The Post's editorial opposition to repealing the Social Security earnings test {"A Bad Idea on Social Security," Dec. 2} rests largely on the notion that Social Security "was not created simply to reward old age. It is not a savings but an insurance program against the loss of income on retirement. Like all insurance programs, it pays only if the thing insured against occurs." This argument would be valid if American workers paid into the Social Security trust fund understanding it to be an insurance program, but they do not.

The American worker today views Social Security as a government-imposed savings plan. This perception facilitates continued funding of the Social Security system, for few workers would willingly contribute 7.5 percent (which will be the Social Security tax as of Jan. 1) of their gross income without taking solace in the notion they will get the money back some day. Funding a program under the impression of forced savings but paying benefits on the basis of an insurance program is a deceptive government practice.

The editorial does make some salient points regarding the benefits such repeal would harbinger for upper-income retirees, but its embrace of the earnings test seems hidebound. Thoughtful reform of the earnings test could aid "the little guy," without helping "more doctors than dishwashers." Since the earnings test does not apply to unearned income such as savings, pensions and other assets, which are predominantly characteristic of higher-income retirees, the test actually discriminates against the lower- and middle-class workers who want to avoid sole reliance on Social Security benefits.

Indeed, there are many elderly workers today who are being paid "under the table" in order to skirt the law. At a recent informal hearing by the House Republican Research Committee's task force on regulatory reform, which I chair, a spokesman for the National Alliance of Senior Citizens said reforming the earnings test "would make honest people out of honest people who by this law have been forced to be dishonest."

The present cap on earned income of $8,160 for normal beneficiaries is much too low. Who is affected by this limit? Any older American working full-time for more than $4.08 an hour. Earnings above the limit lead to an effective federal surtax of 50 percent. Added to the 7.5 percent Social Security tax and the lowest federal tax bracket of 11 percent, a beneficiary working full-time for $4.09 an hour would find himself in a staggering 68.5 percent marginal tax bracket.

Obviously such a high marginal tax provides strong disincentive to working 40 hours per week. Earnings-test advocates fully realized this when they enacted it during the Great Depression. At that time it was acceptable policy to drive elderly workers from the work force in order to make room for younger ones, but Americans no longer accept, or can afford, an unfair mandatory retirement policy.

There are a number of options to consider for reforming the earnings test besides repeal. Raising the limit to, say, $25,000 for individuals or $32,000 for couples is one. The short-term cost would be much less than outright repeal and would still allow lower- and moderate-income earners to choose the work place, but would preclude any windfall to the wealthy elderly.

Phasing in an increase in the limit would enable Congress to assess the supply-side advantages of lifting the regulation, such as increased state and federal tax receipts, increased disposable income among the elderly, and reduced federal Supplemental Security Income and Medicare payments. These advantages might provide enough revenue to offset the anticipated cost of reform.

One anomalous aspect of the earnings test is that it applies only to those aged 65 to 69. At age 70, the regulation is lifted, with the idea that a worker must at some point begin to get a return on his investment. Essentially, at age 70 the Social Security system is treated as a pension rather than insurance. Lowering the age at which the test is lifted would also be more fair to those who choose to continue working.

The Social Security system is in dire need of fresh ideas born of honest debate. Unfortunately, honest debate is not often characteristic of Social Security issues, and many legislators are afraid of discussing the possibility of reform. In this instance, however, careful consideration of reform proposals is clearly preferable to letting the earnings test exist in its present deceptive form. -- Richard Armey The writer is a Republican representative from Texas.