Social Security: hard choices ahead - includes related articles; on social security myths and chronology

Nation's Business, April, 1990 by Robert T. Gray, Joan C. Szabo

Social Security: Hard Choices Ahead

The Social Security system "places an undue and inequitable escalating financial burden on businesses and their employees," the White House Conference on Small Business declared in 1986.

Delegates appealed to Congress to cancel scheduled payroll-tax increases that would add substantially to that burden. In the previous decade, the wage base had gone up 174 percent, and the tax rate had risen 22 percent.

The entrepreneurs' appeal was unheeded. The wage base has since increased another 22 percent, and the rate has gone up 7 percent. The tax rate for the self-employed has nearly doubled since 1976.

And small business is still appealing for relief. "We urge the Congress and the administration to reduce the payroll tax," the U.S. Chamber of Commerce says in a resolution adopted unanimously by its board in February. That panel acted on a report in which the organization's Small Business Council noted: "For most small businesses, payroll taxes are a far greater burden than income taxes."

While today's small-business plea for relief is the same that was sounded at the 1986 conference, there is a sharp difference in the environment in which the issue is being raised today.

Throughout the 55-year history of Social Security, official concern has generally centered on the payments side. Politicians competed for recognition as principal protectors and enhancers of the benefits pouring out to elderly recipients whose political clout was expanding in line with the fast growth in their ranks.

But the Great Social Security Debate of 1990 was touched off by a proposal to ease the payroll taxes that finance the benefits, and the discussion has expanded to the fundamental issue of determining the most effective and equitable ways for the retirement system to meet the long-term demands it faces.

The size of those obligations is awesome. Some 40 million individuals, including retired workers and their survivors as well as the disabled, are receiving benefits today. That total goes up relatively gradually until the baby-boom generation starts arriving at the payout window. In 2010, there will be more than 50 million beneficiaries; in 2020, some 65 million; in 2030, 75 million; in 2050, more than 80 million.

Current expenditures of $256 billion to retirees, their survivors, and the disabled will more than double over the next 10 years, will double again by 2010, and again by 2020. For 2055, the forecasters are using such mind-boggling numbers as $20 trillion or more in outlays.

As the baby-boom beneficiaries and the money needed to pay their benefits move into those stratospheric ranges, another demographic inevitability will occur. The decline in the birth rate since 1964 means there will be fewer workers to support more beneficiaries down the road, and those beneficiaries will be living longer. (See the chart on Page 21.)

There were 42 workers per beneficiary in 1945, but the ratio had fallen to 4-to-1 by 1965, and it is 3-to-1 today; by 2035, there will be fewer than 2 workers for each beneficiary. Some observers see in those numbers the seeds of a future intergenerational battle, with the increasingly smaller pool of younger workers rebelling against the costs they will have to bear to maintain the retirement system.

Whatever the outcome of today's proposals for changes in the system, they are at least forcing an unprecedented scrutiny of a massive government program that eventually affects every American.

In addition to pressing its long-standing arguments for reductions in payroll taxes, business is utilizing the current prominence of the Social Security issue to make these related points:

* The retirement system can meet its commitments to present and future retirees only if the underlying economy is strong enough to generate the revenues needed. The biggest threats to the long-range stability of the system are tax increases, uncontrolled spending, and such other bars to economic growth as excessively high capital-gains tax rates.

* Eventual privatization of the retirement system, with individuals maintaining their own pension accounts, should be among the options considered in any review of basic Social Security policy, particularly in view of the scope of demands that will hit early in the next century. (See the article on Page 25.)

The federal program at the center of those and other policy discussions has occupied a special place in the national psyche since its passage in the depths of the Depression. The Employee Benefits Research Institute, a nonpartisan organization based in Washington, D.C., says: "The Social Security Act of 1935 has proved to be one of the most significant pieces of legislation - if not the most significant piece - ever passed by the Congress of the United States."

Certainly, no government program has ever commanded more public support, even admiration, than this plan to provide benefits to retired workers, provide for their survivors, assure that the disabled have an income, and, more recently, meet substantial if not all medical costs for the elderly.