HARD QUESTIONS ON SOCIAL SECURITY

Commentary by Pete du Pont
Now that President Clinton has ratcheted up the Social Security debate with his proposal to dedicate budget surpluses to shore up a weakening system, the hard choices will soon be upon us.

The first hard choice concerns the huge Social Security tax rate increases that must soon be imposed to fund retirement benefits. At a 15.3 percent rate, the Social Security payroll tax is already the most burdensome tax for most workers. Since 72 percent of all Americans paid no more than 15 percent in federal income taxes, this means that for most people the payroll tax is the single biggest tax they pay.

And after the turn of the century, it is going to get much worse. According to my colleagues John Goodman and Dorman Cordell of the National Center for Policy Analysis, rising costs for Social Security and Medicare may raise the payroll tax rate to 53 percent by the time today's college students retire. A recent report from the General Accounting Office reached similar conclusions. According to it, by 2040 Social Security and Medicare alone will consume 100 percent of all federal revenues if present trends continue.

Thus we are presented with a seemingly insoluble dilemma. Social Security taxes are already too high, but inevitably must rise unless benefits are cut. Since there is no political will to reduce Social Security benefits -- and since America should honor its commitments to the retired -- it seems that we are on a collision course with fiscal doom.

Fortunately, there is a way out. The key is a bargain with current working men and women: in return for a cut in your current payroll taxes, which you can invest in your own IRAs or similar vehicles, you would accept a cut in Social Security benefits when you retire. These reduced benefits would not only be covered by your IRA earnings, but you will have the opportunity to retire with even greater incomes.

Over time, as today's retirees die, the tax rate could be further reduced, leaving Social Security as a true safety net for retirees, rather than the principal source of their income. Most of a future retiree's income would then come from private saving, such as Individual Retirement Accounts and 401(k) plans.

How could benefits be cut enough to finance such a privatized Social Security system? That leads to the second hard choice: increasing the retirement age. The retirement age has been fixed at 65 years since Social Security's inception. At that time, life expectancy for a male at birth was just 58 years. Today it is 73 years.

There is no question that the combination of longer life spans and rising Social Security benefits has encouraged many workers to retire earlier than they otherwise would. In 1940, the labor force participation rate for men age 65 was 70 percent. Today it is just 33 percent. Thus we are spending more on Social Security benefits at the same time people are contributing less because of early retirement.

So raising the normal retirement age is an important key to solving the looming Social Security crisis. In testimony before the House Ways and Means Committee on February 26, a number of experts agreed. Professor Richard Burkhauser of Syracuse cited studies showing that many older Americans would like to continue working, but are discouraged from doing so by Social Security rules that reduce their benefits. He found that getting older workers to delay retirement by just a few months does a great deal to reduce Social Security's long-term deficit.

Of course, the retirement age is already scheduled to rise to age 67, but that will not be until the year 2022. A much more significant rise will be necessary to save Social Security from complete collapse.

How would today's younger workers react to the prospect of not retiring until, say, age 70? Given increasing life spans and the shift to knowledge-based careers, I think they would have no problem at all, especially if given the opportunity to invest some of their own Social Security taxes in the market and own the assets those investments produce. Many younger workers already anticipate the need to work longer because they do not think they will get anything at all from Social Security when their time comes.

In short, I think younger workers are prepared to accept the loss of benefits implied by an increase in the retirement age. All they ask in return is the chance to keep more of their own income while they work. Cutting Social Security payroll taxes for younger workers while raising their retirement age may, therefore, be a trade-off that can work both economically and politically.