The Substance of Policy Areas and Representation: Some Observations about Social Policy and Tax Policy

In this short essay, I explore issues of democratic governance in several areas of American social policy and tax policy. How these two broad areas play out in coming decades is central to the fiscal future of the United States. Yet despite much hand-wringing and recommendations from expert commission after expert commission, policymaking is essentially frozen. In addition to their great importance, these two areas share a number of characteristics that complicate democratic action: long time horizons rather than sharp crises (at least for now); highly mobilized constituencies in some areas and nonexistent constituencies in others, both of which undermine pressure for policy change; pronounced inequality among stakeholders in knowledge, resources, political sophistication, and voice; and location along the central cleavage in today’s polarized politics—the size and scope of government. The institutional bias toward the status quo that characterizes American government generally interacts with the particular nature of these issues to create real policy sclerosis. And yet, a few past instances of successful policymaking suggest several ways to break the logjam and move forward on these highly consequential issue areas.

Social Security

America’s fiscal future is integrally linked to the long-term sustainability of the two large entitlement programs, Medicare and Social Security. I will focus on the latter because although Medicare poses the larger fiscal threat and proposals to trim it continue to be made (for example, in voucherization or Medigap reductions), the Affordable Care Act (ACA) does contain a number of provisions aimed at reducing the rate of cost growth.1 Thus it is Social Security where we observe the greater lack of policy movement. The main issue is that the Social Security trust fund will run out of money in 2033 and thereafter, payroll tax receipts will only be able to cover three-quarters of promised retirement benefits. 2

Although conservatives have long sought structural change in the program, most recently in George W. Bush’s 2005 push for private accounts, such change has proven politically challenging. Perhaps as a result, more recent conservative proposals on entitlements (e.g., the Ryan budget) have barely mentioned Social Security. The highly mobilized senior citizen constituency strongly opposed privatization; although private accounts were more popular among younger cohorts, the salience of the issue was much lower for them and seniors’ preferences prevailed. 3 Most current proposals concern not fundamental change, but adjustments within the existing Social Security framework.

That list of proposals is long, and includes possible adjustments to both the revenue and benefit sides. Since Social Security is actuarially predictable, the value of each change in closing the long-term financing shortfall is known, and different permutations of changes could be assembled to close the gap. Of course, the sooner such adjustments are adopted, the smaller they need be. Yet even changes within the existing structure can invite the ire of senior citizens. For a while, chain-adjusted inflation seemed to be the most prominent proposal, a “technical” adjustment that seniors resisted because it would reduce benefits compared to the current formula. (Also, by proposing it in a “one-off” manner, the Obama administration failed to pair it with other, less objectionable changes to create a politically acceptable package.) Although large majorities of Americans of every age say that preserving Social Security for the long term is crucial,  the preferences of the mobilized and vigilant senior citizen constituency prevail on this issue—and they are wary of changes in benefits even for future cohorts, apparently afraid of a slippery slope that would eventually mean cuts in their own benefits. The high turnout rates of seniors, particularly in midterm elections, make lawmakers particularly loath to cross them, as exemplified by Republican members of Congress running from Bush’s privatization proposal as fast as they could. Perhaps because of opposition among seniors and advocacy groups like Social Security Works, chained-CPI was not included in the President’s budget for fiscal year 2015.

With a highly mobilized constituency suspicious of virtually any kind of change (except raising payroll taxes on high earners, which is popular among seniors), and with the moment of crisis twenty years in the future, lawmakers have little incentive to take on this issue. And yet action now would stave off far more draconian change later.

