Social Security Reform and Catholic Social Teaching

The Woodstock Theological Center sponsored a forum in May entitled "Social Security Reform and Catholic Social Teaching: What Can We Learn?" The forum participants looked at the debate on Social Security reform from the viewpoint of Catholic social teaching principles of human dignity, the common good, social and distributive justice, the preferential option for the poor, and solidarity. The panelists were William J. Byron, S.J., distinguished professor of management in the School of Business at Georgetown University and former president of The Catholic University of America and the University of Scranton; Teresa Ghilarducci, associate professor in the department of economics and director of the Higgins Labor Research Center at the University of Notre Dame; and Mathew A. Weidinger, a majority professional staff member of the Committee on Ways and Means, Subcommittee on Social Security, U. S. House of Representatives. Sharon Daly, vice president for social policy at Catholic Charities USA, moderated the discussion. We present an edited and abridged version of the forum.

Father William J. Byron, S.J., is a distinguished professor of management in the School of Business at Georgetown University and former president of The Catholic University of America and the University of Scranton. The author of numerous books and a frequent contributor to scholarly and public opinion journals, his recent books are Answers from Within: Spiritual Guidelines for Managing Setbacks in Work and Life (Macmillan Spectrum, 1998) and Finding Work Without Losing Heart (Adams, 1995).

My responsibility this evening is to identify principles from the tradition of Catholic social teaching that relate to the contemporary debate about reforming Social Security. Several of those principles are suggested in the questions published for your consideration in the brochure announcing this event: (1) the principle of solidarity; (2) the principle of preferential protection for the poor and vulnerable; (3) the principle of justice (distributive justice); and (4) the principle of the common good.

I had occasion recently to produce a list of what I consider to be the fundamental principles of Catholic social teaching; I came up with ten (see William J. Byron, S.J., "Ten Building Blocks of Catholic Social Teaching," America, October 31, 1998, pp. 9-12). All ten are applicable in one way or another to this great debate about Social Security. In addition to solidarity, preferential protection for the poor, justice, and the common good, my list included: the principle of human dignity, the principle of respect for human life; the principle of association; the principle of participation; the principle of stewardship; the principle of subsidiarity; and the principle of human equality.

When a journalist asked me a few weeks ago to comment on the relevance of Catholic social thought to the Social Security question, I found myself saying that the Social Security Act of 1935 showed respect for the principle of subsidiarity. His puzzled follow-up question indicated to me that he was not all that clear on the meaning of subsidiarity, so I explained that it is a social principle that puts a proper limit on government by insisting that no higher level of organization should perform any function that can be handled efficiently at a lower level of organization by human persons who, individually or in groups, are closer to the problems and closer to the ground. The principle of subsidiarity keeps government in its proper place.

Then I described for my questioner a contemporary Washington scene that frames the years of the Great Depression in sculpture and inscriptions related to the presidency of Franklin Delano Roosevelt. The FDR Memorial occupies seven open-air acres of land near the Tidal Basin; the designer created four architectural "rooms" that represent each of the four terms of Franklin Delano Roosevelt’s presidency. In the section dedicated to the second term, 1937-40, one of the sculptures depicts a breadline—five bronze figures of men with overcoat collars turned up, eyes and hat brims turned down, shoulders bent, as they line up against the brick wall of a soup kitchen waiting for the door to open. I’ve noticed since the FDR Memorial opened a couple of years ago that when tour buses unload platoons of school kids to visit the memorial, the youngsters invariably move toward that breadline and insert themselves between the bronze figures and pose for their souvenir snapshots. I’m struck by an irony that the children, rarely, if ever, notice. The sculptured figures represent the great grandfathers of these children of affluence. These children would not have the health, wealth, education, economic security, and long life expectancy that they take for granted had not government, in the form of Social Security and other legislative initiatives, stepped in to do something during the Great Depression to combat poverty and protect the elderly, the disabled, and the survivors of breadwinners who lost their lives.

