SOLVING SOCIAL SECURITY

It was easy for lawmakers and the media to criticize Federal Reserve Chairman Alan Greenspan for saying that Social Security benefits need to be trimmed, especially because he tied the need to rein in entitlement spending to the rising federal deficit.

The Fed chairman was simply restating an important warning that has long been ignored – the current Social Security system is unsustainable. That message remains true whether there is a deficit or a budget surplus. However, contrary to Mr. Greenspan’s assertion that the president’s tax cuts should be made permanent to spur economic growth, the huge and rapidly growing deficit is precisely what tax-cut naysayers predicted before it was approved by Congress last year. As the Fed chairman himself said, government doesn’t have the “resources to do it all.” Translation: Taxes can’t be cut unless government spending is reduced.

As for Social Security, “I am just basically saying that we are overcommitted at this stage,” Mr. Greenspan told the House Budget Committee this week. This is because with 77 million baby boomers reaching retirement age, there will be fewer workers paying into Social Security for every retiree drawing money out. There are cur-rently three workers supporting each retiree. That will drop to 2.25 workers for every retiree in 2025.

The coming insolvency of the Social Security program has been discussed for decades. Real fixes, however, have remained theoretical at best. Taking action soon is necessary even though the problem remains years down the road. Waiting until the crisis is imminent will likely mean draconian cuts or steep increases in the Social Security tax, pitting younger workers against retirees. Plus, letting today’s workers know what benefits they can expect when they retire will allow them to adjust their plans accordingly.

The trouble started in 1972, an election year, when Congress and President Richard Nixon decided to increase Social Security benefits by 20 percent and index them against inflation without providing the proper financing. To address the problem, Presidents Jimmy Carter and Ronald Reagan raised the Federal Insurance Contribution Act (FICA) tax. The tax, which is shared by workers and employers, went from 11.7 percent in 1977 to 15.3 percent in 1990, where it remains today. The increases were suggested by a commission headed by Mr. Greenspan.

Decades later, Mr. Greenspan told House members this week that they should consider raising the retirement age, which is already slated to increase from 65 to 67 over the next two decades. This will buy time to make better fixes because it will keep million of workers in the workforce, and contributing the Social Security, while also keeping them from drawing money out of the fund. It will, however, penalized workers in physically demanding jobs and prohibit more young workers from securing jobs vacated by older workers. Another Greenspan suggestion is to base increases in Social Security benefits on a measure other than the Consumer Price Index, which economists agree overstate inflation.

This may be helpful, but more significant changes need to be considered. Means testing has been debated for years. Although the idea of tying a senior’s benefits to their wealth is politically unpopular, it may be more palatable than increasing FICA again.

Other changes that should be debated include raising the Social Security tax cap. Now, no earnings above $80,000 a year are taxed. That means that someone earning $35,000 a year contributes $2,170 to Social Security, with a tax rate of 6.2 percent. A person making $200,000 a year contributes $4,500 to Social Security, for a tax rate of 2.25 percent.

Mr. Greenspan has re-identified the problem on the horizon. Members of Congress should heed his warning to act now before the crisis arrives.