Social Security: A Debt-Threatened Dream

• Share

(6 of 12)

But as Thurow and many others also emphatically point out, continuing to raise Social Security benefits may soon make the elderly better off than the young, whose earnings are not protected against inflation. And the costs are staggering. In 1975—by no coincidence the first year that benefits were indexed to inflation—Social Security's pension fund, whose formal title is Old-Age and Survivors Insurance (OASI), paid out more than it took in. By 1977 the drain had become so great as to threaten the financial solvency of the system. This occurred even though taxes had been steadily raised from that original $30 a year. By the mid-'70s the maximum amount paid by any worker had reached $825.

Congress responded in 1977 by passing an act calculated to raise $227 billion in additional Social Security taxes during the following ten years—on top of substantial increases that had already been written into law. The maximum tax will rise from $965 in 1977 to at least $3,025 in 1987, because tax rates rise steadily and the proportion of earnings to which they apply goes up every year. The maximum Social Security tax this year has hit $2,170—6.7% of earnings up to $32,400—an increase of 125% in just five years. The taxes are a serious burden on the economy; it is estimated that about one-quarter of all American families pay more in Social Security taxes than they do in income taxes. In theory, employers pay a tax exactly as heavy as that levied on their workers. Actually, many economists believe that the employer's share of the tax is in effect paid by workers and consumers. If an employers' Social Security contribution rises, as it does now every year, he will either pass out smaller raises to his workers or increase the price of his products, or both. Alternatively, he may decide to hire fewer workers. Thus the Social Security tax is believed to increase both inflation and unemployment.

When the 1977 payroll-tax increase passed Congress, legislators congratulated themselves on having assured the financial solvency of Social Security for the next 50 years. Alas, they did not ensure it for four years. Benefits kept being pushed up by inflation. Tax collections, despite the sharp increases in rates, were held down by recessions and widespread un employment, which in April hit a post-World War II high of 9.4% of the labor force. The impact on the Social Security system of a 1% rise in unemployment is far greater than that of a 1 % increase in the inflation rate. Every time one U.S. worker is laid off, the system loses more than $125 a month in taxes that he and his employer no longer pay.

By last year, the OASI fund was perilously close to running out of money. After his May 1981 recommendations were rejected, President Reagan proposed a makeshift bargain: the Greenspan commission would be appointed to recommend what ought to be done by Dec. 31, 1982, and, to keep the fund from running dry before then, Social Security should be given permission to borrow from the disability and Medicare funds. Congress granted that permission, but only for 1982.

That was scarcely a stopgap solution.

If the borrowing authority is allowed to lapse and the retirement fund goes back on its own on Jan. 1, the fund will be able to send out checks on time only