The inscription above the breadline sculpture reads: "I see one-third of a nation ill-housed, ill-clad, ill-nourished." And these additional words of President Roosevelt are carved in stone nearby: "The test of our progress is not whether we add more to the abundance of those who have too much; it is whether we provide enough for those who have too little."

The fact is that no individuals or groups, no lower levels of governmental or private organizations could have done what Social Security began to do in 1935. That’s what I mean when I say the program respects the principle of subsidiarity.

But here we are in 1999. Whatever is proposed now by way of reforming the system and guaranteeing the long-term viability of Social Security has to continue to respect that principle.

It also has to honor the principle of human dignity.

It must show respect for human life.

And since the tradition of Catholic social thought emphasizes that the human person is not only sacred but social, it must guard against the excesses of individualism (including individual choice) to the detriment of the socialization of risk that makes an insurance program possible. Social Security, you must remember, is a social insurance, not investment, program.

The principle of participation would require respect for the right of all the people to participate in reform discussions and in the benefits of the reformed system. The human person has a right not to be shut out from participating in programs and institutions that are necessary for the development of human potential.

The principle of preferential protection for the poor and vulnerable looks with special attention to the plight of the disabled, to survivors of wage earners who lose their lives long before retirement age, and to economic security at a level clearly above the poverty line for those who are at and past retirement age.

Your forum brochure asks: "What does the Catholic virtue of solidarity have to do with how the United States insures its elderly and disabled?" The principle of solidarity functions as a moral category that leads to choices that will promote and protect the common good. Solidarity means that we are our brothers’ and sisters’ keepers; we are one human family.

The principle of stewardship reminds us that we are managers, not owners, of physical creation. We have to be concerned about preserving and handing on the necessities of life to future generations. Stewardship responsibilities also have us look toward our use of personal talents and our intelligence to improve that which we hold in trust as stewards. Not excluded from this responsibility are the programs and systems subject to our social and political control.

The principle of human equality, of basic fairness, formally introduces the notion of justice to our discussion. And the forum brochure asks what bearing the principle of distributive justice might have on the Social Security reform debate. Distributive justice is understood as a relationship of the whole to the parts, of the state, for example, to all the citizens. It deals with the fair distribution of both benefits and burdens for the good of all. Proportionality is a norm here. What is fair? What is appropriate? What is the need? What is the ability to contribute? These questions are challenges to the art of politics.

The tenth of the principles on my list is the principle of the common good. You will notice that the Woodstock brochure asks about the relevance of this principle to the "United States’ social welfare structure as evidenced by the Social Security Act." The common good relates to the social conditions that permit people to realize their full human potential. What constitutes the common good is always going to be a matter for debate. The absence of any concern for or sensitivity to the common good is a sure sign of a society in need of help. As a sense of community is eroded, concern for the common good declines. A proper communitarian concern is the antidote to unbridled individualism, which, like unrestrained selfishness in personal relations, can destroy social justice.

Mathew A. Weidinger is a majority professional staff member of the Committee on Ways and Means, Subcommittee on Social Security, U. S. House of Representatives. Previously, he was a professional member of the Committee’s Subcommittee on Human Resources and a senior legislative assistant to Representative E. Clay Shaw, Jr. He has been actively involved in welfare reform legislation and health and pension policy.

I work for the Ways and Means Committee, and specifically for the Subcommittee on Social Security. My two bosses are Congressmen Bill Archer from Texas and Clay Shaw from Florida. Mr. Shaw and Mr. Archer have just introduced a plan to keep Social Security going. I hesitate to call it a Social Security reform proposal, because it does nothing to reform the Social Security program. What it does is reform the way people’s Social Security benefits are paid for, are financed, and, hopefully, how these benefits can be maintained so that we don’t have the train wreck that Social Security’s trustees tell us is currently looming. In either 15 or 35 years, depending on how you view these things, we are going to have some extreme fiscal pressures on the Social Security program that might damage it, especially some of the principles that Father Byron spoke about. Let me talk about this plan and the thinking behind it.

