The MacNeil/Lehrer Report; Social Security

NARRATOR: The Social Security bill for job insurance and old-age pensions becomes a law. President Roosevelt signs the measure, and hails its far- reaching consequences.

PRESIDENT FRANKLIN D. ROOSEVELT: This Social Security measure gives at least some protection to thirty millions of our citizens, who will reap direct benefits through unemployment compensation, through old-age pensions, and through increased services for the protection of children and the prevention of ill health. We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-stricken old age.

ROBERT MacNEIL: Good evening. It`s more than four decades since Franklin Roosevelt signed the Social Security Act. The system has grown enormously in that time, becoming a central part of American life. But it`s also been getting into financial trouble, and is now threatened with bankruptcy. Last May President Carter proposed some new ideas to refinance the system; Congress rejected most of them, and both houses have passed bills calling for large increases in the traditional payroll tax. The bills now await action by a conference committee, and there should be a new law by the first of the year.

The tax increases contemplated would amount to some $200 billion over ten years, and some people are deeply worried about what that may do to our pocketbooks and the economy. Tonight we examine the consequences of rescuing Social Security. But first, a little primer on what Social Security is -- and what it isn`t. Jim?

JIM LEHRER: Robin, the best place to begin is with what Social Security is not, and that means despite its billing it is not an insurance system -- never has been, and never will be. Each of us does not have his or her own Social Security policy account on the books here in Washington, putting our contribution aside in our name to be paid out with interest on retirement. It not only works differently than insurance, it pays better. Let me run through an example to show what I mean. Pardon the figures, but they`re necessary to understand it.

Let`s say a person, call him Billy Bob Dunn, retired this year at age sixty-five. He`d been working since 1937, and had paid the maximum payroll tax, otherwise known as the Social Security contribution. Dunn`s total contribution over those forty years would be $8,700. Dunn`s employers through the years matched that with another $8,700, making the total $17,400. Now, let`s assume those contributions earned interest at the prevailing savings account book rates from 1937 until now. We`re now up to $28,000. If it was an insurance annuity, our man Dunn, retiring at sixty- five, would get about $240 a month from an insurance company. But under the Social Security system Dunn`s monthly check, effective January 1 of this year, would be nearly twice as much as an annuity would pay. The difference, $220, constitutes the real difference between Social Security and insurance. That $220 is subsidized by the working population and their employers in equal amounts. Payroll taxes collected this year from all those people Dunn left behind in the working place go directly to the Social Security system`s beneficiaries: Mr. Dunn and other retirees, as well as the disabled and others receiving Medicare and survivor benefits. In simple terms, Social Security is a pay-as-you-go arrangement. Money comes in from those still working to pay benefits to those who no longer are. Robin?

MacNEIL: The problem today is that more money is going out than is being collected in payroll taxes. This year, for instance, outlays will total about $104 billion, but only about $98 billion will be collected, leaving a deficit of some six billion. That will be made up from reserves, set aside in the Social Security trust funds, which is supposed to cover a year`s payout. But this is the third year in a row that the system has run a deficit, and the reserves are already below fifty percent of one year`s payout. If the process continues, the various trust funds will begin to run dry, starting in 1979.

James B. Cardwell has been Commissioner of Social Security under the last three administrations. Mr. Cardwell, how did we get into this trouble?

JAMES CARDWELL: We got into this trouble in many ways, the same way the country has gotten into other troubles involving inflation and unemployment. This system, as has been pointed out, is a pay-as-you-go system. Today`s workers pay in and the amounts that they pay in go to pay current beneficiaries their benefits. As we were struck at the beginning of 1973 with unpredictable and very high rates of unemployment, fewer people were paying into the system; less money was coming in. In 1972 the Congress indexed the system. That means that as the cost of living went up, driven by the same inflation that created the unemployment, our liabilities were higher. Indexing means that every year as the cost of living goes up, our beneficiaries are entitled to a higher benefit, indexed to the cost of living. So we had fewer workers paying in, and we had as a result of inflation higher benefits to be paid out. The two do not come together.

MacNEIL: Well, Mr. Cardwell, if the unemployment situation improved, as the administration hopes it will, over the next few years, would that take care of it; if there were enough people working, would they be paying in enough to take care of these higher benefits?

CARDWELL: No, we can`t solve the problem that way; we wish that we could, because we do predict improved unemployment on into the future. Using a five percent unemployment rate looking into the future, the system still will anticipate a long-term deficit. Now that`s driven by two other events and circumstances. The first is that as we look out on the future we come to realize that our population is going to shift in terms of the number of older people eligible for benefits in contrast to a number of younger people paying in. And even with high rates of employment, the ratio of persons paying in to support the system to the people eligible for benefits and drawing out of the system will shift, with fewer workers paying in and a larger number of older people drawing out.

