What should be done about Social Security's financial situation? You won't get much of an answer to that question from the current budget debate. The White House is backpedaling from an agreement it made with Senate Republicans last week to cut Social Security outlays by $40 billion over the next three years. House Republicans are toying with the idea of sidestepping the issue by pretending that Social Security isn't part of the federal budget. The Democrats, meanwhile, continue their ritual dance to ward off spirits that might compromise their favorite political issue.

None of this agonizing will dispel the fact that Social Security faces a financial squeeze as early as the middle of next year. Enough is known about the likely state of the economy to say that some time in 1983 the combined disability and retirement funds will have trouble maintaining their cash flow. Nor is there any prospect of swift improvement. A conservative forecast of economic conditions suggests that the combined trust funds could continue to fall more deeply into the red for several years.

Set aside the Medicare part of Social Security-- it's in good shape for a few more years, though, without serious cost-containment efforts, it will fall into deep trouble thereafter. It appears that the retirement and disability funds need an infusion of about $12 billion a year over the next three years-- not a large amount compared with the $580 billion in cash benefits that the system is expected to dispense over the same period. This would not produce any increase in the funds' relatively low current reserves--it would only keep them from further deterioration.

There are only two ways to get the needed money: raise payroll taxes--a bad idea--or curb growth in benefits. The best way to do the latter is to limit cost-of-living adjustments so that they no longer outrun increases in the wages that are taxed to pay for them. This method has an additional benefit: if the economy is unexpectedly strong, unneeded cutbacks will be avoided.

There is no justification for building up extra reserves in the trust funds to offset deficits elsewhere in the budget. This would amount to financing the defense buildup and the income tax cuts from a regressive payroll tax. But neither is it wise to let basic Social Security benefits become a drain on general revenues. One of the strengths--and major sources of protection--for Social Security is that it is self-financing.

When all the politicking is done, Congress and the administration are going to have to put Social Security's financial house in order--and that means reducing the growth in benefits by perhaps $10 billion to $15 billion a year.