First, Social Security has been tremendously successful, especially in reducing senior poverty, which has dropped by 69 percent in the past 40 years. In fact, if you want to weigh Social Security against other government programs in terms of its success in alleviating poverty, it is at least twice as successful as all other programs combined. About 18 million people are lifted out of poverty by Social Security. So maintaining Social Security is critical. The issue is how to adjust the financing of Social Security so that it is solvent for the long run.

Social Security faces some serious problems and they are mostly demographic. For example, we are having fewer children than we did during the baby boom. Americans are also living longer. In the future retirees will tend to live up to 18 or even 20 years longer than they used to after reaching age 65. In addition, people are retiring sooner. Currently, about 80 percent of seniors retire before 65. As recently as 40 years ago, only about 20 percent of seniors retired before 65. So, besides living longer beyond 65 we are also retiring at a younger age.

That cost, especially in a system that operates like the current Social Security program, has a consequence. If you understand that Social Security is a program that taxes workers today to provide benefits primarily to retirees and other beneficiaries today, then you understand the impact of these changing demographics. Where once we had about 40 workers per beneficiary, today we have three workers per beneficiary, and by the time I retire there will be only two workers per beneficiary. So that sort of financing structure is going to come under increasing pressure, and addressing that looming crisis in advance is a critical national need. That is why the administration and Congress are trying to grapple with ways to handle this problem.

Let’s look at some figures. The General Accounting Office (GAO), has said that if we want to maintain Social Security solvency for 75 years we would have to raise payroll taxes today by 15 percent or cut benefits today by 13 percent. No one wants to do that. To translate that into real terms, the average retiree getting about $750 a month would have to take a benefit cut of almost $100. That would not pass political muster, much less would any responsible individual want to do it. Many retirees getting average benefits are on the threshold of poverty, and clearly if we cut benefits for them, that would threaten many of the principles that Father Byron laid out.But if we delay and do nothing, these problems become worse. By 2008, the first baby boomer will retire, with 76 million more to follow. By 2014, the taxes that Social Security takes in will fall below the benefits it pays out. At that point, the program would have to rely upon general revenues—income taxes, basically—to make sure that full benefits can be paid. By 2034, when I retire, the program will no longer be able to rely on other taxes to support it; benefits would have to be cut by almost 30 percent. These are things we don’t want to do. We want to act in a prudent way to address these problems while we still have the chance.

As I mentioned, the members of Congress that I work for have actually offered a proposal, which is somewhat novel.

The first thing I would say about this plan is that it leaves Social Security alone. Will everybody get their full benefits? Yes. Will current retirees be affected? No. The members of Congress for whom I work—motivated either by heroic vision or political fear—do not want to touch the Social Security program. It’s a legacy of our political tradition and our history, important for the country, the common good, and millions of families.

What the plan does is reform the financing by raising Social Security’s rate of return. It involves saving, investing, and then using those savings and investments to support Social Security benefits in the future. In other words, Congressman Shaw and Congressman Archer have decided to save and invest, jettisoning the benefit-cutting and/or tax-raising alternatives.

The mechanics of the plan are somewhat complex, but they involve taking the current Social Security surplus and distributing it among workers by giving them tax credits that are automatically deposited in saving accounts in the workers’ names. That is, every year, everyone who was out in the workforce and was covered by Social Security would get a tax credit. It would go into a savings account that would build over time. Workers could choose investments within standards of safety and soundness set by the government. The logic of this is that workers would each have a nest egg that would grow over time and in the end support their Social Security benefits.

This is not a privatization scheme. It is not predicated on taking current Social Security taxes and carving them out, thereby increasing the pressure on current beneficiaries. Moreover, it is premised on the idea that we should not have the federal government picking and choosing investments, and here Chairman Shaw and Chairman Archer part company with the President.