The 1983 Social Security amendments do offer a model for reform in some respects. In this case, a "Gang of 9" met secretly to hammer out a package of reforms and used a decision rule, a 50-50 mix of benefit reductions and revenue increases, to reach agreement. Within that mix, lawmakers spread the pain of reform among both current and future beneficiaries, utilized a number of lower-visibility options (such as increasing the length of the wage history used to calculate retirement benefits), and pushed the most visible changes—such as increasing the retirement age—decades into the future. By goring everyone’s ox a little, and by strategically deploying different options vis-à-vis their time frame and visibility, they were able to assemble a politically acceptable reform package. A recent “trade-off analysis” among various packages of Social Security reforms by survey firm Mathew Greenwald & Associates revealed the greatest net level of support for a package that similarly divides the cost of maintaining and even bolstering benefits: the most popular package included higher payroll taxes both on high earners (raising the earnings cap) and on all workers (gradually raising the payroll tax rate by 1 percent), paired with higher minimum benefits for low earners and an increase in the cost-of-living adjustment by basing it on inflation for the elderly rather than the regular CPI. 4

However, although the substance of the ’83 amendments potentially offers a template for reform today, the impetus for action now is not as strong. Congress was forced into action three decades ago because the Social Security trust fund had run out of money and was borrowing from the Medicare trust fund to issue pension checks. Only under such extreme circumstances did Congress move. Jonathan Oberlander has pointed out that similarly, over Medicare’s history, Congress has only made significant program changes when its trust fund was within seven years of exhaustion. 5

Programs such as Social Security represent a genuine dilemma for representative democracy. With no pressing need for reform now, and plenty of evidence from past episodes that reform can be politically toxic, lawmakers resist. It is not entirely clear how to break out of the stasis. And Social Security is a relatively easy policy to fix—everyone knows the numbers, so it is “just” a matter of toting up a package of tax increases and benefit reductions that equal 100 percent of the long-term shortfall. Reform is much more difficult where there is disagreement not just about what should be done, but also about what can be done and how much it will help.

Long-Term Care

Compared to Social Security, long-term care (LTC) reform faces the opposite problem: no constituency. With that said, however, there are possible elements in place that might be able to exert some political leverage.

The need for publicly provided long-term care services (e.g., nursing home and home healthcare) is rising due to growth of the aged population, particularly the very old; increasing rates of physical disability and dementia; and the trend towards smaller and more geographically dispersed families (the traditional source of most care). Private long-term care insurance has been a failure—it is expensive, with small, uncertain, and time-limited benefits—and it only funds about 1 percent of total long-term care.6 Medicare only funds short post-acute stays in skilled nursing home facilities; thus most public provision is through Medicaid. Because Medicaid is means-tested, recipients have to spend down to poverty to enroll, a real burden for the 40 percent of LTC recipients between ages eighteen and sixty-five, and a real indignity for the elderly disabled, who are often surprised to discover Medicare does not cover LTC. Long-term care is also a budget buster for the states, which jointly fund Medicaid with the federal government.

Long-term care is an ideal area for mandatory social insurance. Because individuals underestimate their risk of needing long-term care, both market-based and voluntary social provisions fail to maximize the risk pool. German reformers in the mid-1990s realized this and replaced the existing Länder-run, means-tested program (which was very similar to Medicaid) with a mandatory payroll-tax-funded social insurance program. The happy result: no more budget burden for states, and no more spend-down to poverty for consumers. The Affordable Care Act included a long-term provision in CLASS, a contributory social insurance program with benefits that are in some ways superior to those in private LTC plans (the lack of time limit, for one). However, CLASS enrollment would have been voluntary, leading to adverse selection. As a result, the Department of Health and Human Services chose in 2011 not to implement CLASS because it is actuarially unsustainable, and the provision was later repealed by the American Taxpayer Relief Act of 2012, the “fiscal cliff” bill.

