Having observed Congress and the president labor mightily to bring forth a deficit-reduction mouse, some commentators, self-designated wise men, and a few elected officials have concluded that real progress in cutting the deficit cannot be made until Congress cuts Social Security benefits. A little bit off the cost-of-living adjustments, commentators like Peter Peterson and Martin Feldstein speculate, wouldn't hurt anyone.
But a case for singling out Social Security can be made only if this program has contributed significantly to the budget deficit, if benefits are excessively generous or if recipients are economically privileged. The facts clearly do not support any of these conditions.
The Social Security program is big (some 20 percent of the budget), and it has been growing rapidly (144 percent over the last decade). But it has not contributed to the deficit problem. Financed by a dedicated tax that is yielding far more than benefits and program administration cost, the Social Security system is an island of budgetary surplus in the midst of an ocean of red ink. During fiscal year 1987 the surplus in the Social Security system was $19 billion. The surplus will jump to $38 billion in 1988 and $69 billion by 1992.
The surpluses exist largely because of payroll tax increases enacted by Congress in 1983 and signed into law by President Reagan. And these surpluses are being accumulated for a reason: to pay the anticipated costs of the pensions due when the baby-boom generation retires. But to suggest that Social Security is part of the current deficit problem is lunacy.
In fact, the surpluses being accumulated by the Social Security system are already a big part of the apparent "solution." They offset a portion of the deficit in the rest of the budget and, therefore, reduce the deficit estimates widely cited in the press. Without the increases in the Social Security surpluses, the deficit anticipated for 1992 would be $50 billion larger.
What about the possibility that benefits may, in some sense, be unneeded or too generous? While much has been made of the recent improvement in the economic position of the elderly, it is important to realize that this has only brought the aged into approximate economic parity with the rest of the American population. This major accomplishment should not be confused with economic privilege. The average Social Security benefit in September 1987 was $491 per month for retirees, $449 for aged widows and widowers.
Although average benefits are modest, no one should doubt that the economic status of the aged hinges critically on these payments. Social Security benefits make up 38 percent of the income of the elderly. Social Security constitutes more than half of the income for 53 percent of the elderly. Any large cuts in benefits would push some of them below the poverty threshold and return many to the position of economic inferiority from which they only recently emerged. Fully 8.1 percent of the elderly have incomes less than 25 percent over official poverty thresholds, compared with 4.7 percent of the nonelderly.
While the case for cutting Social Security benefits is weak, it is only responsible to expect that all segments of American society will have to sacrifice something if significant deficit reduction is to be achieved. In this spirit, Social Security recipients should make some contribution.
But across-the-board reductions are not the way to impose them, and cutting the annual COLA is just about the worst. To understand why, consider the proposal advocated by Martin Feldstein and some others to provide cost-of-living adjustments only for inflation in excess of 2 percent per year. In time, this formula would ensure that the oldest and most vulnerable in society would suffer the greatest income loss. An 85-year-old retiree, who probably has used up most of her savings and faces high medical bills, would receive benefits nearly one-third smaller than she received at age 65. A totally disabled 25-year-old could rest assured that his benefit would be cut in half by the time he turned 60. Such a grotesque proposal deserves not serious debate, but derision.
Another proposal, to grant cost-of-living adjustments only on the first 2 percent of inflation, is equally nonsensical. This formula would protect beneficiaries from small adversities, but leave them unprotected against the calamity of rapid inflation.
If Congress and the president decide to take a real bite out of the deficit, not the $30 billion nibble announced Nov. 20, the most sensible way to curtail net Social Security is to subject an increased portion of the benefits to the income tax. Currently, a couple must include in its taxable income the lesser of 1) half of its Social Security or 2) the amount by which its adjusted income exceeds $32,000 if its regular income plus half of its Social Security income and all of its tax-free interest income exceed $32,000. The comparable threshold for single individuals is $25,000. These thresholds could be lowered or eliminated, or the fraction subject to tax could be increased to 60 or 70 percent.
Such changes would make the tax treatment of Social Security more comparable to that of private pensions. They could contribute to a grand deficit-reduction compromise that included other spending cuts and significant tax increases. Moreover, they could do so without reducing the incomes of that large portion of the retired population that is clinging precariously to its modest, but not sumptuous, standard of living.
The writers are senior fellows at the Brookings Institution. Henry J. Aaron is also a professor of economics at the University of Maryland.