A blue ribbon panel called yesterday for major change in the Social Security system, including use of general tax revenues to cover part of the cost, compulsory inclusion of public employes and making half the monthly benefit payments to federal income taxes.
The Social Security Advisory Council, in a final report after two years of study, declared Social Security "the government's most successful social program" and said "all current and future beneficiaries can count on receiving all the benefits to which they are entitled."
But it said the system, which has 35 million beneficiaries and pays $147 billion a year in retirement, disability and Medicare benefits, needs both financial strengthening and benefits improvements for certain classes of workers.
The council's recommendations now go to Congress, which may take some action on Social Security next year. Many members are anxious to forestall a large increase in the Social Security tax now scheduled for Jan. 1, 1981.
There also has been debate in Congress over various aspects of the benefit structure. In past years, Congress has paid close attention to Social Security Advisory Council recommendations, many of which have ended up as law.
The most important recommendation was to infuse general income tax revenues into the financing structure, which would allow a reduction in the Social Security tax. Now all basic costs are paid by collections from a tax of 6.13 percent each on employer and employe, on the first $22,900 of annual earnings. This is scheduled to rise to 6.65 percent each on the first $29,700 by 1981.
In a unanimous recommendation, the council said "the time has come to finance some part of Social Security with non-payroll tax revenues." It recommended that Medicare, which now uses 1.05 percent of the 6.13 percent tax, henceforth be funded from corporation and personal income taxes. Each employe's income tax form would show the amount going for medicare.
The Social Security tax could then be reduced to 5.6 percent each on employer and employe from 1980 to 2005, when it would rise to 7.25 percent. This would be enough to take care of all old age and disability payments through the middle of the next century.
These changes would reduce the Social Security tax burden, which is heaviest on low-paid workers, and pick up the Medicare costs from a broader income tax that includes dividends and rents and a progressive rate structure. But Congress has resisted use of general revenues for Social Security in the past.
Other major council recommendations would:
Authorize the Treasury to make general revenue contributions to Social Security whenever payroll tax revenues falls because unemployment is over 6 percent.
Allow Social Security to borrow from the Treasury, as well, and combine the old age and disability funds for added flexibility.
Increase benefit calculations for the lowest-paid, long-term fulltime workers to make sure all workers with 30 years or more employment end up with benefits higher than the poverty level.
Increase benefits for the highest-paid workers somewhat so they get a better return on the payroll taxes they pay.
Make one-half the Social Security benefit subject to federal income taxes. At present, benefits are wholly tax-free, but the council said the half of benefits paid by the employer should be taxed. Most elderly persons would not be affected, because their incomes are not high enough to be taxed under income tax rules even when the Social Security half-benefit is included.
Grant cost-of-living increases twice a year instead of once.
Take steps to protect and increase retirement benefits for widows and divorced women who did not work or who worked only sporadically while married.
The council recommended that aged widows and widowers be given benefits based on the combined earnings of husband and wife during the years of marriage, and that persons divorced after 10 or more years of marriage split the Social Security credits earned by the couple during years of marriage. Thus, a divorced woman who did not work during marriage would get half her husband's credits for the years of marriage.
These two recommendations were seen as the first step in a possible full income-splitting plan -- to be studied further -- in which a husband and wife would split all earnings credits during marriage years and thus build individual entitlements for all purposes.
Move to bar a disabled worker from receiving family benefits higher than his previous earnings by imposing a family benefit ceiling equal to 90 percent of average earnings in the worker's highest five consecutive years of earnings. The council also recommended reducing the waiting period for disability benefits from five months to three, and somewhat easing the definition of disability.
Make Social Security coverage mandatory for all newly hired federal, state, local government and non-profit employes starting work after date of enactment of this provision. They could then negotiate supplemental plans similar to private employe pensions to go on top of their Social Security benefits.
This plan would give basic Social Security coverage to more than a million workers who lack any pension coverage, public or private; would improve Social Security financial strength, and would reduce "double dipping" and improve Social Security coverage for workers who spend several years in state or federal jobs and then go to private employment.
Seriously consider raising the basic Social Security retirement age over 65 sometime after the end of the century, to reduce costs and strengthen the labor force.
Reject last year's recommendations by President Carter for several Social Security cuts, such as abolition of the lump sum death benefit, student benefit and regular minimum benefit.
The advisory council, which meets every four years, was headed by Brookings Institution economist Henry J. Aaron. Among other members were economists Joseph Pechman and Gardner Ackley; former Social Security Commissioner Robert Ball; Bert Seidman, AFL-CIO; Morton Miller, vice president of Equitable Life, and J. W. Van Gorkon, chairman, Trans Union Corp.