Social security

The sputtering, smoking political time bomb of social security is about to go off.

Over the past two years, Congress - through an accounting change - has simply lengthened the explosive issue's fuse. A national commission, appointed by President Reagan, has for 11 months solemnly studied why the fuse is burning, and what can be done to douse it.

But Congress's temporary repairs expire in two months. The National Commission on Social Security Reform is scheduled to present its report at the same time.

When campaign-weary members of Congress return after the November elections, they will find the issue sizzling on their desks. This time, there will be no place to hide.

Under current law, social security ''will be unable to pay all of its benefits on time by July 1983,'' Congressional Budget Office (CBO) director Alice Rivlin recently told the national commission. ''Substantial outlay reductions, revenue increases, or both will be required in order to build up trust fund reserves to an adequate level over the next few years,'' she adds.

The social security system faces a pair of problems. The first, a short-term cash flow squeeze, has been mainly caused by the unexpectedly poor performance of the economy since 1977, the last time Congress was forced to fix the system's finances. When the economy falters, social security's income - payroll taxes - also declines.

The Old Age and Surviviors Insurance trust fund (OASI), largest of the system's three funds, has been so battered that it will be unable to pay beneficiaries on time by next July, unless something is done. The system as a whole will need $14 billion in relief to keep checks flowing out on time through 1985, the CBO estimates.

The cash flow crunch will ease in 1985, when scheduled tax increases take effect. Social security will then bask in a period of relative calm and affluence - while its second, long-term problem gathers just over the horizon, crackling with menace.

The long-term problem stems from the changing demographics of the United States. Around 2010, the hordes of the baby-boom generation will begin easing into retirement. By 2025, there will be an estimated 72 million social security beneficiaries - double the figure of 1981. The ratio of workers to beneficiaries will decline from today's 3 to 1, becoming less than 2 to 1. Under current trends, a fully financed social security system would chomp off 25 percent of all wages by the middle of next century.

So far, Washington has been unable to muster the political courage needed to face this potentially explosive issue.

Last year, Congress, instead of making major changes in the system, simply approved interfund borrowing, which allows the sounder trust funds, Disability Insurance and Hospital Insurance, to lend money to their shaky compatriot, OASI. This fund-shuffling authority expires at the end of this year. CBO's Rivlin says further extension of interfund borrowing won't solve the system's short-term problems.

President Reagan, singed by the furious reaction to a package of repairs proposed in 1981, appointed the National Commission on Social Security Reform to study the problem, and then ran for cover.

The 15-member NCSS is scheduled to start writing its report at a three-day meeting beginning Nov. 11. Among solutions being considered:

* Moving forward tax increases now scheduled for 1985, 1986, and 1990. This would increase social security tax revenue $46 billion by 1985 - almost enough cash to solve the short-term problem. Democrats on the commission favor this proposal. However, many conservatives - both on and off the panel - are distressed by the idea of speeding up tax hikes.

''I would consider it a spectacular failure if, in the current economic environment, the commission recommended taxing labor and capital even more,'' says Dr. Robert Kaplan, dean of the Carnegie-Mellon business school.

* Requiring newly hired employees of the federal government and nonprofit organizations to enroll in social security. Currently, these workers aren't required to join the system. One commission member estimates this would raise $ 25 billion over the next five years.

* Uncoupling benefit hikes from rises in the consumer price index, and rehooking them to increases in wages, minus 1.5 percent. Because of the way the social security program is designed, such a change would largely keep the system from being battered by economic downturns. Commission chairman Alan Greenspan is ''very much for'' this move, according to one commission source. Democrats object, saying it would simply shift economic risk to the retiree.

* Increasing the retirement age. One proposal would raise the age at which retirees qualify for full benefits to 66, for workers born after 1932. Thereafter, there would be further automatic increases, based on increases in national longevity.

* Changing the tax treatment of social security benefits. This change, based on a proposal of the Committee for Economic Development, would allow workers to deduct social security taxes on their federal income tax forms. Benefits, when received, might then be subject to income tax. The elderly are generally in lower tax brackets than the working population, so this move would likely result in some loss of tax revenue - but it would shift some tax burden off the shoulders of current workers.

The NCSS has now become the key actor in the continuing saga of social security. If the commission - bipartisan, but dominated by Republicans - forms a consensus on a set of reforms, Congress will similarly find it easier to break through partisan rhetoric and agree on ways to solve social security's problems.

''I'm sure there'll be a report,'' says Robert J. Myers, executive director of the commission. ''Whether there'll be a consensus or not - I won't stake my life on it.''

If the commission approves its final report by only a 9 to 6 or 10 to 5 margin, Congress is likely to view the document as a political product. Without a nonpartisan package of solutions, congressional action on social security's long-term problems is unlikely, say congressional sources - though the pressing short-term problem must be acted on.

''It will be disastrous if the (commission) vote is split,'' says a congressional aide familiar with the panel's progress.

The social security issue may land in Congress's lap during the special, postelection session that will probably begin on Nov. 29. Sen. Bob Dole (R) of Kansas, chairman of the Senate Finance Committee, has repeatedly said he favors dealing with the problem then. But the special session's agenda is already crowded, and House Speaker Thomas P. O'Neill Jr. (D) of Massachusetts wants to put off action on social security until the 98th Congress convenes in January.

