The success of Social Security since its reorganization in 1983 has made it the target of budget predators, risking the solvency that emerged from the reorganization. That sort of budget balancing is imprudent and unjust. The time has come to erect safeguards to protect the financial independence of Social Security.
There are, however, substantial reforms that can be made without undermining the fiscal integrity of the program, and we favor a number of them. But they must be understood in the context of the current situation and the danger posed by those ready to dismantle the program.
The problem was brought into focus by the Gramm-Rudman-Hollings Act's effort to reduce the budget deficit by fiat and formula. As part of that plan, Social Security was taken out of the unified budget and once again established as an independent financial entity--an appropriate recognition of an important national commitment. But, at the same time, the enormous surpluses being generated by Social Security now and for the foreseeable future were allowed to be counted as part of the deficit-reduction program, which at best is silly bookkeeping and at worst raises the risk of Congress' someday dipping into Social Security reserves.
Already some economists, business leaders and congressional leaders talk about federal budget "savings" that could be effected by cutting Social Security. Some have suggested, for example, postponing cost-of-living adjustments. In fact, any adjustment of cost-of-living payments would only enhance the surplus in the Social Security account. It would not generate income for the U.S. Treasury. The program's reserves are lent to the Treasury at the current rate of interest, but they belong exclusively to Social Security.
In 1986 Social Security received $15.3 billion more in payroll contributions from employers and workers than it paid out in benefits to retired persons. In 1987 that rose to about $20 billion. The reserve will continue to increase until the year 2030, according to the most recent estimates. At that point, changing demographics--notably an aging population and a shrinking work force--will begin to draw down the reserves until the point of potential exhaustion, about the year 2051.
Evidently the present system will not work forever. Some additional reforms will be needed in about 40 or 50 years to redress the potential exhaustion of funds, just as was done when bankruptcy threatened in 1983. Any efforts to upset the 1983 agreement in the meantime will only reduce the viable life of the program and accelerate the need for reforms.
There are, however, three important steps that could be taken immediately that would strengthen Social Security while making it more equitable.
Dr. Otis R. Bowen, secretary of health and human services, has already proposed one of these: lifting the limit on work earnings that now discourages persons eligible for Social Security from staying on the job. Social Security recipients currently lose $1 for every $2 earned above $6,120 for those under 65, and above $8,160 for those 65 to 70. Persons 70 and older are already exempt. The penalty does not apply to income from pensions, dividends, capital gains and other forms of so-called unearned income. The present income limitations are costly to administer. Eliminating them would be expensive initially--an estimated $7.5 billion over a five-year period. But Social Security has the funds to cover that increased cost of benefits. And the Treasury would benefit from income taxes on the earnings of those staying on the job. As the senior population expands and the younger population shrinks in the decades ahead, there will be an increasing need to encourage older workers to stay on the job to maintain the nation's productivity. This reform would address that need as well.
Another promising reform would increase the incentives for postponing Social Security. Under existing laws, benefits are increased by 3% for each year retirement is postponed through the 69th birthday. That is a paltry return. But if the return were increased to 8%, according to a study by the House Republican Research Committee, it would achieve actuarial fairness and encourage broader participation.
Finally, there inevitably must be a reexamination of tax exemptions for Social Security payments. Under existing law, up to one-half the Social Security benefit is subject to income tax for individuals earning more than $25,000 and for couples earning more than $32,000 in adjusted gross income. An argument can be made that it is unfairly low for higher-income recipients. Income taxes on Social Security had been resisted for many years on the ground that taxes had already been paid when the money was earned. At present, however, benefits exceed Social Security contributions for many recipients. Full income taxation of the benefits for upper-income recipients would seem to be both fair and a way of addressing the national budget deficit without imperiling Social Security itself.
The nation can take pride in the financial health of Social Security. The program is not cheap. The tax rate in 1988 will be 7.51% on wages up to $45,000. Maximum monthly benefits will rise to $838. As the program's reserves build over the next 30 or 40 years, vigilance will be required to prevent sponsors of less prudent programs from raiding Social Security.