One other thing. Under this plan, Social Security would never be insolvent. Under the Archer-Shaw plan, in addition to Social Security, the trust funds are always there. So there are a number of reasons to suggest this sort of approach. It’s similar to the President’s approach in that it attempts to create national savings today for use by the Social Security program tomorrow. It’s different from the President’s approach in that it actually saves Social Security for a full 75 years and beyond. And it relies more on individual savings provided through the government. But again, for purposes of our discussion here tonight, to the degree that you find the current Social Security program successful and in keeping with Catholic social justice principles, I believe you would find the Social Security program as amended by Mr. Archer and Mr. Shaw to be equally acceptable, if not more so, because beneficiaries are left alone. Full benefits are guaranteed, in contrast to the current program, which in the long run is not sustainable financially and will not be able provide full benefits as promised.

A proposal that actually creates some savings and some investments today really has a very solid chance of maintaining the program for a long period of time. Depending on the rates of return of investments (and actuaries use generally conservative rates of return on investments) we can even imagine payroll taxes being reduced in the future. So when my son hits 60 in 2050 and my youngest daughter hits 52 in 2050, they would possibly face lower payroll taxes while having a completely solvent Social Security program. That is something we haven’t been able to say in this country for a long time.

Teresa Ghilarducci is an associate professor in the department of economics and director of the Higgins Labor Research Center at the University of Notre Dame. The author of Labor’s Capital: The Economics and Politics of Private Pensions (MIT Press, 1992), Dr. Ghilarducci is a board member of the Public Employee Pension Fund for the State of Indiana and is a Presidential appointee to the Advisory Board of the Pension Benefit Guaranty Corporation.

I’m glad I came, Matt. I’ve been trying to figure out the Archer-Shaw plan, so your explanation has helped me a lot. Up until the Archer-Shaw plan, the current debate looked very polarized. On the one hand there were those who basically support the current Social Security system (the "trim-and-tuck crowd"), and on the other hand those who wanted to fully or partially privatize it. Archer-Shaw says, "We’re not privatizing." But in fact, you are—in very important ways. And I’ll tell you why.

You cannot think of the Social Security system as a system of accounts, just as you wouldn’t think of your fire insurance coverage as a place where you have an account. It is insurance. It’s social insurance. That is, by definition it defines a community, as described in the principle of solidarity. This community will distribute premiums and benefits based on certain contingencies. In the fire insurance community the contingency is: "if your house burns down." You don’t means test it; you just meet those contingencies. Under social insurance, if you meet the contingency of being a worker and contributing and someday being disabled, having a dependent, living too long, being too old to work—all the risks that people face in a market economy based on selling your labor—then you get the benefit, just like any social insurance.

But the privatizers want you to think of a different metaphor. Listen to the language from Archer-Shaw. They want you to think of the Social Security system as one of accounts. And this is a very important key to understanding the debate, I feel.

Why are we talking about separate accounts, of having workers take control of their accounts and invest in the stock market now? Actually, the Republican party wanted this kind of plan in 1935, but it was rejected. Then, in 1970, the Cato Institute was formed principally to look at ways to privatize the Social Security system. Ronald Reagan, one year after he was elected, stepped off a plane in Los Angeles, and said, "I’m looking forward to a lot of things. One of them would be to make Social Security voluntary." It was the first defeat of the honeymoon of his adminis-tration. So, why is this proposal reemerging now? I submit that there are a number of motivations.

One obvious reason is that there has been a very unusual boom in the stock market. As one who invests a lot of workers’ money, not only in the Pension Benefit Guaranty Corporation but in the state of Indiana, I, like most professionals, feel that, "This won’t last." The stock market is too high. There’s nothing fundamentally to support double-digit returns, or even seven or eight percent returns. But humans have a problem of saliency: judging the future and the past based on what’s happening now. They think that what just happened is always going to happen. That’s one reason why privatization is so popular now. Give us a crash and it will be off the table. I predict it. You can hold me to that.

Another motive behind privatization is the conviction that there is, to use Matt’s words, "a looming crisis." Crisis? Looming? Sounds bad. Day of reckoning. A financial problem and a financial crisis. I’ll deny this later.

