PRESIDENT REAGAN faces the awkward possibility that he might have to raise taxes before he can cut taxes. All the talk of cuts refers to the income tax. But the Social Security system is going to begin running a bit short sometime within the next couple of years, unless the growth of benefits is curbed -- or, of course, unless the payroll tax is raised.
Vast confusion always surrounds the Social Security system's financial troubles, since a lot of people assume that it works like a private pension plan. It doesn't. A private plan collects premiums from you, invests them and pays them back to you when you retire. Social Security pays out this year in benefits what it collects this year in taxes. The trust fund is only a small cushion to absorb unexpected shocks. The shortfall through the early 1980s now seems likely to run between $10 billion and $18 billion a year -- not a very large figure for a system that, this year, will collect and disburse some $160 billion. But neither is it a figure easy to ignore.
Since there was a sharp increase in Societ Security taxes barely four weeks ago, the system's troubles invite further explanation. Social Security is emerging as a gigantic example of the hidden perils in indexation. Nine years ago, Congress indexed the benefits -- that is, it enacted a law raising them automatically in proportion to the Consumer Price Index. But the Consumer Price Index frequently overcompensates for inflation. Meanwhile, for the past couple of years, working people's earnings have not quite risen as fast as the inflation rate. With benefits pegged to inflation-plus, and revenues pegged to earnings, a gap between the two is beginning to open. Through indexation, Congress has inadvertently constructed a very efficient device for accelerating the redistribution of income from people who are currently employed to people who are retired or disabled.
The president and Congress can accomodate that process by raising the payroll tax again. Or they can interrupt that process by rewriing the indexation formula to keep benefits from rising faster than earnings. There is no other real solution. The Carter administration wanted to allow the various trust funds to borrow among each other. But Congress, rightly, doesn't care much for that idea. It only staves off the day of reckoning, and not far enough to be worth the trouble. As for the debate about raising the age of retirement, that's all very interesting for the long future, but it would hardly affect the arithmetic or the system before the turn of the century.
The nature of this choice is well understood at least among the new administration's experts on social benefits. At his confirmation hearing earlier this month, the new secretary of health and human services, Richard S. Schweiker, declared that the protection of the integrity of the Social Security system was his most urgent concern.He acknowleged that one possibility was to change the indexation formula governing the future increases of the benefits.
That, surely, is where the right answer begins. The indexation formula will have to be amended to ensure, at a minimum, that benefits rise no faster than the true inflation rate. It's fair to go a little further and say that the benefits ought to rise no faster than the earnings out of which they are being paid. But if those changes don't quite balance the system, another small tax increase would be necessary. The principle of Social Security is a commitment from which this country will not retreat. When Mr. Reagan speaks of income tax cuts, both he and his audience need to keep in mind the other tax bill that will be up for consideration this year.