SOCIAL SECURITY

The Why of the Tax Increase

ON Jan. 1, the deduction for social security from pay envelopes will increase automatically from 1 1/2 to 2% of the first $3,600 in wages--to be matched, as is now the case, by employers. Whether this increase should be rescinded may be the first order of business before Congress. Since President Eisenhower has once asked Congress to freeze the rate at 1 1/2until Jan. 1, 1955, he may do so again.

The main Republican argument for postponing the rise is political. (The boost, once scheduled to go into effect in 1943, was postponed after a fight led by the late Senator Arthur Vandenberg.) Some Republican Congressmen argue that the 10% cut in income taxes on Jan. 1 will be more than offset for workers in low tax brackets by the larger social-security payment. Actually, this is a weak argument. At the new rate, unmarried workers will get less take-home pay only if their taxable incomes are under $800 a year: married couples without dependents only if their income is less than $1,500, and families with two dependents if they make $3,000 or less. At most, the loss in take-home pay will be $12.50 a year. But some Congressmen are pushing for the freeze anyway, thinking it good politics in an election year. This is questionable, especially since such an old hand as Dan Reed, chairman of the powerful House Ways & Means Committee, is dead set against a freeze. He believes that if Americans want social security, they ought to pay for it. (The hike would also mean more revenue for the Government, and a smaller cash deficit next year.) Furthermore, unlike most taxes, those who will pay for the boost are solidly for it. Labor and employers, most of whose pension plans are tied to social-security payments, fear that unless social-security income is stepped up. benefits will suffer. While the social-security system is still young, the Government is piling up an annual surplus of income over benefit payments ($1.4 billion last year alone), and has built up a trust fund of $18 billion. But by 1957, at the present rate of contributions, the fund will be paying out more than it takes in.

Thus those in favor of the hike argue that the Government will not be able to meet its obligations to the 48 million Americans now covered by social security without more income for the fund. At the present 1 1/2rate of contributions, the trust fund will be exhausted by 1967, but at 2% it would last until some time after 1975. And if later scheduled increases (to 2 1/2% in 1960, 3% in 1965, and 3 1/4% in 1970) go through, the trust fund will exceed $65 billion by century's end.

Another pressing reason for raising social-security contributions is that the Administration wants to expand benefits and extend old-age and survivors' insurance to 10.5 million Americans not now covered. The inclusion of 6,500,000 would be mandatory under the Administration plan, including 3,000,000 self-employed farmers, about the same number of farm and domestic workers, and 500,000 professional workers, such as doctors, dentists and lawyers. Clergymen and state and local government employees could join if they chose. The Administration is also considering: 1) an increase in benefits, perhaps by $5 or $10 a month, to those now receiving them, and 2) a flat $30 a month to 5,000,000 retired oldsters who have never contributed to social security, and thus get no benefits now. To meet these big new expenses, the Administration will probably ask to broaden the social-security tax base from the first $3,600 of earnings to as much as $4,800.

There is also a strong move, sparked by the U.S. Chamber of Commerce, to put social security on a pay-as-you-go basis. This idea got support from the President last May in a message to Congress. The Chamber of Commerce argues that there is no need to build up a large social-security trust fund. Instead, it wants a revolving fund large enough to safely handle current payments. Under pay-as-you-go, the rate of contributions by workers and employers would be periodically adjusted to bring in what the Government has to pay out in benefits. Labor unions oppose pay-as-you-go; they believe that businessmen want it only because it would lighten their social-security taxes for years, at least until benefits exceed income. Eventually, under pay-as-you-go, the contributions tax by both employer and employee might go to 4% or more to cover benefits.

But pay-as-you-go would spotlight the actual cost of social security and would stop the Government from using social-security taxes to pay other Government bills. It would also lessen the danger that the social-security program, under political pressure, might degenerate into an overliberal program of Ham & Egg handouts from a big trust fund already piled up. The big virtue of pay-as-you-go is that if any pressure group tried to change social-security benefits to its advantage, the added tax would show at once.

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