The Post noted, with appropriate alarm, that the large Social Security surpluses scheduled to begin next year will do little good if the deficit in the rest of the budget gobbles them all up {editorial, July 5}. Although this concern is well founded, The Post then suggested actions that are internally inconsistent and potentially harmful.

The surpluses result from the 1983 congressional decision to collect more in payroll taxes than Social Security costs and thereby build up large reserves to help pay for future retirement benefits of baby boomers and to shield future workers from some of the costs. These surpluses serve their purpose, however, only if they find their way into productive investment at home or abroad. By letting budget deficits divert Social Security surpluses into paying for current government spending, The Post suggests, we are "fooling ourselves."

The Post recommends a solution with three parts. The first element is a reduction in the budget deficit, undoubtedly sound advice, although The Post says not one word on how to accomplish it.

The other two elements are not so benign. The Post would cut payroll taxes to forestall the accumulation of the large reserves that will build up under current law. It seems churlish to suggest that tax cuts are bad things, but the simple fact is that the baby-boom generation will retire one day. When they do, they will claim large amounts of Social Security benefits. These costs could be met, as The Post urges, by taxes imposed on workers then in the labor force. But that course would merely place heavy burdens on the relatively small cohorts that will then be working, an action that is unfair and would jeopardize political support for benefits that the baby boomers would then be receiving. The logic behind the 1983 legislation -- that the baby boomers should be asked to pay their own way -- was sound then. It is sound now.

In any event, the debate about how large the Social Security reserves should eventually become is currently a bit academic. Reserves sufficient to cover benefits for at least one year, and preferably as much as two, are necessary to spare the nation the need to raise taxes in the midst of a recession. Reserves are currently sufficient only to cover about four months of benefits. The reserves must be allowed to build up for nearly a decade just to create a prudent cushion.

The Post's second suggestion calls for the investment of Social Security reserves in private companies. This idea is based on the presumption that if the Social Security reserves are invested in U.S. government securities they do not add to private capital formation.

Though superficially plausible, this notion is wrong. Investing a Social Security surplus in government securities reduces the amount that the federal government must borrow from the public. By borrowing less from the public, the federal government leaves a larger part of private saving for private individuals and businesses to invest at home or abroad. Hence, increased Social Security surpluses add to funds available for private investment, even if they are used initially to buy government securities.

To be sure, the Social Security system might be empowered directly to invest in private assets. In that event, the federal government would have to increase the amount it borrows from the public by exactly the amount that the Social Security system invests in private assets. Such a course would do nothing to increase the flow of capital to private investments. But it would embroil the federal government in endless controversy over the purchase and sale of private securities and introduce major uncertainties into Social Security planning. Congress for 50 years has resisted suggestions that Social Security reserves be invested in private assets. For good and sufficient reasons.

The beginning of understanding about both the budget crisis and Social Security financing is to recognize, first, that the Social Security system is running a surplus and, under current law, will do so for decades and, second, that the budget apart from Social Security is deeply in the red. While one could reduce the overall deficit by enlarging Social Security surpluses still further -- using payroll taxes to pay for defense, so to speak -- the direct solution is to cut expenditures outside the Social Security system or to raise general taxes.

Once such measures are taken, the logic of the Social Security amendments enacted in 1983 -- to build up large Social Security reserves to help pay for the retirement costs of the baby-boom generation -- is sound. Because the Social Security system will be running a surplus and the rest of the government would then be in balance, the federal budget as a whole would be adding to national saving. The interconnectedness of American capital markets guarantees that these funds will find their way into private investment. That investment will increase national income. When the baby boomers retire, the nation will be better able to shoulder the burden of supporting them.

Henry J. Aaron

The writer was chairman of the 1979 Advisory Council on Social Security.