MacNEIL: I`ve seen some figures that say this year three workers are paying in for every one beneficiary receiving, but that by the year 2030 only two workers will be paying for every beneficiary.

CARDWELL: Those figures are correct, and they illustrate the point.

MacNEIL: I see. How could this situation have been avoided, the potential bankruptcy situation?

CARDWELL: If we look at the long-term view, this matter of the shift in the population, there was no way it could be avoided. We are not good as demographers in predicting the kinds of shifts in the population that are now occurring. No one in 1950 would have predicted that by the year 2000 the ratio of old people to younger people would have shifted as we now predict they will. So that was beyond anybody`s capacity.

There`s another factor that affects the long-term picture, and that goes back to the way in which the system was indexed in 1972, this matter of authorizing automatic cost-of-living increases. There a mistake was made, it seems to me, and I think others now agree, in the way the formula was devised in 1972. That formula will have the effect, after the turn of the century, of paying some workers higher benefits under Social Security -- their benefits would exceed the amount that they actually earned at the time they retire. That was avoidable, and I would emphasize that both of the bills, the House bill and the Senate bill now pending in conference, would remedy that problem. And that would solve about half of the long-term deficit that the system now faces.

MacNEIL: I see. Thank you, Mr. Cardwell. Jim?

LEHRER: While the two versions in the House and Senate do agree on that point, there is one major disagreement in Congress over the new shape of the Social Security, and it has to do with who bears the larger share of the increased payroll tax burden. Now payroll taxes are paid equally, as I said a moment ago, by employees and employers on a matching basis. In the language of Social Security, borrowed from the farmers, it`s called "parity," but that would change under the Senate version, which would break the equal share/parity tradition by having employers pay more than employees. Senator Gaylord Nelson, Democrat of Wisconsin, was floor manager for the bill in the Senate, and chief proponent of the break-parity provision. Senator, why should the employers pay a bigger share than the employees?

Sen. GAYLORD NELSON: You can get the money to finance the Social Security system in any number of combination of ways. One of them is to dramatically increase the base on which taxes are paid, or more dramatically than the current law provides. And increase taxes, or increase taxes more heavily and slower on the base. Or you could take a combination of those two and raise the base higher on the employer than on the employee. The Finance Committee bill does that, although it should be kept in mind that they would come back to parity again in about twenty-two years, because we`ve put a $75,000 base and that`s where the base on the employee would be in the year 2000, 2001.

LEHRER: "Base" meaning he`d pay payroll taxes only up to $75,000 of income.

NELSON: That`s correct. Now, as I said to the Finance Committee and on the floor of the Senate, when you`re talking about increasing taxes, no matter what the circumstances may be and arguing about various plans to do it, as I said to them, the one that I was advocating was less worse than the rest of them. There isn`t going to be any of them that`s popular. It does have some handicaps and it has some benefits, just as the rest of them do. It doesn`t raise the tax as high, therefore, as it does on any of the other plans. The tax paid by the employer is deductible, and there is a long-term feature: since the benefits an employee gets are based upon the base on which he pays, the higher the base the higher his benefits; so if you do not raise that base as high as rapidly, you don`t make the long-term commitment which the employer has to share in paying. So that`s the combination we took. We had difficulty, of course, getting through Finance, getting on the floor of the Senate. We will now go to conference with the House and all these issues are in conference and what will come out will be a compromise of what each house did.

LEHRER: Let`s talk about compromise for a moment. As you say, it was close on the Senate floor -- in fact, there was a tie vote and it was broken by the vote of the Vice President, so you even had problems in the Senate.

NELSON: Well, that was on a motion to table, which happened the time before on a motion straight up and down on practically the same proposal; it was fifty-forty.

LEHRER: Okay. At any rate, it`s close. So do you think that this particular provision will survive conference committee, or is the proparity feeling too strong?

NELSON: Well, I can`t answer that question. As you know, the administration proposed that there be no ceiling at all, that you just raise it and pay taxes on $500,000 of income, or Janine`s income of $900,000. I advocated fifty in `75 with a phasing back together again when the employee got $75,000. I`m sure that each of the tough issues between the House and the Senate will have to be compromised a bit by each side. That`s just the reality of the situation. We won`t win everything that the Senate adopted, and the House isn`t going to win everything that they adopted, and that`s what negotiation is all about; and they`re reasonable conferees and I think ours are, and we`ll work something out.

LEHRER: All right, Senator, thank you. A few more figures now to explain how the House version differs from the Nelson-Senate one on this question of parity. Under the House bill, by 1986 the tax rate for both employers and employees would rise to 7.1 percent, with a maximum wage base going to $40,200. That means that the stiffest possible bite would be $2,854 for both the employer and the employee. Now, under Senator Nelson`s plan the employee`s contribution would go up to $2,279 by 1986, but the employer, under the maximum situation, would pay as much as $5,325. Now all of the opponents of the Nelson-Senate approach are not in the House and Senate; another is the U.S. Chamber of Commerce, and Michael Romig is an economist with the Chamber.

