Social security system may build a surplus in 20 years
Eighteen months after Congress revamped the social security system to deal with pressing financial problems, the retirement plan is ''out of the headlines and out of the red.''
So says Alicia H. Munnell, research director at the Federal Reserve Bank of Boston and an authority on social security. She and several other experts testified Tuesday before the Joint Economic Committee about the system's short-term and long-term prospects.
As a result of the benefit reductions and tax hikes Congress passed in March 1983, social security will be in good shape in the mid to late 1980s, unless an unexpectedly severe recession hits the United States during that period, the experts said.
And if current financial projections are correct, the social security system will enjoy large surpluses in the next two decades. These surpluses will allow the system to begin building a nest egg to cover retirement benefits that will be paid to members of the baby-boom generation in 2015 and thereafter.
The experts opposed trimming social security retirement benefits to bring down the federal deficit. ''The federal budget problem is in no way attributable to excessive'' social security retirement outlays, noted Gary Burtless, a senior fellow at the Brookings Institution.
Without corrective action, however, the severe financial problems expected to face the medicare portion of the program in the 1990s could put pressure on Congress to hold down retirement benefits, he said.
Whatever the future holds for the program, in the near term workers will be paying higher social security taxes. And retirees probably can expect a 3 percent cost-of-living increase in their January 1985 checks due to a recent increase in the inflation rate.
In late July, President Reagan proposed that an exception be made in the social security law, which requires consumer prices to rise at least 3 percent before benefit checks are increased. The Senate has approved Mr. Reagan's proposal and hearings have been held in the House Ways and Means Committee.
But given the seasonally adjusted 0.5 percent jump in consumer prices in August, most analysts expect inflation will rise enough to trigger a benefit increase without congressional action. To do so, the average consumer price level in the third quarter of 1984 must be 3 percent higher than the average level in the third quarter of 1983.
''It appears likely that the CPI will go above 3 percent,'' says Robert J. Meyers, a former executive director of the National Commission on Social Security Reform. He cautions that there is ''a small chance'' the price threshold will not be exceeded and so favors congressional action.
A 3 percent hike in social security checks would mean the average single retiree's monthly check of $425 would be boosted by $12.75. The average check going to a married couple would increase $21.99 from its current $733 level, according to Social Security Admininstration data.
Whenever a benefit increase is triggered, the wage base on which workers pay social secuity taxes also increases. So in 1985, the taxable wage base will be increased by the amount average wages of those covered by social security increased between the third quarter of 1983 to the same quarter of '84. According to Social Security Administration estimates, that means in 1985 workers will be taxed on the first $39,300 of their wages. This year, they were taxed on the first $37,800.
The rate of tax applied to those wages also will climb. In 1984, the tax rate was 7.0 percent, but employees were allowed a 0.3 percent credit on the payroll tax. This made the effective rate 6.7 percent. Employers, who match workers' social security taxes, paid at the 7 percent rate. But in 1985, workers and employers will be taxed at a 7.05 percent rate. So the maximum social security tax a worker could pay will jump 9.4 percent, from $2,532.60 in 1984 to $2,770. 65 in 1985. The $238.05 tax increase will thus eat up a portion of whatever wage gains a worker makes in 1985.
Further social security tax hikes already have been scheduled. The taxable wage base is expected to climb to $41,700 in 1986, when the tax rate climbs to 7 .15 percent. Another hike in the tax rate is slated for 1988.
Due to the tax and benefit changes enacted in 1983, ''there is a very high probability'' that the retirement system ''will not have another financing crisis in the 1980s,'' Mr. Myers said.
However, by depressing payroll-tax revenues, ''an especially severe recession in the next two or three years'' could cause the retirement trust fund balance to fall below the amount needed to pay benefits, Mr. Burtless said.
He rated such an occurrence as ''unlikely'' and the retirement trust fund could borrow from the hospital trust fund to cover the shortfall.
After 1988, the retirement trust fund will benefit from a tax increase scheduled for that year, as well as from favorable demographic factors. These include the relatively low number of new retirees due to low birth rates in the late 1920s and 1930s, Ms. Munnell said.
The experts advised against cutting social security retirement benefits or reducing cost-of-living adjustments to trim the budget deficit. Among other things, they said, such cuts would increase the number of elderly poor.
Certain reforms in social security could be made that would cut the deficit without such adverse effects, Munnell said. These include adding the value of fringe benefits to the wages taxed under social security and increasing the proportion of social security benefits subject to income tax for higher-income beneficiaries.
Tax rate Year Taxable on Maximum wage base on tax employees 1982 $32,400 6.7% $2,170.80 1983 35,700 6.7 2,391.90 1984* 37,800 6.7 2,532.60 1985e 39,300 7.05 2,770.65 1986e 41,700 7.15 2,981.55 1987e 44,100H7.15 3,153.15 1988e 46,800 7.51 3,514.68 1989e 49,800 7.51 3,739.98 e-Estimate *The tax rate in 1984 was 7.0 percent, but employees were allowed a 0.3 percent tax credit. This made the effective rate 6.7 percent.