The Senate proposal for cutting the budget deficit relies heavily on a plan to cut $17.5 billion in protections that Congress built into the federal tax and Social Security systems to shield Americans from the effects of inflation.
Spurred by the price spirals of the 1970s, the government now adjusts federal taxes and benefit checks for inflation every year. Tax brackets are indexed against inflation and most federal benefits are increased by an automatic cost-of-living adjustment (COLA).
The Senate conferees propose to save $17.5 billion by adjusting tax brackets and COLAs only every two years -- in 1986 and 1988.
The savings would come from skipping the 1987 adjustments, but the 1988 adjustment would not be affected. The Senate conferees argue that this would provide long-term protection against inflation, with the compromises in the short term. Critics call it a retreat from a federal promise to protect consumers' buying power.
The changes apparently would affect about 77 million taxpayers and 42 million recipients of federal benefits, including Social Security, civilian and military retirement, railroad retirement and other programs not subject to a means test.
Based on assumptions used by the Senate, the plan would increase the tax bill of a wealthy family of four by as much as $174 in 1987, while a family with $10,000 annual income would pay $48.72 more. The 1988 payments for both families would be about the same as under current law.
An average couple on Social Security, now receiving $776 a month, would lose $416.40 of inflation adjustments in 1987, but their 1988 checks would be almost the same as under current law, based on the Senate's inflation assumptions.
The changes would dilute inflation protections created by Congress in response to public pressure from taxpayers and Social Security recipients.
Congress voted to create annual COLAs for Social Security in 1972, after increasing benefits 10 times in the previous 10 years as compensation for inflation. Military retirement COLAs started in 1962, civilian retirement COLAs in 1963. These COLAs automatically increase the monthly checks of beneficiaries once a year by an inflation factor.
Under current law, an average couple's Social Security check would be $807.80 a month in 1986, $842.50 in 1987 and $877 in 1988. Under the Senate proposal, it would be $807.80 in both 1986 and 1987, and almost $877 in 1988. This plan would save $9.5 billion by 1988, according to Senate analysts.
In the federal tax system, Congress created indexing in 1981 in response to taxpayer outcries against "bracket creep" throughout the inflationary 1970s. Incomes were rising because of inflation, putting people in higher tax brackets, while their spending power was no greater.
Congress voted to index each year the personal exemption and standard deduction -- the income exempt from taxes. Tax brackets also were indexed by an inflation factor, so that taxpayers would face the same marginal rates if their income increased no more than inflation. These changes were deferred until this year to save federal revenue.
Under the Senate proposal, Americans would pay $8 billion more in taxes by 1988, according to analysts.