Mr. Romig, why shouldn`t the employers pay more than the employees as outlined by Senator Nelson?

MICHAEL ROMIG: Well, we think there`s two reasons that we shouldn`t go that way. First of all, what they`re doing is hiding the tax increase. They`re hiding it in terms of fewer jobs, higher prices, lower wages. The second one, and the one I think should concern us ...

LEHRER: Wait a minute. How would that affect those three very crucial areas? In other words, the taxes that the employers pay will be funneled right back into higher prices, is that right?

ROMIG: That is correct. We must understand that there`s no free lunch here. We`re going to pass these costs on to the best extent that each firm can. Some firms will raise prices, other firms will cut workers or not hire new employees, and others will reduce profits, reduce services, whatever way they can pass this cost on.

LEHRER: I take it, then, that you would not agree with Joseph Califano, the HEW Secretary, who said that there`s ample flexibility for companies to pay the increased payroll taxes out of existing profits without passing it on in price increases?

ROMIG: That is certain that we do not agree.

LEHRER: All right. You were going to make a second point.

ROMIG: Oh, yes, the second point -- and I think the one that should disturb us even more -- is that the equal tax has been very significant as sort of a check and balance mechanism. It has really served to work against runaway benefit increases. There`s nothing that a politician responds to more than an outraged taxpayer. And as we decrease the tax, or put the tax only on one small segment of the American public, that outrage is reduced correspondingly.

LEHRER: Do you agree with Mr. Cardwell, who said a moment ago that one of the real problems that`s caused Social Security to be in the state of affairs that it`s in was the decision by Congress in 1972 to index, to gear benefits to the cost of living?

ROMIG: Oh, yes, no question. There was a flaw in that formula and it has given rise to the possibility of some tremendous windfall benefits. It`s like putting your money in a bank account where they guarantee you five percent; when you get your first return you find out they`ve credited you with ten percent. You know it`s wrong, and this is the situation we have here.

LEHRER: What is the Chamber`s basic position on the way to save Social Security? You go with the House, then, rather than the Senate?

ROMIG: Actually, the Congress has given us the choice between the devil and the deep blue sea. We had advocated a more common-sense approach in which with the magnitude of tax increases that were necessary we wanted it increased as early as 1976. We wanted that increase to be placed on everyone, including members of Congress and other public employees, who do not pay into the program, and we of course wanted to cure this benefit flaw that was created in 1972. The Congress, of course, has delayed, and each year we`ve delayed it means that there`s that much more deficit that we have to pick up in the future. Secondly, they have decided that they want to put the tax -- whether it be the House, where they load it primarily on high-wage employees and their employers, or the Senate, which puts seventy- seven percent of the increase on the employer community -- they want to put it on a select few. These people are going to react in a way that is predictable, and I think it`s going to have some real problems for us in the future, particularly for the economy.

LEHRER: All right, thank you. Robin?

MacNEIL: Another economist who`s run the figures through his computer model of the economy to find out the effect on the economy is Richard Hokenson of Merrill Lynch Economics. First, the impact he predicts on unemployment: his figures show that the House bill could cost up to 400,000 jobs in 1982 alone, and the Senate bill, 650,000 jobs. On inflation, his computer model estimates that the House bill would raise the cost of living by an additional three-tenths of one percent in 1982; the Senate bill, he says, would raise prices by an added one-half of one percent. Mr. Hokenson, could you explain, simply -- in terms that I can understand -- how we would lose 400,000 jobs? In other words, 400,000 additional people to other causes would be out of work, you predict, if this House bill went into effect, in 1982?

RICHARD HOKENSON: That is correct.

MacNEIL: How does that happen?

HOKENSON: As Mr. Romig pointed out, businesses will view the tax as an increase in cost, which they will attempt to pass forward in increased prices. They will also reduce somewhat the work force as a result of the anti-jobs bias. The increased inflation rate reduces real purchasing power of all consumers in the United States.

MacNEIL: It just takes more money out of all our pockets, because we have to pay more into the Social Security tax.

HOKENSON: Yes. Well, there`s two effects. One is, the Social Security taxes are increased, which reduces our income dollar for dollar; but secondly, inflation is a tax we all pay, so our real purchasing power is again reduced as a result of the higher prices. That results in a 400,000 job loss under the House bill, and because the Senate bill passes more of the tax increase to employers it results in a higher inflation premium and a greater loss in jobs.

MacNEIL: I see. Now, are these the sort of "worst case" figures? Have you put it in the worst light?

HOKENSON: No, I don`t believe so. I wouldn`t characterize these as optimistic figures, but based on normal reactions in the economy. If employers or employees were to lose greater confidence as a result of these tax increases, the results could be somewhat more negative.

