In what could be a turning point in Social Security's history, the Reagan administration yesterday proposed what amounts to a 10 percent cut in future outlays that by fiscal 1986 would save the Treasury -- and cost recipients -- $24 billion a year.
The most important reduction would be in the so-called replacement ratio for future retirees -- how much of a worker's last paycheck is replaced by his first benefit check. Under current law, this basic measure of benefit levels is slated to become 41 per cent for the average worker in the next several years. The administration would reduce it to 38 percent for the average worker. The figure would be higher for low-paid workers, lower for the higher-paid.
The administration woulds also, among many other steps, define disability in a more restrictive way and move to keep federal employes from "double-dipping" into the Social Security system as much as some now do.
The administration said its proposals, unprecedented in Social Security's 45-year course, were necessary to keep the system from going broke. But critics quickly charged that the proposed cuts go well beyond what is required to keep the system solvent. They suggested the administration was using Social Security's short-term problems for its own longer-term social and fiscal purposes, to shrink the government and balance the budget.
"They're taking advantage of a temporary financing problem to make major permanent cutbacks in the long-range role of Social Security," said former commissioner Robert Ball.
Health and Human Services Secretary Richard S. Schweiker, who spelled out the proposals at a news conference yesterday, began by emphasizing those benefit cuts the administration was not proposing. It was not, he noted, suggesting an increase in the traditional retirement age of 65, as some members of Congress have, nor would its proposals remove from the rolls or reduce the prospective benefits of anyone now on Social Security.
Almost all of the proposals would affect only those persons going on the rolls after next Jan. 1, Schweiker added, and there would be no effort to restrict future cost-of-living increases for those now on the rolls, as has also been proposed in Congress.
Schweiker also noted that the administration was proposing to phase out the so-called retirement test, which limits what those on the rolls can continue to earn without loss of benefits.
And the secretary said the administration was proposing reductions in the Social Security tax increases scheduled for the rest of this century under current law. But it was later explained that these tax cuts are contingent on whether the Social Security trust funds build back up as expected.
There are now 36 million beneficiaries, about one American in seven. The system makes up more than a fifth of the federal budget. In recent years the trust funds have been sorely strained by the combination of high inflation and high unemployment, which has increased costs (benefits now rise automatically with inflation) and cut tax receipts.
Here are the major proposals as outlined by Schweiker and other officials yesterday:
The reduced replacement ratios, which would save the most money -- about a third of the contemplated total -- would be phased in over five years for new retirees. The average worker retiring in 1987 would get $719 a month under existing law but only $619.90 under the new formula.
As reported yesterday, the administration would penalize workers much more than now for retiring before age 65, as about 70 percent of all workers now do. Under current law, those retiring at 62 have their benefits permanently cut to 80 percent of what they would be at the normal retirement age of 65. To encourage more people to work longer, thereby adding to receipts and reducing costs, the Reagan proposals would pay a person who retires in the future at 62 only 55 percent of the age-65 amount. The spouse's benefit, as under existing law, would be half of this, 27.5 percent instead of the current 40 percent.
Also to encourage people to work longer, Reagan would remove for those 65 and over the current $5,500 annual limit on how much can be earned without a reduction of benefits. The figure would go up to $10,000 in 1983, $15,000 in 1984, $20,000 in 1985 and be eliminated altogether in 1986.
Although the president would not change the calculation of cost-of-living increases, he would shift the date of payment from July 1 each year to Oct. 1, starting in 1982. This would, in effect, mean a slight loss of benefits not only for those going on the rolls after Jan. 1, 1982, but for everyone already there.
The administration would also limit total family benefits for a worker and dependents to 150 percent of the worker's basic benefit, instead of the current 188 percent, in all cases.
The proposal would reduce through a complicated calculation what Schweiker called the "windfall benefits" of those drawing both Social Security and federal, military, state of local government retirement benefits. Many federal retirees who have also worked a short time for private employers now draw relatively large Social Security benefits as well as their federal retirement checks.
Also proposed are new restrictions on applicants for disability benefits. At present, disability is defined not just in terms of an applicant's medical conditon but on the basis of whether he is likely to find a new job in view of his age and experience. The administration is proposing to consider medical condition only.
Another change would lengthen the waiting period of disability benefits from five to six months. The administration is proposing that applicants mush show they will be disabled for 24 months instead of the current 12 to be eligible. And they would have to show that they worked in employment subject to the Social Security tax for at least 30 of the 40 quarters preceding disability, instead of the current 20.
These changes are all substantial new barriers to qualifying for benefits. Of the current 36 million Social Security beneficiaries, about 4.6 million are disabled workers and dependents.
To raise more money, the Social Security tax would be applicable to the first six months of sick pay a worker receives; most isn't taxed today.
Taken as a whole, Schweiker said these proposals would enable the trust funds, now facing depletion in a year or two, to build up to a reserve equal to half a year's benefits and achieve a long-term sound basis.
If this buildup happens, he said, the current 6.65 percent payroll tax rate on employers and employes, scheduled to rise to 6.70 percent next year, 7.05 percent in 1985 and 7.15 percent in 1986, probably could be held down: perhaps to 6.95 prcent in 1985 and 7.05 percent in 1986. These changes could save today's young worker about $33,600 during his lifetime.
Overall, the proposed changes are estimated to povide net savings to Social Security of about $9 billion in fiscal 1982, mounting to $24 billion annually by 1986, with the cumulative amount during that period totaling $82 billion.