A universal social insurance program for LTC would be a great boon to the disabled of all ages. Where can the political impetus for change come from? The German example suggests that a third party, such as states, can be powerful advocates for change. Indeed, the National Governors’ Association has issued many proposals over the years for the federal government to take over the LTC portion of Medicaid. In Germany, however, states were better able to achieve reform and shed the fiscal burden of LTC because of the structure of German federalism—Länder are represented in the upper chamber of the national legislature and have veto power over policies inimical to state interests. In contrast, American states have few levers for asserting their interests or exerting power at the national level. In other words, it’s easy for the federal government to just say no. 7

What about pressure from the public for LTC reform? A mass constituency is difficult to assemble; neither disabled elders themselves nor their exhausted family members are politically active, while active elders underestimate their likelihood of needing care and don’t want to discuss such depressing topics. However, the involvement of some members of the disability community in the development of CLASS suggests potential among the mass public. Many organizations for the disabled have local chapters and federated structures—the types of grassroots organizations that have the potential to exert pressure on lawmakers from below. As Theda Skocpol notes in her analysis of the differential fates of healthcare reform and cap-and-trade legislation during the first Obama term, Washington-based lobbying strategies may not be as successful as grassroots pressure from the congressional districts and states that lawmakers really care about.8 Disabled activists may be able to build on existing structures to exert similar influence for LTC reform.

The case of long-term care suggests that voiceless mass constituencies can benefit from reform when there is a third party that champions it, as German states did in their LTC reform. Perhaps organizations for the disabled can provide the organizational structure for a new grassroots push for LTC reform from below. With that said, however, the lack of a sense of crisis surrounding LTC is a barrier to reform. The inadequacy of existing LTC provision in Medicaid is a chronic condition, not an acute problem, and Medicaid’s very existence undercuts any momentum for reform: we do have a LTC policy, even if it is highly imperfect. That makes reform difficult.

Tax Policy

There are number of areas crying out for reform in federal tax policy: the enormous complexity of the code; the accretion of tax expenditures (responsible for much of the complexity); the incentives for multinational corporations to offshore profits. Beyond these are questions of tax level and redistribution: should any reform be revenue neutral or not? Should the tax code do a better job of penetrating very high incomes? There is obviously deep disagreement on these issues. Not only are the conditions for a regime change not in place (such as fundamentally changing the tax mix by adding a consumption tax—changes which, in the United States, typically only come during wartime), but there is also no consensus around what the goals should be for smaller-scale reform within the existing tax regime. There is talk of a base-broadening reform along the lines of the 1986 Tax Reform Act, but that route seems to be mentioned in current discourse mostly for lack of another obvious path.

Among the public, knowledge of the tax system is both low on average and highly correlated with income and education. The complexity of the system is a central concern and shapes tax attitudes; reforms touted as simplifying the code are often embraced by those who would be materially worse off under the reform (such as lower-income taxpayers who embrace a flat income tax that would likely shift the tax burden away from the affluent and onto them). Further, as Suzanne Mettler has pointed out, the fact that many social benefits are delivered in a hidden manner through the tax code undermines support for both taxes and the role of government.9 In surveys about what bothers them most about the tax system, Americans are twice as likely to cite the complexity of rules around credits and deductions as they are to cite the actual amount they pay. Yet at the same time, large majorities support the very tax expenditures that cause complexity and tilt the hidden welfare state toward the affluent: the home mortgage interest deduction and deduction for employer-provided retirement and health plans, among others. They also do not care much what the rich pay as long as their own taxes are low.

With the public lost in the “fog of tax,”10 and with little elite consensus about what reform means, it’s hard to know what paths are possible. Many reach for the 1986 model of lower tax rates on a broadened base as a decision rule that might facilitate negotiations (just as the 1983 Social Security Amendment writers settled on a decision rule first). The ’86 tax reform also increased corporate taxes; in this case, the public supported these goals and exerted enough political pressure that both parties had an incentive to cooperate and avoid blame for killing the bill. Also, the business lobby was split between heavy industry, which wanted to preserve its tax breaks, and consumer-oriented businesses, which wanted lower rates. Reformers were able to divide and conquer.11

It’s hard to know if any of the elements necessary for reform are present now. Business has wised up and is unlikely to fall for the same political stratagems again. 80 percent of tax expenditures go to individuals, not corporations, and most benefit the affluent more than lower-income Americans. Given the steep gradient in political participation in the United States, especially in campaign contributions, it is difficult to imagine what a coalition to rein in big-ticket tax expenditures would look like. With opposition to taxes as the sole issue uniting disparate elements of the Republican party, and with party control so closely divided in Congress, the incentives for the GOP to 'just say no' to any reform are quite substantial. And with no consensus among the public about what reform should look like, it’s hard to imagine electoral pressure inducing reform.

