IT TAKES two scorecards to keep track of the current Social Security debate. One is needed to follow the argument over Social Security's near-term financial trouble. The other card should be reserved for tallying options to deal with the possible longterm gap between the system's in-take and out-go. The two problems are different, and there is no quick fix for either of them.
The size of Social Security's long-term deficit is highly speculative, and, in any case, it's not expected to set in until sometime in the next century. Deciding now to phase in adjustments to cover this contingency won't produce the savings likely to be needed for the next few years. The short-term cash flow problem, on the other hand, does not necessarily pose and threat to the system's long-term solvency, since Social Security, unlike a private insurance fund, is financed on a pay-as-you-go basis. Each year's revenue is used to pay that year's beneifts with only a small reserve -- a cushion -- kept on hand to cover unexpected fluctuations. There is now a temporary shortfall that needs to be dealt with promptly, but the solvency of the system in future years depends much more on what the population and the economy look like then.
Prompt action is needed to deal with that shortfall. Without legislated changes, Social Security revenues will fail to cover retirement benefits by 1984 and possibly as early as 1983. One proposal is to provide authority to switch money among the three trust funds -- retirement, disability and Medicare. With favorable economic conditions, the entire system might then squeak by until 1980. But this would be a risky strategy. It would also aggravate the Medicare deficit expected in the 1990s and, in the meantime, leave the whole system very vulnerable to any downtown in the business cycle.
The only safe path is to either cut benefits or increse revenues. The $2.6 billion in benefit cuts already proposed by the administration are not only controversial but far from sufficient. More substantial immediate savings could be achieved by limiting cost-of-living increases or by extending Social Security coverage to all government workers. Both proposals draw shrieks of alarm from powerful constituencies.
Increasing revenues seems a better bet. But stepping up the payroll tax would hit very hard on middle-income families, particularly the growing number with two or more earners. This is a group that, with likely rates of inflation, stands to gain relatively little from the administration's proposed income tax cuts. The regressive effect of a payroll tax increase might be offset by allowing people to claim a credit for it against their income taxes. A more straightforward approach, urged by two recent Social Security advisory groups, would simply earmark a portion of general revenues to cover part of Medicare costs. Either of these options, however, would require that other tax breaks be shaved back, unless the federal deficit is to be increased.
The Social Security debate must, inevitably, become intertwined with the already complicated arguments over the size and shape of the administration's income tax cut package. Perhaps you'd better pick up a third scorecard while you're at it.