DURING HIS Wednesday press conference, President Reagan repeated a point he has made frequently in defending his campaign decision to put Social Security off limits for budget cuts. "Social Security," he said, "is not part of the deficit problem. It is totally financed by a payroll tax. . . . If Social Security spending were reduced you could not take that money saved and use it to fund some other program in the deficit." How right is the president?
Economists will point out that, as far as the drain on private investment capital is concerned -- which is the main reason for worrying about deficits -- it makes no difference at all which programs are net contributors to or drains on the Treasury. If Social Security payroll taxes exceed benefit payments, the surplus in the trust funds is invested in Treasury bonds and thus can be used to finance other programs. That's why Social Security is, properly, included in the unified budget, which measures total federal outgo for comparison with total federal revenues.
But while the president's statement is not strictly correct in terms of Social Security's impact on the deficit, he is making another important point. Social Security retirement and disability benefits are financed by a "regressive" payroll tax -- that is, a tax that takes a much higher proportion of incomes in the low and moderate range than it does of higher incomes. This higher burden on lower incomes is justified by the fact that the benefits paid for by the payroll tax replace a higher proportion of incomes at lower levels.
It would, however, be very unfair to cut Social Security benefits substantially, leave the payroll tax intact, and build up a big surplus to offset defi- cits elsewhere in the budget. This would amount to making lower-income people pay for the fact that corporate and personal income taxes are too low to pay for other domestic and military spending.
There are reasons, however, why some restraint on Social Security benefits would be justifiable. One is simple fairness. Current Social Security beneficiaries are entitled to benefits far exceeding their own past contributions. Many people receiving Social Security are in poverty or on the brink, but most are not. If you are going to make further cuts in other programs that primarily serve the needy, it seems fair to ask some sacrifice from middle- and upper-income beneficiaries as well.
Despite recent reforms, the Social Security trust funds could use an extra cushion of cash both to protect the retirement fund from the effects of another recession and to delay further the time when the Medicare fund goes into the red. That's why the president said that an "overwhelming bipartisan majority" in Congress just might persuade him to let a temporary freeze on other non-military spending extend to Social Security. Not surprisingly, House Democrats promptly declined to take on that responsibility. But if Congress and the White House get serious about deficit control, Social Security is likely to be called for some contribution.