Summing Up

Beyond the issues mentioned above, there are many other social policy changes that should be made: fixes to the ACA; perhaps a single, higher asset test for federal means-tested programs as the Obama administration has proposed (so that people don’t have to be so completely impoverished to get food stamps or school lunch and can build an emergency fund). But politically, these issues resemble Social Security, long-term care, and the tax code: there is no crisis, so how does an impetus for reform emerge? Does the public know what it wants enough to exert political pressure? Is it organized in ways that channel that pressure meaningfully? Can lawmakers settle on goals and decision rules that facilitate negotiation over policy details? There are shreds of useful precedent in policy episodes of the past. Whether they are effective in the face of today’s polarization and policy sclerosis is another question.

  1. ACA provisions include a rollback in Medicare Advantage reimbursements and the introduction of the Medicare Shared Savings Program, which provides incentives for Accountable Care Organization formation and shifts to a global payment model. There is also a host of demonstration projects aimed at cost reduction.
  2. The Social Security Disability Insurance trust fund will run out of money even sooner, in 2016, due to increases in SSDI enrollments in recent years and decreased payroll tax receipts during the Great Recession and the payroll tax reduction in place from 2010 to 2012.
  3. Andrea Campbell and Ryan King. 2010. “Social Security: Political Resilience in the Face of Conservative Stride.” In The New Politics of Old-Age Policy, 2nd ed., ed. Robert Hudson. Baltimore, MD: John Hopkins University Press.
  4. Mathew Greenwald. 30 January 2014. “How Do Americans Prefer to Address the Social Security Funding Gap.” Presented at the National Academy of Social Insurance annual policy research conference. Washington, DC.
  5. Jonathan Oberlander. 2003. The Political Life of Medicare. Chicago: University of Chicago Press.
  6. When the value of informal, family-provided care is included in the total amount of care given. See Scan Foundation, “The State of Long-Term Care Financing,” http://www.thescanfoundation.org/sites/thescanfoundation.org/files/tsf_ltc_infographic_725_billion_1.pdf, accessed March 8, 2014.
  7. Campbell, Andrea Louise, and Kimberly J. Morgan. October 2005. “Federalism and the Politics of Old-Age Care in Germany and the United States.” Comparative Political Studies 38:887-914.
  8. Theda Skocpol. 14 February 2013. “Naming the Problem: What It Will Take to Counter Extremism and Engage Americans in the Fight against Global Warming.” Prepared for the Symposium on the Politics of America’s Fight Against Global Warming. Cambridge, MA: Harvard University. http://www.scholarsstrategynetwork.org/sites/default/files/skocpol_captrade_report_january_2013_0.pdf.
  9. Suzanne Mettler. 2011. The Submerged State: How Invisible Government Policies Undermine American Democracy. Chicago: University of Chicago Press.
  10. Edward J. McCaffery’s term. See: McCaffery, Edward J. 2009. “Where’s the Sex in Fiscal Sociology? Taxation and Gender in Comparative Perspective.” In The Thunder of History: Taxation in Historical and Comparative Perspective, eds. Monica Prasad, Isaac W. Martin, and Ajay Mehrotra: 220. New York: Cambridge University Press.
  11. Jeffrey H. Birnbaum. 22 October 2006. “Taxing Lessons, 20 Years in the Making.” Washington Post.
About the Author
Andrea Louise Campbell is a professor of political science at the Massachusetts Institute of Technology and serves on the Anxieties of Democracy program's Working Group on Politics of Distribution.