Rescuing Social Security

While calling a temporary retreat on welfare reform, President Carter has moved briskly to deal with another tough domestic policy problem: the near bankruptcy of the Social Security system.

Because of the recession and soaring benefits for some 30 million Americans, the system has been paying out more than it is taking in from Social Security taxes. Outgo is expected to exceed income by $5.6 billion this year, and if the trend continues, the system will run out of money by the early 1980s. Carter's solution combines liberal and conservative elements: he proposes both an increase in taxes and a slowdown in the sharp rise in benefits.

The program's major innovation --and the feature that will arouse the most opposition--is the use of general tax revenues to fund the system. Until now, Social Security has been financed solely by payroll taxes, on the theory that it is an insurance plan, not an income transfer plan. Under the Carter program, the Social Security system would dip into ordinary tax revenues --which come mostly from business and personal income taxes--if the unemployment rate rises above 6%. When it does, the amount that is considered "lost" to the system because of reduced payroll taxes would be made up with money from general revenues. This device, it is estimated, could add $14 billion to the system over the next five years.

Payroll taxes would also rise, as expected, and weigh heaviest on employers. At present, employer and employee each pay half of the Social Security tax, which is set at a rate of 11.7% on a wage base with a $16,500 limit. The plan would somewhat boost the wage-base increases scheduled for employees; the limit would rise to $17,700 next year and $24,000 in 1979. The wage base on which the employer pays taxes would also increase to $24,000 in 1979, but then jump to $37,000 in 1980; in the following year the lid would be removed entirely. That means that the employer would pay his half of the tax on an employee's full salary no matter how much he makes. Payments by employers into the system would rise by $7 billion to $8 billion a year. These increases would doubtless be passed along by employers in the form of higher prices or reduced wages.

The Carter plan will scale down benefits by eliminating what is known as double indexing. A revision of the Social Security law five years ago tied increases in the wage base, on which Social Security payments are figured, to the inflation rate. At the same time, benefits were also indexed to inflation, virtually guaranteeing a steady upward spiral in payments. If this system were to continue, some workers might make more in retirement from Social Security than they earn on the job. On the average, retired workers currently receive benefits amounting to 43% of the salary they had when they were working; the Administration wants to keep that level from rising beyond 44%. This alone would eliminate one-half of the projected long-term deficit of the system; the payroll tax increase and the general revenue financing would take care of most of the remainder. The system would then be shored up until the early part of the next century, when declining births and increasing longevity are expected to shift the ratio of active workers to retired ones from 3 to 1 at present to 2 to 1, putting new pressures on the system. But that will be another generation's dilemma.

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