Seeking Social Security solutions.

• Author: Schnepper, Jeff A.

EACH DAY, newspapers serve up economic headlines offering alternative remedies to reduce the growth, if not the magnitude, of the national deficit. Yet, in all of the magic bullets aimed to decrease that deficit, one program is untouchable--Social Security. It will remain holy as long as such high proportions of the elderly continue to vote. Nevertheless, Social Security, which consists of three trust funds, is in financial trouble. A report issued by the Senate Finance Subcommittee on Social Security and Family Policy showed the Medicare trust fund will run out of money by 2002; the Disability trust fund will be exhausted by 2016; and the Social Security trust fund will be insolvent by 203 1.

The problem is that, unlike a traditional pension plan, Social Security lacks the reserves today to make tomorrow's payments. The current levy on wages lacks a savings element. While it is sufficient to cover current payments to recipients and meet some interest on the national debt, "pay-as-you-go" planning soon will hit the wall of the baby boomer generation. Projected future workers will not be sufficient to generate the cash needed to maintain scheduled payouts under the current structure.

The options are not complicated. Either rates will go up, the wage base will be expanded, or benefits will be reduced. Under 1995 rules, employers and employees pay a "tax" of 6.2% on the first $61,200 over covered compensation (the FICA wage base) plus an additional 1.45% on all covered compensation (the Medicare Part A Hospital Insurance), without limit. The self-employed remit both the employer's and employee's share (12.4% and 2.9%, respectively), but get an income tax deduction for one half of the total paid.

Some combination of the above solution mix must be implemented. Alternatively, a portion of the Social Security payout will come from general revenues--funded by increased income taxes or reduced expenditures in other areas. All of the above have been used in the past. Younger workers now have to work longer to get full benefits, despite the fact that their Social Security wage base and the percentage paid on it have been increased.

Politics continues to preempt practical reality. Shirley S. Chater, Commissioner of Social Security, has said that "no short-term crisis exists and we should avoid creating an atmosphere where hasty decisions might be made." Americans must focus on "short-term," as 2002 is the year of the first trust fund insolvency. This...