Congress Faces Dilemma on Retiree Cost-of-Living Hike

In 1972, when Congress created today’s system of automatic annual cost-of-living increases for Social Security, it did so in pursuit of frugality and reform. The system, ripe with cash, should protect the elderly from inflation, Democrats and Republicans agreed, and the temptation to vote fat increases in election years should be removed.

“I told them Congress was giving up a good political plum, but I only got 36 votes,” recalled Wilbur Mills, then chairman of the House Ways and Means Committee and a legendary power broker.

Ironically, the effort to save money ultimately cost the U.S. Treasury billions of dollars. When the great inflation of the 1970s hit, double-digit cost-of-living adjustments, or COLAs, drove Social Security outlays to undreamed-of heights and contributed mightily to the soaring deficits that now threaten the nation’s economic health.

Today, locked in the resulting struggle to curb federal outlays, Congress is debating whether to cancel the automatic Social Security raise for one year--a step that would trim $6.8 billion from the federal budget deficit.

Touchy Domestic Issue

That debate reflects what may be the sharpest domestic policy dilemma facing the House and Senate this year.

Advocates of budget cuts point out that since Congress guaranteed annual cost-of-living adjustments, Social Security has become truly massive: Spending for fiscal 1984, the year that ended last Sept. 30, totaled $178.2 billion. Outlays have grown to 20% of the entire federal budget, up from 14% in 1965.

And, thanks to a quirk in the way the COLAs were computed, Social Security benefits rose 108% during the last 10 years while the cost of living rose only 78%.

Historically, some specialists add, Social Security was not meant to be the primary means of supporting retired persons. “Franklin Roosevelt never intended Social Security to be the sole source of income,” said Mills, now a Washington lawyer. “It was just a floor on which to build other retirement plans.”

Yet there is another side to the story--politically, economically, and in terms of social policy.

Millions of Checks Monthly

Social Security directly benefits more Americans than any other federal program: Every month, checks go out to 25.4 million retired persons, 3.8 million disabled workers and 7.2 million survivors of deceased workers.

Equally important, Social Security payments represent anything but luxury for most recipients. Two-thirds of all retired Americans rely on the monthly checks for at least half their income. For one-quarter of all recipients, Social Security is 90% of their income.

Moreover, the automatic increases--coupled with a general increase in benefit levels during the late 1960s and 1970s--lifted millions of senior citizens from poverty and then shielded them from a decade of otherwise-ruinous inflation.

In 1972, almost 20% of all Americans aged 65 and over were living in poverty, nearly double the 10% poverty rate for the rest of the population. By 1983, the poverty rate for the elderly had fallen below that of the rest of the nation: 14.5%, compared to 15.4% for everyone else.

Concept Approached Gingerly

Thus, while Social Security has been consuming a steadily rising share of the federal government’s income, any proposal to restrict the annual cost-of-living allowance is approached gingerly. For any plan to have a chance, says Rep. Ron Wyden (D-Ore.), “You need something that can be understood at the kitchen tables and the workplaces.”

“When I talk to senior citizens,” said Wyden, who once worked as an organizer for the Gray Panthers, a outspoken senior citizens group, “they know the deficit is poison for this country; they know we have to make some changes. But they say, ‘Any changes that apply to us need to apply to all areas of the budget--it should be the same way for ex-Presidents, for members of Congress and for the military.’ ”

Senate Majority Leader Robert J. Dole (R-Kan.) is among those who want to skip the COLA for a year as part of a deficit-reduction package which would include curbs on defense spending and domestic outlays. But his prospects for success seem uncertain.

Rep. Bill Frenzel (R-Minn.), a member of the House Ways and Means Committee, said it appears “very unlikely” that Congress will freeze benefit checks for a year. Another committee member, California Rep. Robert T. Matsui (D-Sacramento), said he might support a “fair proposal” that would curb Social Security COLAs to upper-income recipients, but only in combination with defense cuts and elimination of many tax preferences.

Budget Assumption Told

President Reagan’s new budget, which goes to Congress today, assumes that the Social Security COLA will be paid on schedule, and the President has said he would consider a benefit freeze only if it receives the overwhelming endorsement of Congress.

As Social Security spending mounted with inflation, Social Security tax revenues failed to keep pace because taxes were levied on wages, which climbed more slowly than prices for most of the years since 1972.

The retirement trust fund was kept solvent only by enactment of massive increases in the Social Security tax rate in 1977 and again in 1983. For millions of American workers, Social Security taxes take a larger bite out of their paychecks than federal income taxes do.

In 1985, employees are paying a 7.05% tax on the first $39,600 of their wages, compared to a 5.85% tax rate levied against the first $14,100 of earnings in 1975. The maximum tax was $824.85 in 1975; this year the maximum tax will be $2,791.80.

System Solvent Now

Because of these tax boosts, the Social Security system is solvent now, with income running $200 million ahead of spending for the last year. That surplus, which can be used to finance other government programs, made a modest dent in the the fiscal 1984 deficit.

The average benefit for a retired worker was $449 in December, the most recent month for which data is available. The average monthly benefit for a retired couple aged 65 or older was $776.

At bottom, the issue of COLAs--like many others in the budget--comes down to a question of where the burden falls. With COLAs, the burden of inflation falls on the budget; without them it would fall on the elderly.