Just a Little Maintenance

We Can Fix Social Security, If We Can Manage the Politics

On April 20, 1983, Republican and Democratic congressional leaders joined President Ronald Reagan at the White House to sign landmark legislation strengthening Social Security. They were addressing a genuine crisis. Beginning in the 1970s, a lethal combination of high inflation and high unemployment had sent benefit payments soaring as payroll tax revenues dwindled.

"Just a few months ago," Reagan noted, "there was legitimate alarm that Social Security would soon run out of money. On both sides of the political aisle, there were dark suspicions that opponents from the other party were more interested in playing politics than in solving the problem." But then, he said, a bipartisan commission found a solution, political leaders of both parties "set aside their passions," and a compromise was reached.

If only that were true today. Now, with the baby boom generation nearing retirement, Social Security needs another adjustment. The mechanics of fixing the program aren't complicated, but the politics of fixing it are. The problem isn't so much insolvency as it is ideology. I served on that 1983 commission, representing then-House Speaker Thomas P. "Tip" O'Neill, the Democrat from Massachusetts, and I know that repairing Social Security is well within our grasp -- all we need is the political will.

Much has been made recently of Reagan's innate optimism, but even the late president would be hard put to bring Democrats and Republicans together today in the "spirit of compassion and commitment" that he invoked 21 years ago. Back then, Reagan reaffirmed "for all time our nation's ironclad commitment to Social Security" and said the bill "struck the best possible balance between the taxes we pay and the benefits paid back." By contrast, the present occupant of the White House has committed himself, if reelected, to begin dismantling the Social Security system by introducing private savings accounts to be financed, in part, by siphoning off some of the payroll tax revenue now committed to Social Security.

Meanwhile, on Capitol Hill there is no discernible interest among Republican leaders in the kind of bipartisan spirit whose essence, as Reagan noted, "is to give up a little in order to get a lot." And the Democrats' strategy is to say "leave the system alone" and let Republicans make political mistakes by proposing changes.

So we appear headed for another standoff. But it doesn't have to happen.

First, let's consider the nature of today's challenge. There's a high probability that Social Security faces a long-term imbalance of revenues and expenses, which, if left unaddressed, could eventually lead to insolvency. But even the experts aren't sure whether the shortfall will be minor (and relatively easy to close) or not so minor.

Indeed they can't be sure. For long-range planning, Social Security's trustees make 75-year forecasts. This is a highly uncertain exercise. Think about a 75-year forecast made in 1929. No matter how astute, it couldn't have foreseen the Depression and World War II, either of which would have skewed any forecast beyond recognition. We need to keep that cautionary tale in mind as we consider the forecasts that drive the Social Security debate today. They're planning aids, not prophecies cast in stone.

The reports released this year by Social Security's trustees and by the Congressional Budget Office (CBO) provide further evidence of this uncertainty. The estimators are nonpartisan professionals using their best judgment. But CBO anticipates a long-term deficit about half as large as the one foreseen by the trustees.

Does it matter which forecast is closer to the mark? Not really. Even the trustees anticipate an eventual shortfall of relatively small size: about 2 percent of payrolls. Reagan and O'Neill could have worked with a gap of that size. We can, too.

Most of the financing for Social Security comes from deductions from workers' earnings and taxes on employers' payrolls. Closing the financing gap means raising tax revenues or lowering benefits in one form or another. But that doesn't mean we have to raise payroll tax rates across the board; nor do we have to do radical surgery that would alter the nature of the program. All it requires are changes that should be made in any event. If these changes produce more deficit reduction than needed, I would urge their adoption anyway and a cut in the payroll tax rate.

I want to propose four such changes:

• Raise the tax ceiling to cover more of what high-income earners make. Right now, workers and employers don't pay Social Security taxes on any individual earnings over $87,900 a year -- limited contributions for limited benefits. That ceiling is adjusted every year. In 1983, Congress set a ceiling that would subject 90 percent of covered earnings to the Social Security tax. Currently, however, only about 85 percent of covered earnings are being taxed (and credited to workers' accounts for purposes of calculating benefits). This is a major reason why Social Security faces a long-range deficit.

This isn't the result of any policy change, but rather the accidental byproduct of the fact that over the past 20 years incomes of those above the ceiling have risen much faster than the incomes of those below. To gradually restore coverage to 90 percent, we should boost the cutoff point by 2 percent more each year than would occur under current law, which automatically raises the ceiling by the amount that average wages increase. By 2036, the goal would be reached.