Moynihan Urges Social Security Tax Cut, Return to Pay-as-You-Go Benefits System

A key senator Friday advocated cuts in the Social Security payroll tax that would save 130 million workers and employers a total of $62 billion during the next two years.

The proposal by Sen. Daniel Patrick Moynihan (Y.) would cancel a 0.14% increase in the levy scheduled to take effect on Jan. 1 and would lower the rate by an additional 0.96% for workers and employers in 1991.

Moynihan, who as chairman of the Senate Finance subcommittee on Social Security is in a crucial position to advance his plan, said that it would put the retirement system back on a pay-as-you-go basis instead of amassing trust fund surpluses exceeding $200 billion in the coming decade.

“The Administration is content to see the budget deficit gradually eliminated by the growing Social Security tax revenue,” Moynihan said at a news conference. “This . . . perverts the original purpose for the surpluses--to provide for the retirement of the baby boom (generation) in the next century.”

The trust fund concept was adopted in 1983 to accumulate reserves in advance of the huge demands expected on Social Security when members of the baby boom generation born after the end of World War II begin to retire in the early part of the next century. But Moynihan and others said that the huge surpluses have been used instead to mask the size of the federal deficit. Without the surpluses, Congress and the Administration would have to make more drastic spending cuts or generate new revenue to meet deficit reduction targets.

“We can no longer tolerate the use of Social Security surpluses to finance, say, B-2 bombers or a capital gains tax cut,” he added.

The deficit for fiscal 1989, Moynihan said, would be $204 billion instead of $152 billion if the Social Security surplus had not been counted. Congressional Budget Office projections show the Social Security surplus rising to $236 billion in the year 2000, virtually concealing a deficit of $268 billion in other government transactions.

Although there is strong support in the Senate for excluding the trust fund surpluses in calculating the budget deficit, President Bush has opposed any change in the current accounting system. He is also expected to oppose Moynihan’s proposed cut in the payroll tax because of revenue losses estimated at $7 billion next year and $55 billion in 1991. The fate of the proposal is difficult to predict.

The 7.65% tax--including 1.45% for Medicare, which everyone pays--will be imposed next year on both workers and employers on all earnings up to a cutoff of $51,300, with a maximum tax of $3,924 for each.

Moynihan contends that it is unfair tax policy to rely so heavily on a payroll tax that allows no deductions and takes the same percentage from everyone regardless of their ability to pay.

“The United States almost certainly now has the most regressive tax structure of any Western nation,” he said. “This is so because the Social Security payroll tax--which is decidely regressive--has come to make up an increasingly larger share of total federal tax levies.”

About three-fourths of all wage-earners, he said, will pay more in Social Security taxes in 1990 than they will pay in federal income taxes, which are more geared to the ability to pay.

Under the legislation that Moynihan will introduce when Congress reconvenes in late January, an increase in the Social Security payroll tax to 7.65% from 7.51%, due to take effect Monday, would be repealed.

If the 1990 tax is held at the 1989 rate of 7.51%, the savings for those paying the maximum would be about $72. In 1991, those earning more than the estimated maximum wage base of $54,300 would pay about $600 less than they are scheduled to do if the law is unchanged, Moynihan said.

Starting in 1991, the tax rate would be lowered to 6.55% under the Moynihan plan.

With the changes, Moynihan said, the nation’s basic retirement system would revert to financing on a pay-as-you-go basis--or setting the tax rate at the lowest level needed to produce enough revenues for current benefits.

“This approach will eliminate the current regressive financing of the budget deficit, while keeping Social Security on a sound financial basis,” the senator said.

Robert J. Myers, who was chief actuary of the Social Security system for nearly a quarter of a century, has advocated a return to pay-as-you-go financing, the method used for decades to provide payments to beneficiaries.