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Cato Policy Report, January 1979

Social Security: Has the Crisis Passed?

by Carolyn L. Weaver

In 1977 it was announced that the Social Security program had "unexpectedly" accrued a deficit of $4.3 trillion, triggering the widely held belief that there existed a "crisis" in Social Security. Elimination of this deficit would, it was suggested, require massive tax increases. Payroll tax rates projected in 1972 to peak at 11.9% early in the twenty- first century were projected only three years later to reach nearly 30% by the year 2050. To this state of affairs, past Secretary of Treasury William Simon was prompted to say, "The future prospects of the system as we know it are grim."

According to the "official" perspective, which saw the crisis as essentially financial, the 1977 Amendments should put the claims of impending bankruptcy to rest and mark the passing of the crisis. The indexing provision that overresponded to inflation was modified, and tax rate and taxable earnings schedules were adjusted upward so that projected deficits as a percent of taxable pay- rolls were slashed from 8% to 1.46%. In the words of the Acting Commissioner of Social Security, the system is, once again, "sound and will remain so." For President Carter, these "tremendous achievements" represent the most important ame ndments to the law since the program's inception in 1935.

From an actuarial perspective, of course, an average deficit of 1.46% of taxable payrolls is still quite substantial. Even with the 1977 Amendments, which entailed the largest peacetime tax increase in U.S. history, it is anticipated that the average deficit for the OASDHI system will rise from $800 million in 1980 to $1.7 trillion in 2025, and reach $7 trillion in 2050, when expenditures are projected to reach 24% of taxable payrolls. The annual tax payment (employee plus employer) for individuals earning more than the taxable maximum is scheduled to rise from $2,140 in 1978 to $4,580 in 1983, reaching $6,550 in 1988. When the college students of today retire, moreover, people who are working at tha t time will be expected to saddle themselves with 24% tax rates to finance Social Security alone. How can it be said that the financial crisis in Social Security is be- hind us, particularly when it is remembered that the cost projections used by Congress to expand the program in 1972, just prior to the onset of the "fiscal crisis," actually projected that the system was overfinanced? Some wariness in embracing the "official" view about Social Security seems prudent.

This article originally appeared in the January 1979 edition of Cato Policy Report.


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