Social Security Penalty

WHEN one collects a corporate pension, he pays taxes on it at the normal income tax rate. Not so with a Social Security pension. Under current law, older workers between the ages of 65 and 69 lose $1 in Social Security benefits for every $2 they earn above $8,800. The limit is $6,480 for workers under age 65, and there is no limit for those 70 or older. The penalty amounts to a steep 50 percent marginal tax rate, well above the top marginal income tax rate of 33 percent.

This penalty stems from the days of the Great Depression when jobs were scarce. It was meant to encourage full retirement to open up positions for younger workers. Even then this high taxation of the working elderly was dubious. That's because those choosing to work in their senior years will spend or save their extra earnings, adding to the consumer demand and capital supply that creates new jobs.

The system makes even less sense today when the average age is advancing rapidly. Government should be encouraging older people to work and add to the nation's output, especially when that makes them happier or provides needed income. Government will still reap a share of these earnings from normal taxation.

Now a study by two research groups maintains the new taxes paid by older workers would exceed by some $140 million the higher Social Security benefits.

At present, almost 1 million Social Security beneficiaries lose some or all of their benefits each year. Another 100,000 people in the 65-to-69 age group do not file for Social Security benefits.

The new report, by the Institute for Policy Innovation and the National Center for Policy Analysis, calculates that removal of the earnings limit would prompt more than 700,000 retirees to enter the labor market. Output of goods and services would increase by at least $15.4 billion. Government revenue would rise by $4.9 billion, modestly exceeding the cost of continuing to provide full Social Security benefits to these working elderly.

The Social Security Administration believes, contrary to the analysis of the two Dallas-based research institutes, that relaxation of the earnings limits would cost the government money.

One test of these views will come next year when the earnings penalty is reduced to $1 on every $3 earned, or 33 percent. The extra earnings of older people encouraged to work by this lesser penalty should give some idea of the cost - or additional revenues - of the government.

The House Ways and Means Committee has voted to raise the earnings limit for those aged 65-69 to $10,440 by 1991. That's an improvement, but not enough.