Come 12:01 on the morning of January 1, the Social Security tapeworm will celebrate the New Year by curling up for a delicious new feast, compliments of America's wage earners. Because of legislation passed in April 1983, ostensibly designed to stave off the bankruptcy of Social Security, the ravenous system will take an even larger bite out of paychecks than before.
For those unfortunates already paying into the system, the Social Security tax will go up from 6.7 percent to 7 percent and the maximum annual contribution (calculated for a wage base of $37,500) will rise from $2,392 to $2,625. These are only the first squiggles in a long-term upward spiral. By 1990, the Social Security tax rate is scheduled to rise to 7.65 percent and the maximum contribution to $4,200.
New Year's Day will also mark the addition of new dishes for the system's ever-growing appetite. Most notably, the paychecks of newly hired federal workers and of all employees of nonprofit organizations will be subject to the same tax-and at the same rate-as their fellow workers.
It is instructive to recall that the 1983 legislation, the tapeworm's new meal ticket, came about as a result of the Social Security Crisis. Those with long memories will recall that in early 1983, Social Security pushed nuclear weapons to a distant second in the hierarchy of crises, and that old chestnut the Energy Crisis was nowhere to be seen.
Normally when a crisis is announced, the single best policy that Washington could (but usually does not) adopt is doing absolutely nothing. What these crises really signify is that some entrenched bureaucracy is eager for a raid on the Treasury. If it gets what it wants, things will surely get no better and will probably get worse. If the worry is why Johnny can't read, the response is to toss federal dollars into education, create a new cabinet-level agency, and watch sat scores plummet to the level of a utility infielder's batting average. If OPEC connives to raise the price of oil, the government declares an energy crisis, baptizes yet another cabinet post, and produces lines at gas pumps that would gladden the stern heart of an ayatollah.
Unfortunately, when the crisis is itself the direct fruit of misguided governmental policy, the usually sound advice doesn't always apply. Such is the case with Social Security. A string of presidents and congresses have shown their compassion for America's aged (and, incidentally, for their own incumbency) by creating an actuarially unfunded debt of $6 trillion, give or take a trillion. Pundits now learnedly debate whether the system will go belly-up before 1990 or expire in a sea of red ink early in the 21st century. If you believe the former, you are officially dubbed a "pessimist," if the latter, an "optimist."
The response to this particular crisis observed all the traditions. First the president's National Commission on Social Security Reform spoke, and then a resounding echo was heard in the Congress. The results were entirely predictable. Your newly revised version of Social Security features not only higher payroll taxes but also a tap on the Treasury's general revenues, the inclusion of millions of formerly exempt warm bodies, a brief pause in cost-of-living adjustments, and some taxation of retirement benefits. Chances are now excellent that no Social Security check will bounce anytime in the next decade.
Polite folk and those who have taken to heart John Maynard Keynes's dictum, "In the long run we are all dead," will not inquire further. However, the rest of us are advised to refrain from applause just yet. In his State of the Union address last year, President Reagan warmly applauded the bipartisan spirit that generated this pact, reserving special praise for the Speaker of the House, not hitherto noteworthy as a recipient of Reagan's plaudits. Such comradely benedictions indicate either that a new spirit of statesmanlike fellowship roosts on Capitol Hill or that taxpayers should grab for their wallets.
The package is-pick one-a delusion or a disaster. The tax increases called for will slow or halt recovery. Solvency in the near term requires that optimistic economic forecasts come true-not a good bet on the past record. Nothing has been done to address the dilemma for Social Security early in the next century, when the postwar baby boom generation retires with few wage earners available to support it. Indeed, the legislation has exacerbated this problem. By dragooning government employees into the system, funds will be made available in the near term, but at the cost of many more checks to mail out a few decades hence. Most important, "reform" measures have done nothing whatsoever actually to reform the system-Social Security will continue to be a ripe target for political gamesmanship. It is a near certainty that periodic crises will remain with us. What then should be done?
In fact, there is no quick fix to the Social Security dilemma, else I would have announced it two paragraphs back. Raising the tax rate promises to produce supply-side miseries that will multiply unemployment; but to cut promised benefits to the elderly would be to default on the compact between government and citizen. Nor, in case one has failed to notice, does there exist a healthy Treasury surplus from which funds can be obtained.
Perhaps there is no very attractive solution to the Social Security mess. Then we must look to the least bad response that can be designed. The following four criteria ought to be applied to proposed strategies as a test of their political, economic, and moral soundness:
(1) Whatever plan is adopted must not leave economic carnage in its wake. Part of the reason for Social Security's current parlous state is the fact that our economy has been in the doldrums for a decade. Prolonging or increasing economic misery is no way to secure the financial foundations of Social Security or of any other government program.
(2) The fact that past congresses and presidents have lavishly promised benefits through Social Security which they have failed to fund adequately may amount to malfeasance of duty. It does not follow, though, that ill-made promises are null and void. Those now past or approaching their 65th birthday have planned for retirement with the expectation that Social Security will be there to meet a large chunk of their needs. Those expectations carry moral weight even if they rest on political legerdemain. It would be unjust to violate them at this late date.
(3) Those Americans who had the good luck to be born between 1880 and 1920 have enjoyed and will continue to enjoy benefits from the retirement provisions of the Social Security system far in excess of their contributions to it-perhaps averaging five times greater than what an actuarially sober pension plan would have afforded. To put it another way, Social Security is 20 percent pension, 80 percent Ponzi scheme. That means that younger participants must inevitably be net losers. It is too late to take back any but a negligible amount of benefits from pre-1920 generations. What can be done, however, is to spread the losses as evenly and fairly as is now possible among the various age groups. Any proposal that pretends to offer a way out that hurts no one must be viewed with a jaundiced eye.
(4) Whatever remedy is offered must realistically address the problems that actually exist and, above all, be immune to recurrent financial hemorrhages a few years down the road. Congresses and presidents have repeatedly produced legislation advertised as "solving" the problems of Social Security; as recently as 1978, President Carter announced that he had signed a bill guaranteeing the soundness of the system through 2030. The gloomy record of repeated past failures should make it clear that superficial tinkering with tax and benefit schedules can, at best, temporarily postpone the day of reckoning.