When it finally tackles the issue, Congress will have the politically unpalatable task of weighing the importance of retirees' needs against the taxpaying ability of workers.

Years of scrutiny have produced a lengthy list of possible solutions to the retirement system's problems. Tying together a package of reforms means making hard choices about broad goals for social security.

Some key questions that Congress must consider:

What is the government's role in providing retirement income?

When social security was founded in 1935, it was meant to guarantee workers freedom from destitution in their old age. In this mission, the system has been successful: 35.2 percent of the elderly were officially poor in 1959, while but 15.7 percent were below the poverty line in 1980.

But since 1935 social security has become much more than an antipoverty program. Medicare, insurance for disabled workers, and an option to retire early have been added to the basic system. Benefits have been periodically raised, and in 1972 were hooked to increases in the consumer price index.

Outlays for social security have zoomed from $11.8 billion in 1960 to $195 billion today. This money comes from workers' pockets: In the last 30 years, the social security tax rate has quadrupled.

Toward the end of the century, when the baby-boom generation starts to retire , a shrinking pool of workers will support a growing number of retirees. Has Uncle Sam been too generous, promising retirees more than the country can afford?

Some say he has.

''Social security is too big . . . for its defects to be ignored,'' writes Peter Ferrara, in a Heritage Foundation report published before he took his current job as a staff member in the White House Office of Policy Development.

Mr. Ferrara proposes a radical reduction in the government's role in providing retirement income. He would enlarge federal programs that support the elderly poor, and gradually eliminate social security itself, while allowing workers to put money currently paid in social security taxes into expanded Individual Retirement Accounts.

On the other hand, there are those who feel the federal government's commitment to the elderly is, at best, adequate.

''The system is not one that is overgenerous,'' says one social security expert, who asked not to be named. ''When measured against the reasonable future capacity of the economy, the commitment doesn't get any greater.''

Spending on old age and disability benefits now accounts for 5.2 percent of US gross national product. Under current law, these benefits will account for 6. 1 percent of the GNP in 2030, and 5.2 percent in 2055, according to the 1982 report of the social security trustees.

How should beneficiaries be protected from adverse economic conditions?

Nasty economic events - oil price explosions, slow productivity growth, recessions - periodically surprise US citizens. To protect retirees from the income-sapping results of such shocks, Congress in 1972 indexed social security benefits to inflation.

Over the last 13 years, social security benefits have gone up 37 percent, after adjusting for inflation - but the average weekly wage of workers has not gone up at all.

Should retirees be expected to share in the misfortune caused by a floundering economy? Or, having put in their years on the job, should their purchasing power be totally protected from erosion?

Charles L. Schultze, chairman of the Council of Economic Advisers under President Carter, suggests increasing social security benefits by the yearly rise in wages, minus annual productivity growth. Congress could then periodically review benefit levels, and decide if further increases were necessary.

''It boils down to not quite giving retirees full, automatic protection against full inflation,'' he says.

Mr. Schultze also suggests a partial freeze on benefit increases over the next few years, as he believes that the consumer price index has overstated inflation. Such a freeze, says Schultze, would greatly ease the system's short-term problems.

But tampering with the cost-of-living adjustments of current retirees amounts to changing the rules in the middle of the game, say some critics.

And retirees react furiously when anyone questions their right to protection from the ravages of inflation. Much of their income, they say, is spent on items that increase in price faster than the general inflation rate: food, fuel, and health care.

''Senior-citizen groups and organized labor are very reluctant to give up the present guarantee of stable purchasing power,'' points out Robert Ball, social security commissioner from 1962 to 1973 and now a member of the National Commission.

What's the ''normal'' retirement age?

When social security was founded, age 65 was set as the boundary line between the world of work and the green fields of retirement. Later, workers were given the option of retiring at age 62, with reduced benefits.

But US citizens are now living longer. By the end of this century, those who retire at age 68 can look forward to as many years of leisure as those who retire at age 65 in the early years of social security.

Jobs are also becoming less physically demanding. ''A long-term shift in employment has taken place, from mining and manufacturing where health hazards are relatively high to trade and service jobs that older workers can perform with less strain and threat to good health,'' concludes the March 1981 report of the last commission appointed to study social security.''

Raising the retirement age would save social security huge piles of cash. Should workers stay on the job a few years longer before qualifying for benifits?

The Committee for Economic Development, for instance, recommends raising the retirement age to 68. The change could be phased in, says the CED, by rasing the age limit two months each year, until about the year 2000. This would eliminate the long-range problems of the Old Age and Survivors trust fund.

The CED also recommends raising the age for early retirement to 65.

Critics object that increasing the retirement age is, ineffect, a huge cut in promised benefits.

And, given the choice, more US workers are opting to leave their jobs at an earlier age. Since 1960, the labor force participation of males age 60-64 has slipped from 81 percent to 61 percent.A longer life also doesn't necessarily mean workers can stay on the job longer. The American Association of Retired Persons estimates that half those who take early retirement are forced off the job for reasons of health - though Robert Myers, NCSS director, says no one has solid figures on the matter.''We still don't know who has to retire,'' he says.Raising the retirement age isn't the only way Uncle Sam could encourage older workers to stay on the job and keep paying social security taxes. Redefining ''retirement,'' by increasing incentives for part-time jobs for the elderly, could also help ease the long-term outlook for the US retirement system.