by  John H. Makin,                   (11/2/88)
                 Director of fiscal policy studies 
               at the American Enterprise Institute
        Op-Ed page of The New York Times, Oct. 8, 1988
             [Kindly uploaded by Freeman 07656GAED]

Robert S. Strauss has uttered the unutterable.  Recently,  as 
cochairman  of  the  National Economic  Commission  created  to 
devise  a bipartisan solution to the budget deficit, he  hinted 
that  deficit reduction would require less spending  or  higher 
taxes.  Bad enough.  Worse, since almost half of spending is on 
entitlements, including Social Security, he further hinted that 
the  commission  might  think about  slower  growth  in  Social 
Security benefits.
  Both  Presidential  candidates  immediately  repudiated   Mr. 
Strauss's shocking lapse into truth.  That bit of politics not-
withstanding, Mr. Strauss didn't go far enough.  Major  changes 
in  Social Security are required--changes that would mean  both 
lower budget deficits and a cut in regressive payroll taxes.
The  Social  Security  system  is  grossly  unfair  to  every 
American  under the age of 45.  Today's retirees receive  about 
$3 in benefits for every dollar paid in Social Security payroll 
taxes.   But  between now and the time when the  under-45  baby 
boomers  begin to retire, the ratio will drop from $3  to  just 
   The  widely advertised $12 trillion surpluss being  predicted 
for  the  Social  Security Trust Fund  will  not  help  either.   
Quite the reverse.
   This surpluss--a creature of the 1983 increase in the  Social 
Security  payroll  tax--only exists because  of  an  accounting 
trick employed by the Federal Government.  In the  years   when 
payroll  taxes to finance Social Security benefits  exceed  the 
benefits  actually  paid, The Social Security  system  acquires 
special government bonds.  The system is then credited with the 
interest  on  those bonds.  Fair enough.   But  that  interest, 
which  will accumulate to just $12 trillion between  today  and 
retirement by today's workers in their late 20's, will be  paid 
by the Treasury out of general revenues collected from the same 
workers  whose  payroll taxes were raised.  In short,  the  $12 
trillion surpluss just measures another increase in taxes  over 
and above higher payroll taxes.
   Today's  middle-aged and younger taxpayers may think that  at 
least this painfully accrued "trust fund surpluss" will pay for 
their children's benefits.  It will not.  As today's  taxpayers 
in  their  30's and 40's begin to retire, their  large  numbers 
will require that all of the surpluss be paid out in benefits.
   It is ironic that a child born in 1983 to a baby boomer whose 
taxes  were  raised to "rescue" Social Security  will  be  left 
facing the same crisis his or her parents had faced that  year.  
Sixty-five  years  after 1983, the "rescue" will  leave  Social 
Security bankrupt again.
   The  problems of Social Security are the result of a  radical 
transformation  of  the system from a simple safety net  to  an 
intergenerational Ponzi scheme.  During its first half  century 
of operation, the system has provided a very generous  benefit-
contribution  ratio for Americans born during the 40 years  be-
fore  World  War II, but little, if any, net  benefit  for  the 
numerous  baby  boomers  and  nothing  at  all  for  subsequent 
   This  cross-generational pattern of discrimination is  rooted 
in mutually reinforcing causes:  short-sighted attempts by pol-
iticians  to  curry favor with a  growing,  politically  active 
population  of older Americans, and the 1946 to 1962  surge  in 
birth rates.
   During  the Great Society  years of 1968 to 1974 [?],  Social 
Security  benefits were doubled while average  weekly  earnings 
rose by only half that amount.  This benefit bulge  preordained 
a  rise in payroll taxes since wage earnings are the  tax  base 
from which Social Security benefits must be financed.
   In  an effort to slow the extravagant increases in  benefits, 
responsible  members of Congress made an effort to index  those 
benefits to inflation, reasoning that such  increases would  be 
less  than the 10 percent to 20 percent annual increases  being 
pushed through by less responsible politicans.  They were wrong.
   Unfortunately, indexing took effect just as a period of unus-
ally  high inflation was begining.  The double-digit  inflation 
of  1979  to 1981 meant that benefits increased by  another  40 
percent; earnings, however, rose by only 16 percent.
  The  jump  in the payroll tax burden  that was  necessary  to 
this benefit bulge was compounded by a steady rise  in   
the  ratio of the retired to the working population.  In  1950, 
there  were  16.5 payroll taxpaying workers  for  every  Social 
Security  recipient.   By 1980, the ratio had dropped  to  3.2.  
That  drop, when combined with the hugh benefit increases,  led 
to the 1983 Social Security bankruptcy crisis.
   This  demographic  vise will continue to tighten.   For  baby 
boomers  there will be only two workers per retiree  when  they 
retire  and a 1983-style crisis calling for still higher  taxes 
will thus emerge all over again for their children.
   The bogus trust fund surplus and the poor disign of the  Soc-
ial  Security system should prompt serious consideration  of  a 
return to a safety net concept for Social Security. [?]
   Only about one-fifth of Social Security outlays is  necessary 
assure that no American over age 65 has an income below  the 
poverty  line.  The payroll-tax based Social  Security   system 
should be phased out over a 40  year  period  for 
Americans under 50 and replaced by a simple negative income tax 
applicable to individuals over age 65. [?]
   The  negative income tax would mean that any individual  over 
65  with  an income below the poverty line [whatever  that  is] 
would  receive a check from the Government that would lift  him 
or her out of poverty.  [At whose expense?]
   A  phase-out  of payroll taxes would provide  Americans  with 
increased means to provide for retirement by investing as  they 
see  fit,  rather than by saddling  them  with  ever-increasing 
   Those  who  cling  to the idea of  an  ever-expanding  Social 
Security  system  should  reflect on the  likelihood  that  the 
simplest way to achieve a phase-out of today's Social  Security 
system would be to make participation in the system  voluntary.
[But  let's not replace it with a scheme to make retirees  out-
right welfare recipients, BG.]
   Robert  Strauss  deserves praise for having  the  courage  to 
raise the issue of Social Security as he and his colleagues  on 
the National Economic Commission wrestle with the budget  defi-
   Granted, returning Social Security to a safety net program is 
not  what Mr. Strauss had in mind.  But once  the  Presidential 
candidates  and other commission members realize that  such  an 
approach would mean both less spending and lower payroll taxes, 
they might at least be willing to talk about it in public. 

[Social  Security, and Medicare (and Medicaid) should  be  made 
voluntary and then phased out completely, along with all  other 
welfare -state schemes that can't be ended precipitously, BG]   

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