The Social Security cuts that President Reagan proposed this week would reduce benefits over the long run far more than previously perceived.
The total benefit payout from the giant trust funds would be reduced by nearly one-fourth over the next 75 years if the president's proposals become law, actuarial calculations indicate.
The payout at first would be only a few percentage points under current projections. But, as the changes were phased in, that figure would rise until, by 1986, the system would be paying $24 billion a year less in old-age, survivor and disability benefits. That would be a 10 percent reduction from the payout under current law.
This figure would continue to rise, and the total outlays for the 75 year period ending in 2055 would be almost 25 percent less than scheduled under current law. Some of the reduction would come from tighter eligibility requirements for certain types of benefits and some from reductions in the benefits.
This would be a much bigger benefit cut than needed to keep Social Security solvent if the economy performs as favorably as projected in the Reagan budget.
The administration says the extra cuts are needed as a cushion in case the economy doesn't perform so well, and that if a surplus develops, as the administration expects, Social Security taxes can be cut.
The Reagan administration envisions slowing down a Social Security payroll tax increase already scheduled for 1985, and may make additional payroll tax cuts after that if the trust funds, which are expected to dip to less than a two months' cash reserve in a year or two, build back up to a six months' reserve by the 1990s.
Critics, however, say the administration had deliberately asked for deeper-than-needed cuts to provide a surplus, and thereby help balance the overall federal budget.
As the magnitude of the proposed cuts has begun to sink in, they are being criticized. House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) has already launched an attack, and yesterday Senate Majority Leader Robert C. Byrd (D-W.Va.) said some of the proposals are "harsh and unfair."
The scope of the cuts proposed by the president is shown in two actuarial figures. For long-range planning purposes, Social Security costs and income are calculated on a 75-year basis, and are not usually expressed in cash terms. a
Instead, they are expressed as a percentage of the national payroll subject to the Social Security tax. The taxable payroll today, for example, is about $1.2 trillion. Projections are made as to economic growth, inflation, population growth and the like.
Under current long-range assumptions, the average annual cost of benefits over the next 75 years is estimated as 13.74 percent of taxable payroll.
The Reagan proposals, including both the relatively small cuts proposed two months ago and the big package of cuts announced this week, would reduce benefits by 3.06 percent of taxable payroll. This means that the total cost of benefits for the 75-year period would be 22.2 percent less than under current law.
From the long-range point of view, the biggest cut is a change in the benefit formula, applicable only to those going on the rolls from 1982 on.
In 1977 Congress set the formula so that, after a transition period that is now ending, a worker making an average salary (now $13,800) would receive an initial benefit equal to about 41.4 percent of his last paycheck. This is called the "replacement ratio," the proportion of salary that the benefit replaces.
Because the replacement ratio is a fixed percentage, the actual dollar value of the initial benefit for each new class of workers rises each year as wages rise.
Reagan proposed to decrease this ratio to about 38 percent in phased stages over five years. This change, a reduction of one-twelfth, would save billions of dollars a year in the long run, accounting for two-fifths of all the proposed savings in the Reagan package.
But the full savings wouldn't be realized right away because the decreased ratio would apply only to new retirees (about 4 million a year). The 36 million people now on the rolls would continue to receive benefits under the old formula. Not until they had all been replaced by later beneficiaries would the full impact be felt.
Reagan also proposed a much lower benefit for people choosing to retire before 65. At present, people retiring at 62 (the minimum age allowable) get 80 percent of the benefit payable at 65, and the reduction is permanent.
Reagan is proposing to cut the benefit to 55 percent for those coming on the rolls in the future. This, the second-biggest saving proposal, is designed to make people stay on the job and contribute payroll taxes longer, and collect benefits for a shorter period.
But because this proposal, too, would apply only to future retirees, its total savings impact wouldn't be felt fully for a few years.
Other Reagan proposals, such as increasing the number of work-years used to calculate benefits (this would not affect eligibility, but in many cases would reduce benefits) and greatly tightening the eligibility tests for disability benefits, would take time to phase in.
That is why cuts, while seeming modest at first, would mount and eventually aggregate 25 percent of total benefits over the next 75 years, a massive slash.