth, employment was stagnant; interest rates were edging back up from a March low of 17.5 percent for the prime rate. On the day that the House passed Gramm-Latta, a Wall Street Journal headline read, "Wall Street Is Greeting President's Program With Jitters, Turmoil."
"We're in the midst of a very strange financial crisis," says Peter Solomon, managing director of Lehman Brothers Kuhn Loeb Inc. "You'd think Wall Street would be happy. The President is doing just what you'd like him to. Congress is about to give him his budget cuts. Oil prices are falling." But the financial markets are nervous.[74]
Donald Regan argued that it was a case of different horizons—the administration looking toward fiscal 1982, the markets looking at the "disaster" of existing financial conditions. That meant Stockman's theory of expectations wasn't working.
Alan Greenspan declared that the administration had to prove it would curb inflation by cutting the deficit further. That meant taking on social security. Institutionally and ideologically disposed toward budget cutting, Stockman agreed. Independently, that program's difficulties were bringing it stage front within the administration.
The new secretary of Health and Human Services (HHS), Richard Schweiker, was determined to use his position to help solve the impending crisis in social security financing. High payments and low collections in recent years, due to the greater growth of prices than in wages, had left the trust fund in danger of running dry in 1982 or 1983. (The nature and causes of social security's difficulties will be discussed in a separate chapter.) In the meantime, J. J. (Jake) Pickle (D-Tex.) was holding hearings in his Ways and Means subcommittee, developing a bill, and asking the administration for reactions. He made some tentative proposals the administration would not accept, and he pressed them to make their own suggestions.
Democratic leaders' fondest dream was that the administration would
only be so dumb. "I was praying and working to see if I could get them first committed to gutting Social Security in some fashion," one Democrat recalls. They could never have dreamed, however, that they would succeed as quickly as they did.
April 9, the day Gramm-Latta was unveiled, was also the day Pickle announced his modest reform plan. Even as Stockman pushed to pass Gramm-Latta or something like it, he felt that continued skepticism in the markets required bigger savings, quickly. Pickle's plan could help, but it made up for only a "tiny fraction" of the budget gap Stockman thought was freaking out the markets. "I did desperately need a reform plan that saved a lot more than Pickle's paltry proposal."[75] Stockman hoped that "the impending insolvency of the retirement fund would be a handy cattle prod" to force politicians to cut the most sacred of cows.
In an April 10 meeting, Stockman and Martin Anderson insisted that Schweiker develop proposals to close the gap by reducing benefits rather than increasing coverage. (The standard way of handling fund crises had been to include a new category of worker, in this case government employees, who begin paying immediately but do not collect for a couple of decades.) Anderson and Stockman saw many benefits as unearned and unjustified. Stockman's goal was the proposal he had brought with him to OMB and then held out of his original package: raising the penalty for retirement at age sixty-two to a point where there was no actuarial difference between retiring at sixty-two or sixty-five. Schweiker's staff warned that the changes Stockman wanted would never fly on Capitol Hill. In particular, the rules could not be changed suddenly on retirees; rule changes could not be used for significant, short-term savings. Stockman dismissed that as the bureaucracy's standard inertia. Like many political administrators, the budget director refused to believe that civil servants could help him by telling him things he did not want to hear.[76]
On May 11 the issue was brought to the president who, following his own inclinations, vetoed the coverage expansion as a tax increase and accepted the early retirement changes on the grounds that the existing provisions were one reason why "I've been warning since 1964 that Social Security was heading for bankruptcy." Martin Anderson praised Reagan's courage in choosing to "honestly and permanently fix Social Security." An enthusiastic Reagan signed off, then and there, on a package whose major component was an immediate, major retrenchment of the government's biggest program, changing the rules in midstream on millions. The Legislative Strategy Group was left to work out the plan's presentation and sale.[77]
The political aides, particularly Baker, Deaver, and Darman, were horrified. One recalls,
I heard about the Stockman and Schweiker proposal only on the Friday or Saturday before the decision. I asked how the Social Security package could be bipartisan just because you had one subcommittee chairman saying something should be done, but the train was a long way down the track by then….
[We] spoke to [the President] for a long time but I guess we decided that it had gone a long way—maybe we could surface it?
In retrospect I wish we had been more forceful. We got killed on it. We Republicans can't lead the charge because anything we do or say is interpreted as a reduction in benefits.
Right, particularly if it is a reduction in benefits. While the basic retirement age was sixty-five, people had been able to retire at age sixty-two with around 80 percent of their benefit. The Reagan plan would reduce that rate to roughly 50 percent and then gradually raise the proportion to 80 percent at sixty-three years, eight months. People would have to either delay retirement or retire on much less. If retirement at age sixty-five was the basic promise of the system, then the proposal violated no promise. Chiefly it caused the expected total payout to any recipient to remain virtually unchanged whatever the age of retirement, a sound principle of insurance practice. But for anyone who had planned to retire at age sixty-two, the proposal meant a major change. Along with other changes, it also promised to save between $82 billion and $110 billion over the next five budget years.[78]
The political aides, unable to protect the president from himself and Stockman in the morning, were determined to limit the damage when the Legislative Strategy Group met that afternoon. Baker and Darman insisted that the package was a Health and Human Services initiative. Schweiker, hearing the limb being sawed out from under him, tried to show that the political alignments were not so threatening. "This is a bipartisan initiative, bipartisan, " he insisted. "Damn it, I spent twenty years in Congress. I should know how things work."[79] Jim Baker had spent no years in Congress, but he had a pretty good idea. He ignored Schweiker's argument that, "if there's any doubt as to where the President stands, this'll be dead on arrival when it gets to the Hill."[80] Both Baker and Darman figured it would he dead, no matter what. Stockman argued the package was integral to Reagan's economic plan; Baker and Darman said it was deadly to Reagan's plan, and his popularity. So Baker, as chief of staff, ruled that the announcement would come from HHS in Schweiker's name.[81] Darman wanted the announcement to come from Social Security Administration headquarters in Baltimore (i.e., as far away as possible). The next day Schweiker had his press conference. Then the roof caved in.[82]
People anywhere near age sixty-two were furious. The reaction was
immediate—a deluge of cards and calls to Congress followed by a Republican retreat. Just to make the point clear to their leader, Senate Republicans on May 20 brought to the floor a resolution pledging to protect social security; it passed, 96 to 0. Rob Dole exclaimed, "They threw a life rope to Tip O'Neill."[83] Senator Moynihan imagined what Republicans were thinking: "My God, the Democrats have an issue here that will confirm every doubt anybody has ever had about us for the last fifty years—that we are going to tear up that social security card."[84]
How could Stockman, Schweiker, Reagan and company—sophisticated politicians all—have thought they could get away with this? Well, politics is the science of the inexact. The target was tempting (think of all one's problems solved with a single cut) and the uncertainties sufficiently stimulating (think of how Stockman learned bit by bit that the unfeasible was becoming feasible) to tempt even grown men. Presumably, if no one dared, nothing new ever would be done. Of course, one should remember also that one who dares too much may never get to do anything ever again.
Believers in budget balance could not afford to be amused. The feeling that "they ought to have known better" gives only a temporary feeling of superiority, a feeling that fades fast when the appropriate counterquestion is raised: How can the budget be balanced if its largest programs can never be cut?