The Social Security Crunch

LEAVITT, HELEN

STICKING TO OLD NOTIONS The Social Security Crunch by helen leavitt Washington Because politicians have long believed that voters are more amenable to having money taken out of their paychecks...

...The new legislation will pump more money into the Fund by stepping up the tax each year, until it reaches 7.15 per cent of earnings up to $42,600 in 1987 for both employers and employes...
...it is regressive, while the Federal income tax is progressive...
...No general revenues are to be used for Social Security, however...
...But more important is the effect of the new Social Security tax on the vast majority of workers who are in the system...
...The Administration proposed dipping into general revenue whenever unemployment reached 6 per cent...
...But the new law may end up turning the conventional wisdom that spawned it on its head...
...other Democrats preferred taking a set amount from genera] revenue each year...
...Anyone soon due to retire would be excluded, since he would never contribute enough...
...For a worker earning $10,000, by contrast, the jump will be only 20 per cent, from $585 to $715...
...Employers will admittedly have to pay more taxes now as well, yet they can pass along their costsóand contribute to inflationóby raising prices...
...Leaving aside allowances for dependents, current payments range from a minimum Helen LiAvm, a new contributor, is a H ashington-based freelance writer...
...Congress had to come up with more money because those billions of dollars, like the surpluses in all special-purpose government trust funds, had been borrowed by the U.S...
...For the new hefty Social Security increase, coupled with the government's substantial deficit spending anyway to meet the cost of other programs, promises to produce a sharp change in the attitude of the voters, who traditionally had regarded Social Security tax hikes as a bearable burden...
...From 1935 until just recently, more was being taken in by the system than was being paid out, resulting in a Trust Fund surplus that peaked at $48 billion in 1975...
...Besides the unemployed, an estimated 6 million workers are not included in the planó2.5 million Federal employes who belong to a more generous separate pension fund, state and local government workers covered by other funds, and employes of certain nonprofit organizations...
...John Brittan, senior fellow at the Brookings Institution and author of The Payroll Tax for Social Security, notes that the Social Security tax is a heavy burden even on the smallest wage earner...
...Since 1935, workers and employers have annually paid an equal percentage of all wages up to a fixed limit into the Social Security Trust Fund...
...The Carter Administration and some legislators, mostly Democrats, originally favored drawing funds from general revenue to avoid a steep rise in the Social Security tax...
...In the hopes of attracting these people to Social Security, the legislation provides for a study of possible "universal" coverage by 1980...
...Interestingly, despite Congress' reluctance to finance Social Security with general revenue, it has never hesitated to finance the general deficit with Social Security surpluses...
...That conception of the nation's taste appears also to explain how, on the same day last month, President Carter could sign a bill increasing Social Security taxes and propose a Federal tax cut that virtually cancelled each other out...
...of $114 per month to a maximum of $437...
...The new range is to have a bottom of $120 per month, with the top geared to the cost of livingóbut long-term workers whose low wages only enabled them to put a negligible amount into the Fund will receive $11.50 per month for each year of low-wage employment in excess of 10 and up to 30 years...
...And judging from the grumbling about inequities that could grow with each lighter pay envelope, Congress may have to revise its long-held notions about how people prefer to be taxed...
...Treasury and spent on other programs...
...It should be noted, too, that the President has said he seeks to reduce taxes partly to offset the rise in Social Security taxes, yet this would have the curious effect of rewarding those 6 million workers now outside the systemówho would be compensated for an increase in a tax they do not pay...
...STICKING TO OLD NOTIONS The Social Security Crunch by helen leavitt Washington Because politicians have long believed that voters are more amenable to having money taken out of their paychecks than being hit with an end-of-the-year tax, and because the popular view in Congress and elsewhere is that Social Security should be thought of as "insurance"ówith benefits linked to contributionsórather than "welfare," the Social Security legislation passed in December by Congress will continue the present pay-as-you-go funding pattern...
...Several Republicans suggested that general revenue pay half the cost of Medicare so that a like amount of Medicare funds could be applied to Social Security...
...In addition, a good number of his colleagues no doubt agreed with Senate Finance Committee Chairman Russell Long (D.-La...
...in 1977, Uncle Sam collected $82.1 billion and payed out $87.8 billion...
...This would not include members of Congress, incidentally, who enjoy a generous retirement plan that allows a $46,000 yearly annuity...
...The choice was obvious to the politicians, given their continuing belief that people prefer payroll to income taxes...
...Moreover, Brittan argues, Republicans need not worry about a wild escalation of benefit payments should Social Security be permitted general revenue money: The hike in the income tax that this would entail would be highly unpopular, after all, and would make Democrats wary of embarking on a spending spree...
...A fairer approach might be one suggested by Brittan: extending Social Security to everyone in a way that would both leave existing pension plans in-tart and take into account how close an individual is to retirement...
...Trust fund surpluses have become, in effect, IOU notes in the public debt, and since in the case of Social Security the cash is now needed for what it was originally intended to be used, Congress was faced with the choice of paying back the Fund by further borrowingóthereby increasing the deficitóor by raising either the Federal income tax or the Social Security tax...
...Implicit in this position is a view of Social Security not merely as retirement "insurance," but as a national vehicle for redistributing income among the program's 33 million retired or dependent beneficiaries...
...It is now estimated at $37.6 billion...
...Although the just-revised financing formula mandated gradual increases through 1986, they would not have covered future obligations: For the past several years, more money has been drawn out of the Trust Fund than put into it...
...The largest additional contributions will come from the middle and upper classes: A person with the highest taxable salary or above will see his payments better than triple in the next 10 years, from $965 to $3,046...
...The Senate's version of the bill, discarded in a joint House-Senate conference, would for the first time have assigned a higher rate to employers than the employes...
...Last year, that amounted to 5.85 per cent of the first $16,500 earned...
...The reasons for the gap are twofold: Unemployment plus increasing retirement have shrunk the base the tax is drawn from, while benefitsótied to wagesóhave risen...
...Benefits will also go up, albeit not on the same scale as taxes...
...Lest anyone miss the psychological factor, Treasury Secretary W. Michael Blumenthal and Commerce Secretary Juanita Kreps, among others, have been stressing that tax relief, rather than tax reform, is the "first priority" of business the White House will submit to Congress this month...
...One of the most serious problems confronting the Social Security system concerns the number of people participating, and hence paying into the Trust Fund...
...who maintained that the present $60-billion deficit in general revenue is large enough...
...Apparently Congress was won over by the many Republicans and some Democrats who voiced the fear that if such moneys were made available, the lid would be off benefits (now linked to wages taxed) and Congress would gleefully boost payments each election year...
...If one expert is right, Congress may have made a serious mistake in focusing on the payroll tax...

Vol. 61 • January 1978 • No. 1


 
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