A third explanation is the new way workers get pensions. At their place of employment, middle class workers get much of their pension from their employer outside of Social Security. It is a move away from a defined benefit structure to a 401K-type structure in which people have been directing their own money and getting double-digit returns. People are getting used to the idea, and are excited by it. But it’s another human failing. Just as 90 percent of drivers think that they are better than average drivers, so most people think that they can do better in investing their own money. That’s another heuristic problem people have.

On top of this, there’s also some buyer’s remorse, I think. Many workers feel that if they had been forced to go into the market ten years ago, as Archer-Shaw would have them do now, they would be buying islands in the Caribbean now. They want to be told to get into the market.

Finally, there is a more invidious reason. It is about special interests. I think that Wall Street—I am an economist, I keep watching the market—very desperately wants new money to be injected into the stock market. It’s about their only hope that this financial boom, a big boom for the companies on Wall Street, will continue. And so I think that the Republican Party and Archer-Shaw have heard those concerns from Wall Street and are responding to them.

Let me reflect at greater length on the two most effective arguments for Social Security privatization. One is mostly negative. The other is more positive.

First, the negative argument that says Social Security won’t be there in a few years. The day of reckoning is coming; the demographics, a dependency rate ratio, is making the system unsustainable. Matt told you that by 2034 the system won’t be able to pay 70 percent of benefits. How does Matt know that? He doesn’t. He can’t predict the future. Nobody can. What he is doing is using assumptions from the Social Security actuaries, who are making their best guess of what will happen. But the actuaries don’t know either, so they tell you what they base their projections on. They also tell you they are biased. They tell you, "We’re actuaries, we’re very conservative. And we’re going to project that gross domestic product (GDP) growth, the growth rate of the economy, will be slower than it has ever been." On average they project a 1.7 percent increase in GDP.

The point here is that the health of the system, a pay-as-you-go system, is based on the health of working America. If people are working and salaries are up, the revenues flow into the system. If economic growth is slow, people lose their jobs, salaries slow, and you don’t get revenues. And that is why assumptions about economic growth are the key to the kinds of predictions we’re getting here. Actuaries, as we said, projected 1.7 percent a while back; now they’ve raised it to two percent. The Congressional Budget Office projects 2.3 percent. The growth rate last quarter was 3.5 percent. So projections are all over the place.

It turns out that if growth is 2.5 percent, a little bit better than it was over the past 75 years, we have no problem at all with Social Security. What I’m saying here is, don’t take these projections as if they are fact. They’re projections, projections based on certain assumptions. Tweak those assumptions and you get a very different picture. Let’s look at the system over the past 50 years. Is the system out of date because people are living so much longer? I say, no. Let me tell you the facts. Since 1945, a 65-year-old white male’s projected length of life was to age 79. You know what the projection is now—not at birth, but at 65? Eighty-one. Not a huge increase in longevity. Not a dominant trend-setter at all. What did change in those intervening years is that workers said, "Hey, I want to share in this economic prosperity. I want an entitlement to leisure at the end of my working life." So while longevity stayed the same, retirement of these men increased, meaning that the labor force participation rate fell. I think it’s that gap, the one between how long people now live and their newly-won entitlement to leisure, that is actually the contested terrain here. I think that a hidden agenda of the "privatizers," those who want to make retirement income more risky by putting it in the stock market, is to actually make people work longer. And that helps all sorts of other interests.The second argument in support of privatizing Social Security is a more positive one. It may even seem to fit the Catholic social principle of subsidiarity. "Hey, why should the government run Social Security? Why not let individuals have their own individual accounts?" In fact, according to Catholic social teaching, subsidiarity should not overwhelm other principles; it is not the guiding principle; it is one among many. Monsignor John Ryan made this point over one hundred years ago. He is a principal architect of the ideas underlying Social Security. Commenting on liberty, he said, "If you think of liberty as just absence of governmental restraint, then you actually may be imposing restraints on liberty because you don’t have a government restraint against the strength, cunning, or selfishness of one’s fellows."

