Inflated Expectations
“ This administration today, here and now, declares unconditional war on poverty in America … It will not be a short or easy struggle, no single weapon or strategy will suffice, but we shall not rest until that war is won. The richest Nation on earth can afford to win it.”
— President Lyndon B. Johnson, State of the Union( January 8, 1964)
Economic conditions during the 15 years following the end of World War II were diametrically opposed to conditions during the 15 years preceding it. Major cities across Europe and Asia lay in ruins, while the United States was significantly strengthened. In 1945, the United States possessed approximately 70 % of the world’ s gold, a vastly expanded industrial infrastructure, a massive technological edge relative to global competitors and the privilege of issuing the world’ s new dominant reserve currency. Emboldened by what seemed like bottomless financial reserves, the existence of poverty became less tolerable in the United States. This increased pressure on elected officials to expand Social Security benefits both in terms of coverage and level of distributions throughout the 1950s. Then, in the mid-1960s, another fundamental shift in entitlement spending occurred.
On January 20, 1965, President Lyndon B. Johnson was inaugurated for his first elected term. Channeling the public’ s growing distaste for poverty, President Johnson declared an ambitious goal of eliminating poverty entirely in the United States. Dubbed the Great Society, Johnson worked with Congress to create a slew of new entitlement programs. The Social Security Amendments of 1965, which created the Medicare and Medicaid programs, constituted his signature legislation. Johnson also signed laws approving large benefit increases for Social Security, as well as substantial expansion of the disability program. Combined with numerous anti-poverty initiatives enacted under the Economic Opportunity Act of 1964, President Johnson massively increased the level and scope of federal spending on entitlements.
President Johnson’ s programs were well-intended but proved costly, both politically and financially. On March 31, 1968, President Johnson announced that he would not seek reelection. His presidency suffered from a disastrous escalation of the war in Vietnam, the onset of elevated inflation levels and dreadful results of the Great Society. Richard Nixon defeated Vice President Hubert Humphrey in the 1968 presidential election and entered office with the intent of reining in wasteful spending. Surprisingly, however, the net impact of President Nixon’ s reforms was further expansion of entitlements. For example, Nixon approved a series of Social Security benefit expansions, including costly legislation in 1972 that indexed future distributions to inflation. The cost of these expansions was substantially amplified by an error in
Common Attributes of Pension Benefit Expansion Cycles
The cycle of benefit expansions for veterans’ pension plans shared many common attributes. Politicians repeated the cycle because the glacial pace of expansion occurred over multiple decades, making it difficult to detect the repetition. Several of the more important attributes included:
• Equally Worthy Claims: Pension plan eligibility often expanded when individuals who just barely failed to meet qualification criteria claimed that they were equally worthy of benefits. The problem is that after eligibility expanded, it created a new cohort of individuals who resided on the fringe of eligibility. Over many years, the repetitive process of expanding benefits to cover each new cohort of equally worthy claimants created a much larger group of eligible participants than was originally intended.
• Election Proximity: The passage of pension benefit expansions often coincided with major elections. The reason is because satisfying the demands of individuals with equally worthy claims often promised to tip a close election in one party’ s favor.
• Correlation with Strong Economies: There was a tight correlation between the strength of the economy and pressure to expand benefits. Tragically, quite a few benefit expansions of veterans’ plans occurred immediately prior to major economic downturns, making the costs far more difficult to bear in subsequent years. For example, in the case of the US Navy Pension Plan, a large benefit expansion occurred within months of the Panic of 1837. The combination of massive distributions and a collapse in asset values forced the plan to liquidate its entire portfolio of securities by 1841.
• Chronic Cost Underestimation: The financial health of pension plans often suffered from chronic cost underestimation. Sometimes it was purposeful, but often it was simply because politicians failed to anticipate how the populace would alter their behavior in response to plan changes. For example, incremental enhancements to veterans’ plans invariably created powerful incentives for healthy veterans to report less severe disabilities. In more egregious cases, it also attracted claimants who fabricated disabilities or never even served in the military.
In combination, the above factors explain why veterans’ pensions repeatedly experienced increases in costs. But the deepest root of the problem was the collective amnesia of politicians who allowed the cycle to repeat. The only saving grace for veterans’ plans was the eventual mortality of beneficiaries. But beginning in the mid-1900s, the cycle of expansion became much more costly when permanent entitlements were launched in the aftermath of the Great Depression and World War II.
www. MoAF. org | Spring 2025 | FINANCIAL HISTORY 25