Proposing a 2% Solution

The House of Representatives last week voted to maintain the $122-per-month minimum level for Social Security benefits, but that action will certainly not end the controversy surrounding the troubled program. Harvard's Martin Feldstein, a member of TIME'S Board of Economists, looks at the problems of Social Security and some proposed solutions:

Political leaders are at last beginning to recognize that Social Security has major financial problems that can be solved only by slowing the growth of benefits. The Social Security Administration's own actuaries predict that the retirement fund will be out of money by 1984. Fancy financial footwork can avert bankruptcy that year, but the program's long-term problems cannot be avoided.

When the postwar baby-boom generation retires, there will be more than 50 retirees for every 100 people at work. Today there are fewer than 35. This 50% increase in the relative number of retirees will require a 50% increase in the payroll tax rate unless the benefit rules are changed. The rapid future growth of benefits will eventually require payroll tax rates of more than 20% and perhaps even higher than 30%. Adding such a payroll tax to federal and state income taxes would mean that most American families would face tax rates of more than 50%.

The only solution to the long-term problem is slowing the growth of benefits. One proposal is to gradually postpone from 65 to 68 years the age at which an individual can retire with full benefits. The resulting savings, however, would still be only a fraction of what is needed. A more direct approach to slowing the growth of benefits is also needed.

The basic reason for Social Security's immediate problems is that benefits have been growing extremely fast. Between 1970 and 1980, the average retiree benefit rose by 30% more than the increase in the price level. In contrast, the average earnings of American employees actually fell 10% behind the increase in prices. Thus, Social Security payments rose an astounding 40% relative to the earnings of the employees whose taxes pay for these benefits.

Nevertheless, the level of assistance should not be cut. The promise of Social Security benefits should be like money in the bank. The appropriate solution to the problem is a gradual slowing of the growth of grants for current and future retirees.

I favor the following plan. Starting in 1982, retirees' benefits would grow each year by the price rise in excess of 2%, instead of by the entire price rise as they do under current law. Thus, if inflation raises the price level by 8%, retirees' benefits would increase by 6%. Under no circumstances would the benefits for retirees be cut. For example, a retired couple that now receives $700 a month from Social Security would see its benefits rise to $756 next year, if the inflation rate is 8%. With a 2% floor, benefits would instead rise to $742.

Placing a 2% floor under Social Security's benefit increases would obviously not cause a sudden change in anyone's lifestyle. But by 1985 it would permit a $15 billion reduction in the taxes required to pay for Social Security benefits. By 1992 payroll tax rates would be one-fifth lower than under current law. The rising number of baby-boom retirees could then receive their benefits without substantial further increases in the tax rates.

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