Let’s evaluate the alternatives: (1) the social insurance, government-based plan, the one that’s funded by the promise to pay, and (2) one like Archer-Shaw that’s funded on the promise of the stock market and bond market to go up.

On equity. Similarly situated workers get the same benefits. Previous savings or inheritance make no difference to benefits. But, if people were to invest their funds, benefits would depend on factors like investment skill, access to information, and physical location.

There is also equity in the present system because the tax system is progressive. If you take a dollar from a rich person, it does less harm to that person than taking a dollar from a poor person. And the Social Security system has an internal redistributive mechanism. It replaces 70 percent of a low-income worker’s pre-retirement earnings, 25 percent of a higher-income worker’s earnings. It’s roughly the same benefits when you equalize it. The Archer-Shaw plan does not preserve that equity.

On efficiency. It is much cheaper to administer the current Social Security system. Under various privatization proposals administrative costs are estimated at 20 cents on the dollar of contribution.

On adequacy. Social Security has provided well for those who need it. In doing so, it indexes annuity to inflation, whereas the Archer-Shaw plan does not. Moreover, by relying on the performance of stocks and bonds the Archer-Shaw plan exposes the beneficiary to great risk of inadequate benefits. For instance, in 1970, stock market returns did not exceed inflation.

How to strengthen Social Security. I’ll conclude with my recommendation for strengthening Social Security. I propose that we expand the payroll base. Right now, the Social Security system treats me and Bill Gates the same. It presumes that Bill Gates makes about $68,000 a year. All the millions after that are not taxed. That means 86 percent of all payroll is under the Social Security rate. Just expand that base to maybe $90,000—and we could even do it gradually to taxable income of $100,000—and you actually solve most of the problem. That’s because there is a lot of money in that quintile.

There are lots of solutions that people offer, about a thousand combinations. But raising the payroll base and perhaps raising the tax rate is the best solution. It’s doable and there’s no great negative economic effect from doing it. And you get a great system, completely secure. It’s easy.

ADDENDUM by Father William J. Byron, S.J.

Given Mathew Weidinger’s professional responsibility as adviser and legislative assistant to the Congressional authors of the Archer-Shaw Social Security proposal, given Teresa Ghilarducci’s professional responsibility for oversight of employee pension plans, and given Sharon Daly’s professional responsibility to lobby Congress on behalf of Catholic Charities USA, it is not surprising that the panel discussion focused on and dissected the Archer-Shaw plan. There are, of course, many other proposals reflecting many interests and many approaches to guaranteeing the long-term viability of Social Security.

After listening to the discussion and debate between and among my fellow panelists, I think a useful summary of what concerns us all can be taken from an excellent new book by Henry J. Aaron and Robert D. Reischauer. Countdown to Reform: The Great Social Security Debate (A Century Foundation Book, 1998) concludes with the authors’ "criteria for reform;" these are the thoughts that should find their way into subsequent discussions on this challenging and complicated issue:

Our first criterion requires that a good reform plan ensure adequate benefits that are equitably distributed and represent a fair return for taxes paid. . . . [A]dequacy means that large benefit cuts are unacceptable because they would result in insufficient protection for retirees, the disabled, and survivors. . . . Equity requires that protection be maintained for low earners, large families, and other vulnerable people. And a fair return means that plans should be invested wisely and not incur needless administrative costs. Our second criterion is that the unavoidable risks of long-term pension commitments should be shared broadly, not placed on the shoulders of individual workers. Our third criterion for judging plans is administrative efficiency and feasibility. In addition to avoiding needless administrative costs, the plan should not be unduly complex for private businesses, workers, and the government. Finally, we give higher grades to plans that raise national saving. A plan’s contribution to national saving is determined by its additions to reserves held in either the trust funds or individual accounts, less any induced reductions that take place in private saving or government surpluses outside the retirement system. . . .

[N]o plan that provides inadequate benefits, fails to protect low earners, and gives a poor return for each dollar of taxes paid; that subjects workers to excessive risk; that generates needless administrative complexity; and that does nothing to boost national saving should merit serious consideration. (119-120)