President Carter's Social Security advisory council has tentatively recommended that the Social Security tax rate be cut, rather than increased as scheduled, and that Medicare be financed in the future out of general revenues.
The 13-member council, which meets every four years to recommend changes in the system, proposed over the weekend that the Social Security payroll tax rate be slashed to 5.5 percent for employers and employes and that the entire proceeds be used for old-age and disability benefits.
However, Medicare, which at present also is funded by the Social Security tax, would be financed by ear-marking a portion of each employe's federal income tax and a matching amount from corporate income tax.
In effect, the plan would reduce the pressure on the highly visible and increasingly unpopular Social Security tax by shifting the Medicare burden to general government revenues.
The current Social Security payroll rate, paying for old-age, disability and Medicare benefits, is 6.13 percent and is scheduled to rise to 6,65 percent on Jan. 1, 1981.
The council did not make any recommendation on whether to change the wage base on which the tax is levied. At present, the tax is levied on the first $22,900 in wages, but this maximum taxable wage is scheduled to rise under current law to $25,900 in 1980 and then in steps to $42,600 by 1987.
Former Social Security commissioner Robert M. Ball, who proposed the 5.5 percent plan and Medicare shift, said it would enable the old-age and disability programs to go without further tax increases until the end of the century.
For the average worker, the proposal would mean a big saving in the immediate Social Security tax bite. A $10,000-a-year worker, who now pays $613 in yearly Social Security taxes and who would pay to $664 in 1981, would instead pay $550. A $20,000-a-year worker, who now pays $1,226 and would pay $1,330 in 1981 under existing law, would pay $1,100 under the Ball plan.
Mounting Social Security taxes have come under increasing criticism from Congress and many workers as imposing too heavy a burden on low incomes. Business has also criticized them as inflationary because businesses are tempted to recoup higher Social Security taxes by raising the prices of goods and services. Many members of Congress have vowed to do something in 1980 to forestall the 1981 increase in the tax rate.
By shifting Medicare to personal and corporate income taxes, Ball said, his plan would spread the burden to a wider and more progressive set of taxes and decrease inflationary pressures.
The weekend action is the second time in recent weeks that the advisory council has indicated it favors blocking the 1981 Social Security tax rate increase.
Earlier, it recommended blocking the portion of the 1981 increase destined for Medicare and making up the difference from general revenues, but the most recent proposal reaches much farther because it would shift all Medicare financing out of the Social Security payroll tax, not just a portion.
Except for tiny amounts for special situations, Social Security has always been funded solely by a payroll tax, imposed equally on employers and employes, and never from general Treasury revenues. Shifting Medicare ( $23 billion a year at present) to general revenues would be revolutionary change in system financing. All such changes must be approved by Congress.
To help protect the Social Security trust funds from the effects of unemployment and give them more operational flexibility, the council also recommended:
Automatically pumping general revenues into the trust funds whenever they lose payroll tax income because unemployment has risen above some relatively high figure, for example, 6 percent.
Permitting the trust funds to borrow temporarily from the Treasury to meet short-run financial difficulties.
Merging the old-age and disability funds, so that surpluses in the flush disability fund could be used to aid the more needy old-age fund. Experts say that in shoring up Social Security financing a few years ago, Congress earmarked a bit too much for disability and a bit too little for old-age insurance.
The council will make its final report to Congress in November.