tax. Even if inflation rates which are much lower than today, people will be moving into higher and higher brackets and at some point taxes have to be cut.

All I am saying is that at the time when you do cut taxes, instead of cutting the income tax rate as much as you otherwise would, there are good economic reasons and good reasons from a distributional standpoint to first make the cut in the payroll tax and then you make up for it by not decreasing the income tax rate as much as you otherwise would.

Senator DANFORTH. Yes.

Mr. BALL. That is what it would amount to.

Senator DANFORTH. I understand exactly what you mean.

Mr. BALL. Now, if it is painless, or not as painful as something else, that does not make it less desirable, as long as it accomplishes the purpose.

Senator DANFORTH. But the whole reason for any kind of a general tax reduction is that the Government is increasingly taking more and more out of the economy and you do not want to take so much out.

So you have a tax cut to make up for that and all you are saying is that you do not want to make that adjustment completely. You simply want to transfer more in effect out of general revenues.

Well, there is nothing unpopular about that, but I do not know how long we can continue telling people that everybody is going to be happy. I do not think they are very happy. We have got an 18percent general inflation rate.

Mr. BALL. This plan does not primarily address the issue of the 18-percent inflation rate. But I think it is important enough to mention, and that is, although there are arguments among economists as to whether a reduction in the social security payroll tax would actually reduce the inflation rate, I think there is quite general agreement that among ways of reducing taxes, reducing the Social Security tax would probably have either the best inflationary impact, if you are one group of economists, or the worst if you are another.

In other words, the reduction in the cost of doing business that comes from the reduction in the employer's part of the payroll tax, has a positive good effect on the rate of inflation.

This is partly offset by the increase in purchasing power from the reduction on the employee's side, and if you increase the deficit at the same time, then there is an argument whether that offsets the good effect still further.

But when it comes to choosing which way to make a cut, if you are going to make a cut, I think you get fairly widespread agreement that social security taxes ought to be high on the list for a way to make it.

Senator DANFORTH. I am not going to draw it out any longer, but what you are saying is not only that you would make a cut in the social security tax by not-not a cut, it is just not going through with the planned increase.

Mr. BALL. It is if you do it this year.

Senator DANFORTH. But also then, in effect, you transfer what would otherwise be a general tax cut into the social security fund. Mr. BALL. Into the medicare part.

Senator DANFORTH. Yes.

Mr. BALL. That is right. I would finance medicare that way, although I would want to earmark a portion of the income tax for one-half the medicare cost.

Senator NELSON. Well, I have only known a very few people in my life who relished doing things that were unpopular, and I did 1 not like a single one of them.

Senator DANFORTH. I do not relish doing anything that is unpopular, but at a time when everybody says well, let's bite the bullet, it is nice to be told that there is no bullet to bite.

Mr. BALL. Senator Danforth, I am sure you understand what I am saying and there is a bullet to bite—that is, the income tax reduction that would otherwise come will not be as large by the amount of supporting the medicare program through an earmarked portion of the income tax.

That is the bullet, if that is the way to say it.
Senator DANFORTH. The politics of joy.

Mr. BALL. Aside from how much pain or lack of pain it causes, there seems to me very sound economic and social security reasons not to have the entire cost of all three parts of this system entirely on the payroll tax and there seems to be a much greater willingness to finance some part of general revenue-I mean, some part of hospital insurance from general revenue rather than in the cash program.

So in this way, you can leave the cash program entirely free of any general revenues and then devise a new earmarked way of 1 financing the medicare system.

Senator NELSON. I suppose that-I was not here-but I supposed that in 19-disability went in in 1965?

Mr. BALL. I believe 1956 was disability and-
Senator Nelson: And medicare?

Mr. BALL. In 1965.

Senator NELSON. I suppose the argument could have been made at that time not to compromise the system by introducing a program that is not wage related and that, therefore, you should not put medicare into the social security system. If you had not, the social security system would not be having this particular problem but of course you would be getting it out of the general fund, or some other kind of a tax.

But I do not remember any argument like that being made at the time. It would have been a perfectly logical argument to be made by anyone who supported a wage-related system and did not want it in any way corrupted by introducing elements that were not related to wages.

Furthermore, if we had had a national health insurance program prior to that, then, of course, we would not have medicare in this system either.

But it is just a question, Do you want to maintain benefits at this level? If so, then how do you want to do it? Do you want to raise the taxes, the base, some more, or do you want to go to the general fund, or if you do not want to do either of those, do you want to reduce the benefits in order to――

Mr. BALL. Could I make one point about this matter of reducing benefits?

I am sure it is clear to you that this shortrun problem of social security financing cannot realistically be addressed by a reduction in benefits. You cannot conceive of making cuts of the size that would be necessary to meet this short-range problem. That is because I am sure that the great majority of people would want to protect the rights of those already drawing benefits.

Therefore, when you make a cut, it is just for the people who are coming on the rolls and to have any short-term sizable effect the cuts would have to be enormous. They have to be very drastic, since you are only cutting the benefits of new people coming on the rolls, if you are going to guarantee the rights of those who are already drawing.

Now, for the long run, if you are talking about really longrun problems of social security, obviously there is a real policy choice to be made as to whether people want to pay the costs of a reasonably adequate social security system or whether they do not-whether they want to start to shrink social security.

I would argue that it is not an extravagant system, that it is about minimal and that I would prefer to take the side of the argument that says we ought to finance it rather than even in the long run, reducing the role of the system.

Senator DANFORTH. Let me just add this. I happen to represent the fourth oldest population in the country, the State of Missouri. The fourth oldest.

