Social security could yield savings, experts say

Any effort to cut federal spending has to at last consider the possibility of pruning social security. Social security is ``gargantuan compared to any other nondefense program,'' says Rudolph G. Penner, director of the Congressional Budget Office (CBO). In the 1984 budget year, social security paid out $178 billion to 36 million disabled or retired workers and their survivors.

Social security payments now account for roughly 20 percent of federal spending, compared with the roughly 30 percent being spent on defense, Mr. Penner notes.

Observers from both the political right and left agree that the social security program is well run, with little administrative waste or abuse. Administrative costs are less than 2 percent of the amount paid in, social security officials say, vs. 5 to 10 percent for private insurance companies.

``I dont see much fat in this program,'' says Jack Meyer, resident fellow at the American Enterprise Institute (AEI).

Given the massive size of the federal deficit, any savings from running social security more efficiently ``are not even cats and dogs, they are guppies,'' says Martin Corry, an official at the American Association of Retired Persons.

Because the program is so well run, major savings could come only from freezing or cutting politically popular benefits previously approved by Congress.

Any program-related moves are ``taking money out of someone's pocket,'' says Gary Burtless of the Brookings Institution.

The CBO has identified a variety of savings that could be found in the social security system. The biggest dollar amounts come from scaling back cost-of-living adjustments (COLAs).

For example, holding the cost-of-living adjustment to 2 percentage points under the rise in the consumer price index (CPI) would save $53 billion over a five-year period, the CBO estimates. Currently, social security's COLA payments rise at the same rate as the CPI. Due to the recent decline in inflation, these 1984 estimates may be somewhat overstated, a CBO analyst cautions.

A one-year freeze on social security payments would save $5 billion in 1986 alone, Senate Republicans calculate.

Even discussion of any such changes triggers tremendous opposition.

``You can cut benefits in a lot of ways, but why does anyone want to?'' asks Robert Ball, a former social security commissioner and former executive director of the National Commission on Social Security Reform.

Mr. Ball notes that Congress acted in 1983 to put the system on a sound financial footing and that the price of COLAs was factored into the package. Further, by 1988 the system will be amassing large surpluses, so it can pay benefits in later years, when the ratio of retirees to workers is expected to climb sharply.

The likelihood of any drastic change in the system is slim. On Tuesday, however, House Speaker Thomas P. O'Neill Jr. (D) of Massachusetts said for the first time that social security was ``on the table'' in deficit reduction talks.

But he added that President Reagan would have to take the lead in pushing such cuts. The President's position has been that he would agree to social security cuts only if faced with an overwhelming bipartisan call for them.

Consideration of substantive changes in social security is ``complicated by the myths surrounding it,'' the CBO's Penner says.

Myth 1. Social security is like a private pension plan, in which individual recipients receive in retirement the money they contributed while they were working, plus interest.

Actually, social security ``is a transfer program from the current working population to the elderly,'' Penner says. For individuals now receiving benefits, taxes they paid into the system would have ``paid for a tiny fraction,'' of the checks they now receive, Penner notes. In fact, social security works on a pay-as-you-go basis: Each year's benefit checks are funded by taxes paid in that year.

The fact that current recipients did not pay anywhere near the full cost of their benefits makes it ``quite appropriate,'' to trade off social security spending with other spending programs or higher taxes, Penner says.

The issue of fairness to all taxpayers ``mandates that we include social security in the budget deficit control problem,'' the AEI's Mr. Meyer says.

Myth 2. Social security does not affect the federal budget deficit. In fact, the federal government operates on a unified budget, which tracks virtually all federal income and spending. Thus the budget figures include social security, even though the system is financed by its own payroll tax. As a result, any reduction in federal spending -- including social security benefits -- reduces the overall federal deficit. If social security spending were cut without an offsetting reduction in social security taxes, the excess funds would lower the deficit and strengthen the social security trust fund.

Another result of such a move, budget experts note, is that the government could borrow money from the growing surplus in the social security trust fund to finance other government operations. This would reduce the government's need to borrow in public credit markets. That might help lower interest rates.

Savings from the social security system also might be used to help prop up the financially troubled medicare program. That idea has been studied by the Reagan administration, a recently disclosed internal memo shows.

The CBO also says social security spending could be reduced by:

Limiting increases in benefit-formula ``bend points.'' The effect of this technical step would be to hold down the proportion of preretirement earnings replaced by social security benefits for new retirees.

Lengthening the benefit computation period. Lengthening the number of years of work under the system included in computing benefits would in effect lower benefits to new retirees by requiring more low-earning years to be figured in.

Ending benefits for children of retirees aged 62 to 64.

Tightening limits on maximum family benefits for recipients of retired and survivor benefits. Limits for these programs could be made to match the stricter limits already in place for families of disabled workers. Table: Potential cuts in social security. Cumulative savings in outlays over 5 years.

OPTION SAVINGS

1. Eliminate cost-of-living

adjustment (COLA) for one year $39.9 billion 2. Reduce (COLA) to 2/3s

of the increase

in the consumer

price index (CPI) $43.7 billion 3. Reduce COLA to CPI minus

2 percentage points $52.9 billion

4. End indexing of dependent's

benefits $11.9 billion 5. Limit increase in benefit

formula ``bend points'' $1.4 billion

6. Lengthen the benefit

computation period $1.6 billion

7. Eliminate benefits for

children of retirees

aged 62-64 $2.0 billion

8. Tighten limits on family

benefits for recipients of

retired and survivor benefits $2.4 billion Source: Congressional Budget Office -- 30 --