SOCIAL SECURITY

The System Is Running in the Red

The 75 million Americans who are depending on Social Security to help protect their future face a new and surprising fact. After running big surpluses for most of its 20 years, the Social Security system is running in the red. In the fiscal year just ended, payroll taxes fell short by $125 million of covering the benefits paid out to 10 million retired workers or dependents. The $600 million that the U.S. Treasury paid as interest on the $23 billion Social Security trust fund invested in federal bonds more than covered the deficit. But this fiscal year the deficit will eat up all the interest payment, and next year there will be a gap of around $1 billion between Social Security tax receipts and payments.

Social Security officials have always expected that the system might some day be temporarily strapped for cash. But they did not expect it to happen so soon or in such prosperous times. What went wrong?

The answer seems to be that Congress was too quick to 1) expand the system to cover more workers and 2) boost the benefits without waiting to get the bill for past increases. For example, in 1954 Congress voted to let self-employed farmers retire at 65 if they paid Social Security taxes for only two years. Thus, for $252 a farmer could buy a pension of $108.50 a month for life (if single) or $162.50 a month (if married). Thousands of agile farmers came out of retirement to farm for two years in order to become eligible for benefits, then retired again. The result: some 375,000 farmers signed up for benefits, instead of the 150,000 expected--an actuarial error of 150%. In addition, under a recent revision of the law, working women or wives of pensioners can start drawing reduced payments at 62. Some 790,000 are now expected to elect early payments, 50,000 more than anticipated. Meanwhile, to keep pace with inflation, the top amount a family with several dependents can receive has been raised from $168.75 to $200.

While underestimating outgo by a wide margin, Social Security actuaries have also overestimated collections. In the past fiscal year the experts predicted that collections would be $7.3 billion, payments $6.8 billion. Instead, collections were only $7 billion, while payments exceeded that. For the current year officials had estimated collections of $7.3 billion. This has already been scaled down to $7.1 billion. Next year they had hoped for $7.5 billion, but even with the increase in the total working population, it now appears that they will get only $7.2 billion.

Despite the red ink, nobody believes that the Social Security system is going broke, since ultimately it is backed by the credit of the U.S. and the taxing power of Congress. But too much has been attempted too fast. Politicos of both parties have long been locked in a headlong competition to win votes by spreading Social Security coverage. Example: this month checks are going out to some 275,000 disabled persons over 50.

By 1960 Social Security deficits are expected to be eliminated when the present Social Security tax of 4 1/2% (combined employer and employee shares) on the first $4,200 of annual income is boosted to 5 1/2%, with further 1% tax-rate jumps scheduled for 1965, 1970 and 1975. But Social Security experts admit that even then there may not be enough income to offset benefit payments, necessitating further tax increases.

The Social Security administrator is required by law to appoint a citizens' committee to investigate the soundness of the system and report back before the 1960 tax-rate increase. But that may be too late to give the whole system the close scrutiny it deserves if it is to protect the millions who are putting their billions into it. The trouble is that a hopperful of bills are pending in Congress which, if passed, would throw Social Security even deeper into the red, e.g., Rhode Island's Democratic Representative Aime Forand and New York's conservative Republican Katharine St. George are pushing a sweeping proposal to make it unnecessary for people over 65 to retire in order to qualify for a pension. Added cost: $2 billion a year.

Social Security officials still talk of ultimately having a huge trust fund, as much as $100 billion, which would pay a major share of the costs of pensions out of investment income, thus soften the tax burden on the currently employed. But it is doubtful if the trust fund will get much larger than it is now unless Congress stops increasing benefits and adding beneficiaries without providing for enough increased revenue. Even with the increases now scheduled, the Social Security system likely will be brought back to only a pay-as-you-go basis.

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