The enormous Social Security tax increases voted in 1977 will not be enough to keep the system solvent unless the nation's economy improves substantially, the system's trustees reported yesterday.
William J. Driver, commissioner of Social Security, told reporters that even under the most optimistic economic assumptions, Social Security face severe new short-run financial strains because of national economic problems over the past few years, and will not have enough money to pay old-age retirement benefits starting in 1982 unless Congress acts.
But he said that action need not involve voting further taxes on top of those already scheduled in the 1977 law. Problems can be solved, at least for the near future, by allowing the heavily pressed old-age trust fund to borrow from the more solvent disability and health insurance (Medicare) funds.
Unless the economy fails to improve at all, interfund borrowing which Driver said he hopes Congress will approve shortly, should get Social Security through at least the next decade without loss of benefits.
On the other hand, if unemployment and inflation do not drop sharply in the next few years, to under 6 percent for unemployment and well under 8 percent for inflation, then Social Security will be in very severe trouble.
Under these "worst case" assumptions, the trustees' report shows, the old-age trust fund would run out of money by 1981 and the three trust funds together would have money "insufficient to pay combined benefits" beginning in 1983.
In the case, massive new infusions of revenue from some source would be needed.
In view of these dangers, and of the shortfall that will occur in the old-age fund even under good economic conditions, Driver said he would recommend against any attempt to "roll back" Social Security payroll taxes.
The 1977 tax increases for Social Security were the largest peacetime tax increase in U.S. history. Considerable pressure has developed since to roll back those increases already in place and postpone or cancel the big one scheduled for Jan. 1.
The Carter administration had indicated some interest in such a tax cut next year, to help stimulate the economy. Yesterday's report, as Driver indicated, will make this a more difficult problem; money would have to come from elsewhere, perhaps general revenues.
Driver said he is confident that whatever happens, the government will take steps to make certain that "people will be paid, you can be sure of that."
In 1977, when Congress voted a new schedule of Social Security taxes -- under which the current 6.13 percent tax rate on employers and employes will rise to 6.65 percent next Jan. 1, and then in steps to 7.65 percent by 1990 -- members jubilantly declared that the system would be safe and sound until well past the end of this century.
However, this expectation has been shattered by much higher inflation than expected, requiring more outlays as benefits automatically rise under a 1972 law to keep pace with the consumer price index, and by higher unemployment and slower wage growth, which cut expected revenues from the tax.
As a result, the huge old-age trust fund, for which most of the system's revenues are earmaked by law, simply won't have enough income to pay its bill during the middle-1980s, regardless of whether one looks at the most optimistic economic assumptions, the intermediate assumptions or the most pessimistic. It will improve somewhat at the end of the decade as the tax rate rises but remain in trouble except under the most favorable economic conditions.
The smaller disability trust fund is in much better shape because the incidence of claims seems to be dropping and will be in good condition throughout the 1980s under all economic scenarios.
The health insurance fund is satisfactory through the 1980s but then, except under the most favorable economic conditions, will be rapidly depleted by the early or mid-1990s.
Driver said that the intermediate assumptions about the economy are usually the most likely to be what actually happens.
The intermediate assumptions presume that inflation will level off to an average of 7.8 percent in 1985 and 5.5 percent by 1995 and the drop to 4 percent after the turn of the century. They project that unemployment will drop to 5.9 percent in 1985 and then level off at 5 percent.
If this happens -- which some economists believe may be a bit on the sunny side -- then with interfund borrowing, the combined old-age and disability fund revenues under currently scheduled tax provisions should be enough to take care of all problems until past the year 2025, with a little help during the 1980s from the hospital insurance fund.
Under these same assumptions, however, the hospital insurance fund, in fine shape now, would go along well into the early 1990s (and be able to help bolster the other two funds) but then rapidly decline to insolvency by the mid-1990s.
The pessimistic assumptions project inflation at 9.8 percent by 1985, dropping to 6 percent at the turn of the century, and unemployment at 6.8 percent in 1985 dropping to 6 percent later. If that happens, the combined old-age and disability funds will be insolvent from 2000 to 2010 and then lapse until into bankruptcy again. The health fund will go permanently bust in 1990.