MacNEIL: Is there any way that Social Security could be funded adequately which would not have either an inflationary effect or a drag on the economy and higher unemployment?

HOKENSON: As long as there is the prospect of deficits under current proposals, there will be increases in taxes and there will be increases in benefits. We would only ask that the Senate and the House give some thought to how quickly they increase some of the benefits payable to people.

MacNEIL: Just to sum up, then, you`re saying that if these bills or some compromise on these two bills with more or less the same provisions became law on the first of the year and we were paying these additional taxes, that there would be a serious impact on the economy in terms of unemployment and inflation.

HOKENSON: Yes, I would characterize this as a serious impact.

MacNEIL: Senator Nelson, did you gentlemen take that into consideration in the Senate particularly, when you were passing this bill?

NELSON: Yes, both sides discussed it and the Congressional Budget office analyzed it. What we were faced with is the necessity for raising $70 to $75 billion over and above what the current law raises. The Chamber of Commerce supports the necessity of raising the $70 to $75 billion, the House supports that necessity, the administration does, the Senate bill does; so I suppose the real question is, if you`re going to keep the system adequately funded, where else do you get the money without creating the problem that Mr. Hokenson talks about?

MacNEIL: What`s going to be necessary, Senator, to offset this effect on the economy, if it`s generally recognized? Administration spokesmen -- spokespersons -- have been predicting a tax cut early next year or in the middle of next year -- by anything from $15 to $20 billion; would this effect require an even greater tax cut to offset it, do you believe?

NELSON: Well, I`m not an economist, and the administration, partly because of these increases, is talking about a tax cut in the dimension of which you mentioned. And whether or not that avoids exacerbating the problem and how much, I don`t know.

MacNEIL: Let`s ask Mr. Romig that question. What does the Chamber think on that? Is a bigger tax cut necessary to offset these possible drags on the economy, bigger than the administration`s been talking about, do you believe?

ROMIG: I think that`s what`s the thinking in the employer community right now, that we`ll have to offset this; and certainly a tax cut is one alternative. But as yet we haven`t agreed finally on the magnitude of this tax increase.

MacNEIL: I understand that. And we won`t until we know which bill comes through.

ROMIG: We`re hopeful that the tax increase will be as small as possible and that it be spread out among as many people as possible so that there will not be this reaction to a major tax increase.

MacNEIL: Let`s look at this from a different angle. Mr. Cardwell, as I understand the report of the Board of Trustees of Social Security, you and the Congress based your figures this year on a prediction which wasn`t the most optimistic about how the economy would perform, but a kind of middle- road optimistic prediction, which nevertheless says that by 1984 the unemployment will be down to five percent, inflation down to four percent, wages will only be rising at five and three-quarters percent a year, the birth rate will be rising again a little bit; if these assumptions turn out to be too optimistic -- and there are many more pessimistic assumptions around -- will we not need another rescue plan just a few years from now?

CARDWELL: I think one answer to that question has to do with the importance of the contingency reserves, and whether either of these bills would permit them to be held at a high enough level to carry the system over surges, driven by unforeseen events in the economy. The reserve is very important in that way. No one can predict with certainty exactly how the economy -- or the population -- is going to behave in the future.

We just make the best estimates we can.

MacNEIL: Do you think their estimates are good?

HOKENSON: Their estimates would represent a good case outlook. C-:e additional point I would like to make is, as a result of these economic implications of lower growth and higher inflation that both the Senate and the House plans would mean that the revenue estimates are likely -the actual revenues will come in lower than estimated; and as a result of the higher inflation and the indexing and the benefits, the benefits are likely to be higher than are estimated under both plans.

MacNEIL: I guess what the average person would like to know, not being an economist, would be, are we likely, given what`s probable, to be back two or three years from now facing yet another massive increase in Social Security taxes beyond this one? Senator Nelson, do you think that`s likely?

NELSON: No, I do not think that`s likely. Using the intermediate assumptions -- and that`s all we can do, is use some assumptions -- the intermediate assumptions referred to by Mr. Cardwell, the Social Security plan will be financed and in balance through the year 2050. What a lot of people forget about this when they`re talking about the tax increases is that the average wage is $10,000 a year. The average wage in the year 2000 will be $38,000, and the average wage in the year 2050 will be $300,000.And the person making $16,500 will be getting above that -that`ll be about $600,000. Well, if you do not increase the base, thus paying more dollars, the person twenty-five and thirty years from now will be retiring on enough to pay his board and room for one day. So remember that the dollars paid are dollars paid on a much higher income ten, twelve, and fifteen and twenty years from now.

MacNEIL: Thank you, Senator, and thank you all in Washington. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: Thank you, Mr. Hokenson. That`s all for tonight. Jim Lehrer and I will be back tomorrow night. I`m Robert MacNeil. Good night.