The most important part of President Carter's new economic plan may be that, for the first time, income tax revenues would, in effect, be used to help finance Social Security benefits.
A basic tenet of the Social Security program since it began in 1936 has been self-financing. Beneficiaries are considered to be entitled to their money because of their contributions to the trust fund while they were working. This "insurance" principle marks the crucial difference between Social Security recipients and people on welfare.
There are huge political obstacles to shifting openly from an insurance scheme to paying retirees out of income tax and other government revenues.
Carter's proposed 8 percent Social Security tax credit would not go as far as that. It would compensate individuals for the increase in Social Security tax payments beginning Jan. 1 by cutting their income tax bill, if they have one.
This is tantamount to increasing the Social Security trust fund revenues by switching money directly from the government kitty into the trust funds. But "laundering" the money -- through giving a tax credit to individuals on money they have paid into Social Security trust -- could make the switch more palatable politically.
Those people who do not earn enough to pay taxes, but have to pay Social Security, would not be helped directly by the government's proposal. Carter, however, has also suggested an increase in the special refundable credit that helps the working poor -- the earned income tax credit. This would almost, but not quite, offset the January hike in Social Security payroll tax for those at the bottom of the income scale. But the earned income tax credit only benefits persons with dependents, so there will be some individuals left worse off.
A switch in the financing of the Social Security trust funds has been suggested more and more frequently in recent years because the system has grown steadily more expensive. There are fewer workers to support the elderly, leading to a vast increase in the burden of payroll taxes.
Inflation and recession have added to the demographic problem. It is clear that without important changes in the Social Security system, the taxes levied on workers will become intolerable in the next few years.
For many families, Social Security taxes already are a bigger drain than the federal income tax.
Next year's Social Security tax increase will only keep the fund afloat for another two or three years, a congressional tax expert estimated yesterday.
The system cannot possibly cope with the massive shift in the work force over the next 20 to 30 years from the current three workers per retiree to only two, he said.
The gradual shift from income to payroll tax has hurt the poor. They pay proportionately less income tax but are often hit even harder by the Social Security tax than persons at higher income levels.
Also, Social Security payroll tax applies to any income no matter how little, which adds to its political unpopularity.
Carter's tax credit would help those at the lower income levels, apart from those at the very bottom, more than it would benefit those at the top. Together with the higher earned income tax credit, it would give back much more to those earning between $5,000 and $10,000, and a little more to those between $10,000 and $15,000 than the extra money they will pay out because of the Social Security payroll tax rise in January.
The president made clear Thursday that his proposal was only for two years. During that time the administration says it is essential to review the long-term problems of the trust funds and to recommend fundamental charges.
But the tax credit is likely to run into considerable opposition, and other proposals that might be drafted over the next two years face similar problems.
One measure to ease the financing of the retirement fund has already run aground in Congress. This would have allowed the old Age and Survivors Insurance trust to borrow money from the more liquid trust funds for disability and Medicare.
Another short-term measure -- to allow a bigger proposition of the tax collected to go into the retirement fund -- is well on its way to becoming law. Congress considers this to be less of a threat to the principle of self-financing.
Two suggestions for changing the system without taking money from income tax revenues are to raise the retirement age from 65 to 68 and to include more workers who are currently exempt, such as federal government employes.
Even Rep. Richard A. Gephardt (D-Mo.) of the House Ways and Means Committee, who has proposed a 10 percent Social Security tax credit, still opposes the abolition of the trust fund for retirees and believes it should remain self-financing.