No Bankruptcy

Nearly four decades of half-truths have finally caught up with Social Security. The system is as sound today as it has ever been, but Social Security Administration officials are trying to convince a suddenly skeptical public that the program is not on the edge of bankruptcy. They are having a hard time because for so many years boosters pretended that Social Security is an insurance plan.

The immediate source of concern is the Social Security trust fund, which in the popular mind has become analogous to the reserves insurance companies set aside to make sure that they can pay claims in the future. The Social Security trust fund now stands at $44 billion, but last year it dropped by $1.8 billion as Social Security tax collections fell behind benefits paid out. This year benefit payments of $78.2 billion are expected to run $4.4 billion ahead of income, pulling the trust fund down to less than $40 billion. By 1981, according to projections in the President's budget, the fund will be depleted to $23.4 billion.

Many of the 32 million people who get Social Security checks--15% of the entire U.S. population--are afraid that the fund will become exhausted and their benefits at some future date stopped.

Supporting Strength. There is no such danger; the system is exactly as sound as the U.S. Government itself. Its ability to keep the benefit checks flowing rests not on the amount of money in the trust fund, but on the Government's unquestioned power to collect taxes--and on Social Security's overwhelming political support among the people who pay those taxes. The system does need more money, from somewhere. But no lucid analysis of its requirements is possible so long as the idea that Social Security is insurance, rather than a federal tax, dominates debate.

Under a straight insurance plan, an individual pays premiums and gets in return a policy promising to pay a certain sum to his heirs if he dies early, or to himself if he lives long enough to retire.

The payments are determined strictly by the size of the premiums paid. The original Social Security Act of 1935 set up the system in much the same way:

workers would pay taxes that would be a kind of premium and "earn" the right to receive benefits when they retired.

But in 1939, before the first benefits were paid,* Congress amended the act to base payments partly on need--a concept foreign to true insurance. Low-income workers get retirement benefits that replace a larger proportion of their former earnings than the benefits of high-income workers do. A retired worker with dependents collects more than one without, even if both have paid exactly the same amount of taxes into the system, and there is a minimum level of benefits available to someone who has paid very, very little.

As a result, Social Security has become not insurance, but what economists call an "intergenerational transfer program." Today's workers pay taxes to support yesterday's workers who are retired or disabled. In turn, today's workers must rely on the willingness of their children's and grandchildren's generations to continue to make this sort of transfer. Thus the trust fund is not, never has been, and never can be large enough to meet all potential claims on the system: that would require several trillion dollars. Its true purpose is to provide a cushion out of which benefits can be paid while Government officials decide how to meet financial needs.

Those needs are enormous--because Social Security has become far more generous than any private insurer would ever be. Today the system pays more in benefits to some people in a single year than they have contributed in taxes through their entire working careers. Also, in the '50s and '60s, the Government expanded the system so much that the only major group of employees not covered now are those who work for the Federal Government and some state and local government workers. Congress has never seen fit to include them, and they now have their own, separate pension plan. Benefit levels have been greatly increased, and a 1972 law tied them to movements in the consumer price index so that they are automatically lifted every year by inflation. Among other things, Social Security pays the Medicare hospitalization benefits of the elderly and picks up bills for kidney dialysis treatments for patients of all ages.

But Social Security is still financed as if it were insurance. Virtually no general tax revenues, such as those raised by individual and corporate income taxes, go into the system. It relies almost exclusively on a special payroll tax levied equally on employer and employee: currently each pays 5.85% of a worker's earnings up to $15,300 a year. The tax has risen sharply. As recently as 1965, the maximum Social Security tax that any worker paid was $174 a year; now it is $895.05. The tax has become a major burden on many low-income workers: an employee earning $7,999 a year may well pay more in Social Security taxes ($467.94) than he does in income taxes ($463). Still, that is not enough to cover the greatly expanded benefits.

Boost Proposed. What to do? President Ford proposes raising the payroll tax to 6.15% on employer and employee alike, beginning in 1977. That would cost someone making $10,000 a year an additional $30. By Ford's calculations, the boost would increase tax collections above anticipated benefit payouts, so that the trust fund would swell to $65 billion by 1981.

Critics in and out of Congress doubt that that is the best way to cover benefits. The payroll tax is regressive: it takes a bigger bite out of the wages of a low-income worker, relative to his ability to pay, than out of the earnings of a high-salaried employee. There are no deductions; anyone earning more than $50 in a quarter pays 5.85%, period.

Also, an increase in the tax would be inflationary, because it would add directly to employers' costs: a company would have to send more of its own money to Washington for every worker on its payroll. An increase in the income tax does not have the same effect. Arthur Okun, a member of TIME'S Board of Economists, calls Ford's proposal "a perverse fiscal policy of the worst sort."

Explaining Ford's proposal to a House Social Security subcommittee last week, David Mathews, Secretary of Health, Education and Welfare, ran into similar flak. Asked Representative Abner Mikva, an Illinois Democrat: "How do you explain to a factory worker that money withheld from his paycheck, over which he has absolutely no control, is not a tax?" Mikva says that the time has finally arrived "to blow the whistle" on the ideas that Social Security is an insurance program and that the payroll tax is somehow different from other taxes.

The Democratic majority on the subcommittee plans to weigh Ford's proposal against other alternatives. Two major ones:

1) Raise the wage base on which taxes are levied, perhaps to $25,000 in 1977. That would make the tax less regressive by hitting higher-paid workers more heavily.

2) Finance benefits partly out of general tax revenues. A Social Security advisory council recommended last year that Medicare hospitalization benefits be paid for out of general funds.

The subcommittee chairman, Representative James Burke of Massachusetts, has lined up more than 100 co-sponsors for a bill that would raise the wage base, use general revenue money, and cut the payroll tax rate from the present 5.85% to 3.9%. But he faces stiff opposition. President Ford at his budget briefing argued that with any use of general revenues to finance Social Security, "you are in effect losing the concept that a person working is paying for his or her retirement." Social Security Commissioner James Cardwell fears that reliance on general revenues instead of payroll taxes would be "an open invitation to enlarge the program." As the financial burden of a larger program began to pinch, Cardwell believes, the idea of an "earned right" to benefits would be dropped.

The Burke subcommittee, disliking Ford's plan and knowing that an alternative is unlikely to pass, may well report no bill at all this year. That would leave even Social Security's short-term financing problems unsolved. Longer-term difficulties are approaching too, mostly because of demographic trends.

After approximately the year 2005, when large numbers of people born during the post-World War II baby boom begin retiring, there will be a rapid increase in the number of individuals receiving benefits relative to the number of people working. Between 2005 and 2035, the combined payroll tax on employer and employee would have to rise from about 12% of covered earnings to more than 16% of covered earnings, according to the Social Security advisory council. Should birth rates turn upward again, this long-range financing problem would be smaller. But if they decline or turn up less than the council assumed in making its projections, the problem would be worse.

Expensive Question. None of the system's difficulties are likely to be resolved as long as the idea that Social Security is insurance persists. The system is largely a tax-financed welfare program--worthwhile and indeed essential, but very expensive. The question, as Cardwell puts it, is: "How much are the American people willing to pay for what level of benefits?" That is a question that the nation must face up to--and soon.

* Congress decided that taxes had to be collected for several years before any benefits could be paid.

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