THE FIRST THING to be said about Social Security reform is that it is inevitable. The second thing is that President Reagan's proposed Social Security cuts are a serious mistake -- grossly inequitable, larger than necessary and not even consistent with his own "supplyside" economics.
The most blatant flaw in the proposal is its punitive treatment of future retirees. The proposal amounts to a whopping 30 percent benefit cut for those who will retire between ages 62 and 65. That does not mean a 30 percent cut merely for three years, but for the rest of their lives.
One reason these early retirees now get only 80 percent of "normal" payments is to spread the benefits over their longer average retirement. The Reagan proposal would slash this to 55 percent, from to current average of $370 a month to $250.
As is now case, benefits would stay at this much lower level throughout the retirement years. The accumulated loss to an average workers retiring at 62 would amount to $23,000 in today's dollars.
Another reason for reduced early retirement benefits is to discourage early exits from the labor force. This hasn't worked very well; at present, 70 percent of all people who retire do so between 62 and 65. The Reagan proposal could well stem this early retirement tide, as it is intended to do.
Few older persons can afford to absorb income losses of the magnitude he is suggesting. Even under current standards, 14 percent of all older persons live in poverty. Millions more are kept out of poverty only by Social Security benefits. Many such people, therefore, would be forced to stay at jobs -- if they are still able to hold jobs.
The inequity of all this striking. Nobody else is being asked to take a financial cut of this scope in the name of fiscal austerity. Why should those retiring next year get far smaller benefits than those retiring this year? Both groups worked just as long and paid roughly the same payroll taxes. Indeed, future retirees will have paid much higher taxes than today's retirees because of continually rising Social Security tax rates. What we end up with is this: The generation that has paid the highest taxes in history is left with the lowest benefits.
President Reagan, of course, has vowed not to cut benefits of retired persons; they were to be regarded as among the "truly needy." That promise has now been interpreted, in very literal terms, to refer only to those already retired. The disingenuity of classifying today's retirees as "truly needy" and tomorrow's as not so it self-evident.
Nor are the Reagan arguments for this attack on future retirees very compelling. The administration is quick to point out, for example, that life expectancy has increased since 1935. In 1935, a 62-year-old had a life expectancy of 14 years; today it is 16 years. Hence, today's workers allegedly can postpone retirement for a couple of years without shortening their retirement.
But longer life expectancies are a potential sources of extended retirement as well as of additional work. There is no reason to deny older persons either option. The Reagan proposal, in fact, effectively compels people to overcompensate for increased life expectancy and accept shorter retirement.
The president's benefit cuts are also defended on the basis of increased work incentives. Under present law, workers aged 65 and over lose 50 cents in Social Security benefits for ever dollar they earn above $5,500 a year. This 50 percent marginal tax on earnings, added to normal income and payroll taxes, leaves older workers facing some of the highest tax rates in the country. The administration proposes to phase out this "earnings limitation," thereby providing greater incentives to continued employment.
Strangely, its incentives for continued employment are not extended to those 62 to 64. Under present law, such persons lose 50 cents in benefits for every dollar earned in excess of $4,800 a year. Yet the administration has not proposed to end this stringent earnings limitation. Potential early retirees confront only the stick, not the carrot.
Even if better incentives were available to those 62 and 65, through, not all of them could work. Job loss, long-term unemployment and declining health are also important factors in early retirement. These people would be left out in the cold by the administration proposal. Whatever the merits of denying a viable retirement option to people who can continue working, they don't apply to older persons without employment possibilities.
The question here is not whether Social Security must be reformed. The Social Security Trust Fund will be overwhelmed by the coming "seniors' boom." This is not a forecast; it is a demographic certainly. The post-war "baby boom" will start retiring after the year 2010. By the year 2025 the aged population will be twice as large as it is today. If the Social Security system is to survive, either benefits must be reduced or early retirement trends changed.
But the president's proposal, while responding to both short-term budget pressures and long-term Social Security deficits, is not the way to go. The price it exacts is too high in terms of intergenerational inquity, increased hardship among the poor and insufficient work incentives.
At a minimum, any benefit reductions must be spread more evenly. There is no reason to hold tomorrow's retirees hostage to Reagan's campaign promises. There are more equitable ways of sharing the budget-cutting burden, including across-the-board reductions in Social Security's cost-of-living adjustment and smaller penalties for early retirement.
Alternative mechanisms for encouraging delayed retirement should also be explored. At a minimum, the earnings limitation should be lifted for workers 62 to 64 so that they, too, have an incentive to continue working. This kind of voluntary, "supplyside" approach would certainly be more consistent with the president's economic philosophy than the punitive reforms now proposed.
Finally, the administration and the Congress should consider permanently distinguishing older workers from actual retirees. One-fifth of all "retirement" benefits now go to older persons still working. Should they really be included on the roster of Social Security beneficiaries? If we restricted retirement benefits to retired persons, there would be no Social Security crisis.
Older workers could be compensated for their lost benefits with general employment tax credits. This clear separation of workers and retirees would allows us to respond to the unique needs of each group. We could provide increased incentives for workers without sacrificing the economic security of retirees.
Although the president's proposals are deeply flawed -- and poorly timed, because they will deflect debate from his broader economic program -- they do have some merit. Until now, few politicians have been willing to "take on" Social Security reform. The president's initiatives will embolden Congress to debate this difficult issue. Hopefully, the debate will result in reforms that both encourage employment of older workers and minimize inequities.