The past decade has been a time of continual controversy for social security, the nation's largest retirement income program which covers over 90 percent of the working population and pays more than $120 billion annually to the retired, the disabled, their dependents, and survivors. Opponents and supporters alike are questioning both the short-run and long-run viability of the system in view of the persistent revenue shortfalls and the dramatic demographic shifts forecast after the turn of the century.
Social security is operated on a pay-as-you-go basis, which means that payroll tax revenues should equal benefit payments in each year. To finance the dramatic benefit growth that has occurred over the decade, social-security taxes have been increased significantly. In 1970 employers and employees paid a combined tax of 4.8 percent on the first $7,800 of wages; by 1980 the combined tax had risen to 12.6 percent on the first $25,900. Over the 10-year period the maximum tax levied on a covered worker has climbed from $374 to $1,588, more than a fourfold increase.
Despite the repeated tax increases betwen 1970 and 1980, two severe recessions combined with high rates of inflation have given rise to extreme financial pressures. Recessions drain the trust funds in two ways. First, employment and real wages are lowered, which directly diminishes payroll tax revenues. Second, the unpromising labor market prompts more workers to leave the labor force and seek retirement or disability payments. Inflation further aggravates the financial problems, because social-security benefits are increased automatically in line with the consumer price index.
Because of the effects of the current recession on benefit levels and revenues, even the scheduled 1981 increases, which raise the taxable wage base to $29,700 and the tax rate to 13.3 percent, are projected to be insufficient to wad off future revenue shortfalls in 1983. If these projections prove correct, President-elect Ronald Reagan will face an array of unpalatable choices. His comitment to the social-security system precludes benefit cuts, and resistance to the payroll tax rules out rate increases beyond those already scheduled.The only choice, therefore, is an infusion of general revenues -- also not a desirable alternative for a president who wants to cut personal income taxes and balance the budget.
There are also long-term financing issues which must be considered. Since social-security benefits are financed on a pay-as-you-go basis, the program's financial status is affected by demographic shifts. Thus, the recent decline in the fertility rate combined with the maturation of the postwar baby boom generation will still cause the ratio of retirees to workers to increase rapidly after the turn of the century.If social security continues to be financed exclusively through the payroll tax, by 2025 expenditures will increase to about 26 percent of taxable payrolls. In this setting, increased pressure may arise either to cut benefits or to raise the age at which individuals can claim full retirement benefits.
In the wake of the controversy that has surrounded social security during the 1970s, writing books on the subject has become a major industry. The most recent addition, "Social Security and Private Pensions in Transition: Understanding the American Retirement System" by Bruno Stein, takes a new approach by discussing social security in the context of the other retirement or income support programs available for today's elderly.
The volume opens with an extremely interesting history of the origis of the public assistance and social insurance traditions and their culmination in the Social Security Act of 1935. The public-assistance programs and social-security system established by the act are treated as components of a three-tier retirement income system. The author describes the interaction among the tiers, their effects on labor and capital formation, the adequacy of the benefits they provide, and those factors which will affect the future of the various systems. No other book covers such a breadth of material.
While the breadth of subject matter is the book's primary attraction, the undertaking of such a comprehensive project prohibits Mr. Stein from shedding any new light, introducing new data, or suggesting new solutions for any of the major dilemmas facing the US retirement system. Nevertheless, the book is highly readable, the author understands his subject well, and he has gone to great efforts to simplify extraordinarily complex material. For those interested in an overview of the programs that comprise the US retirement system , this book provides an excellent introduction.