Dirty Little Secret

By Richard Lacayo

Now that the "evil empire" has become the beleaguered empire, nothing scares Washington more than the specter of a battle over Social Security. Even the subtlest effort to tinker with this most sacrosanct of federal benefit programs ignites the rage of senior citizens, whose lobbying groups are among the most feared in the nation. Senator Daniel Patrick Moynihan's proposal to cut the Social Security payroll tax and stop using the enormous funds it generates to disguise the size of the federal budget deficit is anything but subtle. It is so explosive that Republicans and Democrats alike are running from the idea with their heads down and their hands clamped over their ears.

Unfortunately for the politicians, getting away from the issue is not that simple. Though no one expects any drastic change in the program, Moynihan's proposal has focused attention on one of Washington's dirty little secrets. Rather than dealing honestly with the budgetary gap, the Government is once again borrowing against the future. When the baby-boom generation begins to retire about 20 years from now, the IOUs will have to be paid back through sharply higher taxes or still more borrowing.

Igniting a fire storm is precisely what Moynihan had in mind last December when he suggested rolling back the most recent hike in Social Security taxes. On Jan. 1 the rate climbed to 7.65% on the first $51,300 of a worker's income, a sum that employers must match. Moynihan would lower it to 7.51% this year and to 6.55% in 1991.

The New York Democrat is a former Harvard professor with a knack for stirring up controversy. As Assistant Secretary in Lyndon Johnson's Labor Department, he kicked up a fuss by issuing a hotly disputed report on female- headed black families. Five years later, as Richard Nixon's adviser on domestic policy, he urged "benign neglect" on racial issues, meaning that the Administration should let racial controversy cool before launching new civil rights initiatives. In the case of Social Security, Moynihan admits that he was out to attract notice through the political equivalent of hitting Congress over the head with a two-by-four. Says he: "You have to get their attention."

He succeeded beyond his wildest dreams, in the process flipping ordinary notions of national politics upside down. For once, Democrats were in the position of presenting themselves as tax cutters. But after initially expressing interest in Moynihan's plan, many Democrats by last week were giving it a wary, and sometimes hostile, second look. Speaker of the House Tom Foley expressed "reservations" about the idea. Ways and Means Chairman Dan Rostenkowski, a Chicago Democrat who has felt the wrath of senior-citizens groups over the catastrophic-health-care surtax, dubbed the proposal a "disaster." Democrats feared that the budget squeeze on other domestic programs, already harsh, would be still worse if the Government had to go hunting for billions to replace the lost Social Security revenue.

The Democratic retreat created an opening for gleeful Republicans, who found themselves in the unaccustomed role of Social Security's staunchest defenders. Says a Republican leader: "As usual, ((the Democrats)) began flapping around and knocking each other down like the F Troop of politics." To the consternation of Democratic leaders, G.O.P. lawmakers began distributing campaign buttons with the slogan SAVE SOCIAL SECURITY. VOTE REPUBLICAN. George Bush also weighed in, repeating the pledge made in his State of the Union Address that he would not "mess around" with Social Security. "This is an effort to get me to try to raise taxes on the American people by the charade of cutting them, or to cut benefits," said Bush.

Still, the fact that some Republicans had been caught up in the initial fascination with the Moynihan plan led the White House to launch a hasty counterattack. Budget Director Richard Darman presented Congress with a plan for a Social Security Integrity and Debt Reduction Fund that would require the Federal Government to gradually stop using the surplus to cover Government operating costs. The plan would not begin to take effect, however, until after the 1992 presidential election, and then only in stages. "Phased integrity," Republican Senate Leader Bob Dole mischievously called it.

Some integrity is badly needed right now. Until 1983, Social Security was run on a pay-as-you-go basis, with payroll taxes bringing in roughly the same amount that was disbursed as benefits. But that year a bipartisan commission -- on which Moynihan played a key role -- designed a scheme to build a surplus that could swell to $4 trillion by 2010. The money would come from a series of increases in Social Security contributions, which began to phase in six years ago, and from taxing the benefits of higher-income retirees.

The idea was to avoid burdening the far smaller generation that will follow the baby boomers with huge tax increases or a mountain of new debt. But the intentions of the reform plan were thwarted by the explosive growth of the deficit. Instead of accumulating a stash of savings, the Government has borrowed each year the surplus to pay for the normal operations of the U.S. Government, with no plan for repaying the loans. "It is like an individual having a private pension fund consisting of his own IOUs," writes economist Paul Craig Roberts, a Treasury official during the Reagan Administration.

Just how embedded this budgetary sleight of hand has become was illustrated during hearings by the Senate Finance Committee last week. U.S. Comptroller General Charles A. Bowsher described how the Government moved $52 billion from the Social Security trust funds, as well as $71 billion from other Government trust funds, to give the impression that the 1989 federal deficit was $152 billion. The real figure: $275 billion. "The growing reserve is merely an illusion," Bowsher declared.

Fearful that voters may eventually demand an end to the shell game, Senators and Congressmen from both sides of the aisle are racing to offer alternatives to Moynihan's proposal. Some of the trial balloons:

-- Wisconsin Republican Senator Robert Kasten would adopt a smaller and more gradual payroll-tax reduction, while removing the trust funds from the rest of the budget calculation and outlawing Social Security benefit cuts.

-- Congressman Hank Brown, a Colorado Republican, wants to suspend the 1990 tax hike and make Social Security an independent agency so that, he says, "no one can get their hands on it -- not even Congress."

-- The most drastic approach comes from Congressman John Porter, an Illinois Republican. He suggests that the Federal Government each year refund the Social Security surplus into Individual Social Security Retirement Accounts. Every worker could direct his account, like an IRA, into an array of nonspeculative investments, including Government bonds or certain mutual funds. The result, says Porter, would be a system of "vested, fully funded, worker-owned retirement accounts" -- though one in which the more successful investors would reap the larger benefits in the end.

Porter's plan might also negate one of the most important advantages of the current system: higher rates of return to low-income workers. In the present setup, minimum-wage earners who contribute to Social Security over a full work life receive benefits of about 60% of their average monthly earnings before retirement. But workers who earn the maximum amount subject to Social Security taxes get benefits of about 27% of monthly earnings. Such redistributive payments are badly needed by most Social Security recipients, despite the overall increase in wealth among those 65 or older. A 1984 federal study shows that Social Security provides at least half the household income for 62% of its beneficiaries, who also receive Medicare to cover their health-care costs. "We hear so much about Social Security being regressive," says Phil Gambino, a spokesman for the program. "Actually, the benefits are progressive."

Precisely because Moynihan's proposal might prove irresistible if it ever came to a vote, congressional leaders will try to prevent it from reaching the floor. But the plan has already accomplished much of what Moynihan set out to achieve. It has exposed the gimmickry that camouflages the true size of the budget gap. It could make it more difficult to continue those accounting tricks. By forcing Bush to oppose a tax cut that would benefit most workers, it has complicated the President's push for a reduction in the capital-gains tax that would reward mainly those with incomes of $200,000 or more -- and, after an initial surge of new revenues, add billions to the deficit. Last but not least, it has put Daniel Patrick Moynihan back in the position he most enjoys: at the very center of a great and swirling national debate.

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CREDIT: TIME Diagram by Joe Lertola

[TMFONT 1 d #666666 d {Source: General Accounting Office}]CAPTION: MASKING THE MONSTER

With reporting by Dan Goodgame and Hays Gorey/Washington