The problems facing Social Security over the next few years are neither as serious as some (including the administration) have claimed nor so insignificant that they can be neglected. The recently enacted budget package includes more than $25 billion in Social Security and Medicare savings over the next five years. That's more than enough to carry the system through 1986 if the economy behaves reasonably well. It's not enough to protect it against the possibility of a still sluggish economy. There is strong public and congressional feeling, moreover, that one of the already passed cutbacks--termination of the Social Security minimum benefit for 2 million people now receiving it-- should be discarded and fairer ways of saving money found.
This means that some additional action is needed soon. How much depends on how large a financial cushion you think is needed to be on the safe side, but savings in the $5 billion to $7 billion a year range will probably do the job. That sounds like a lot, but in a system that will be paying out close to $200 billion next year in cash and medical benefits, it's only a minor adjustment--not the massive overhaul that the administration proposed this spring.
How might the needed money be raised? One way--which we don't recommend--would be to target cuts on a few relatively defenseless groups like minimum beneficiaries or people planning to retire next year. A better way would be to spread the losses evenly by putting a cap on cost-of-living adjustments until the system gets back in balance. A third technique would be to focus on some people best able to afford a reduction. One good idea in the last category would extend Social Security coverage to all federal workers and restructure the separate federal retirement system as a supplement to Social Security.
The lobbies that zealously guard the very generous retirement benefits that federal workers now get--largely at the taxpayer's expense--will respond to this idea with their standard shrieks of alarm and outrage. Requiring federal workers to contribute to Social Security throughout their working lives would, however, not only improve benefits for the lowest paid workers and provide an immediately helpful infusion into the trust funds. It would also produce substantial long-run savings by eliminating the windfall Social Security benefits that over half of federal retirees now receive from only a few years of private sector work.
Another overdue reform would make part of Social Security benefits received by higher income people subject to the federal income tax. Yes, we know that this administration came into office to cut taxes, not raise them. But surely when it is a question of either taking benefits directly from a group or raising taxes of the same group by the same amount, this is a distinction without much difference. In this case, in fact, there is an advantage since, given the progressive structure of the income tax, lower-income beneficiaries would suffer no loss at all, and only at the highest income levels would the loss be substantial. This would be especially true if certain features were included. For example, no tax should be levied on that part of the benefits paid for by an employees' own contributions, since this has already been taxed. None of these reforms--limiting cost-of-living adjustments, covering federal workers or taxing benefits--would concentrate losses on a few vulnerable groups. Each has merit in its own right. Some combination of them, moreover, would put the Social Security system on a sound footing for the foreseeable future without doing harm to its central features.