I certainly want an adequate and sound social security system. I do not want to cut benefits either. I am very, very sympathetic to older people and recognize the problem that they have.

I think my general concern is broader and that is that we have now an 18-percent inflation rate. It is simply not right to blame it all on OPEC. That may be 3 percentage points of it. And I think that we are so busy telling people here that everything can be done with mirrors.

That is to say, we are not going to have tax increases, we are going to have tax reductions; we are not going to reduce any benefits for anybody, maybe even increase them. And just have a little borrowing here and a little drawing from this fund there and forego some future tax increase which we may have down the road, and that it just seems that we never, ever say to anybody, hey, you know, things are going to be tough and we are going to have to buckle down and we are going to have to get our feet on the ground and get some sort of responsibility back into our economy. And I do not think we ever really do that. We are just so busy saying to everybody, we are for you.

Mr. BALL. I am not saying that. I do not have to be concerned about that.

I am saying that the cash benefit program ought to get the equivalent of 6.13 percent of payroll. That is a big increase for the cash benefit program.

Then I am saying, the hospital insurance plan, which is now running around $24 billion a year, would come out of general revenues, in effect-an earmarked income tax.

That means that you folks out there cannot have as big an income tax cut as you otherwise would. That is what it amounts to.

I do not think that is mirrors, Senator. I think that is a realistic way to do it.

Senator NELSON. Thank you very much, Mr. Ball. We appreciate your taking the time to come today.

Mr. BALL. Thank you, Senator.

[The prepared statement of Mr. Ball follows:]

STATEMENT OF ROBERT M. BALL

Mr. Chairman and members of the committee, my name is Robert Ball and I am now a Senior Scholar at the Institute of Medicine of the National Academy of Sciences. From April 1962 until March 1973 I was Commissioner of Social Security and prior to that served for approximately 20 years in various positions in the Social Security Administration and its predecessor organization, the Social Security Board. I am testifying today as an individual and my opinions do not necessarily represent those of any organization with which I am associated. Although I was a member of the most recent Advisory Council on Social Security and agree generally with the financing recommendations of that Council, I am testifying today solely as an individual and not as a representative of the Council.

As the Administration has testified, new, more pessimistic assumptions about the performance of the economy now make it appear that there is a need for prompt congressional action to avoid a short-term financing problem in the old-age and survivors insurance part of the social security program. While the disability insurance fund is growing rapidly and is expected to more than double in the next two years, the old-age and survivors insurance fund, under present law and the economic assumptions in the budget will be clearly inadequate by the beginning of 1982. Even if the funds are combined-since the obligations of the OASI fund are so much larger than those of the disability insurance fund-the funds are too low by the beginning of 1983. Since the hospital insurance fund appears to be in good shape over the next several years, the Administration proposes to meet the short-term financing problem by inter-fund borrowing. The plan requires that the presently scheduled contribution rate and wage base increases for 1981 be allowed to go into effect and even then the plan runs pretty close to the line.

The Administration's plan appears to me to be minimal. I would think that the Congress should clearly do this much at the very least. Personally I would prefer, even in a minimal plan, handling the matter somewhat differently. Although I believe it is desirable to introduce the idea of inter-fund borrowing as the Administration has suggested, one could reduce the extent of the borrowing either by just combining the OASI and DI trust funds into a single fund, as recommended by the Advisory Council, or if this is not acceptable, there could be a reallocation of rates between OASI and DI. In the 1977 amendments apparently too much money was allocated to the disability insurance fund and not enough to the OASI fund. This should be corrected even if the borrowing authority is provided at the same time. Personally, I would like to go beyond a minimal plan. Even though the long-range cost estimates for social security show the cash benefit system-OASI and DI combined-soundly financed for at least the next 50 years, it is very disturbing to beneficiaries and contributors alike to keep running into these short-term crises because of an insufficient margin in the short-term rates. I would like to see the entire proceeds of the social security tax rate-now 6.13 percent of earnings up to a maximum this year of $25,900-devoted exclusively to the cash benefit program and have the Medicare program financed in an entirely new way as recommended by the Advisory Council.

This would allow us to avoid the scheduled increases in both rate and base for 1981 and would finance the cash benefit part of social security without any further rate increases well into the next century. It would be very good for social securityand for all those involved in making government policy-if we could have a stable rate for the next 25 years or so and avoid all social security rate increases, except, of course, those that might be called for by program changes. If the present rate for the cash benefits and hospital insurance combined of 6.13 went entirely to the cash benefit program, this goal would be accomplished.

Dedicating the entire 6.13 rate to OASDÎ has several advantages:

1. It removes any possible concern about the sufficiency of short-term OASI financing. The ratio of the OASI trust fund to the next year's projected outgo is now so low-estimated to be about 14 percent at the beginning of 1981-that steps should be taken to build up this fund. It is estimated that the trust funds need to be about 9 percent of the estimated outgo in the following year in order to have enough

funds-without some special intervention by the Congress-to pay current benefits as due. The percentage for the OASI fund (but not the DI fund) is estimated to fall as low as 6 percent at the beginning of 1982. Even under a combined OASI and DI fund, the percentage is estimated to drop to 8 percent by the beginning of 1983. Under present law, the combined contribution rate for OASDI is 5.08 this year, 5.35 in 1981, and 5.40 from 1982 through 1984. It then goes to 5.70 in 1985, and 6.20 in 1990. A 6.13 rate would start building the funds up immediately and clearly carry the program well into the next century.

2. The quick build-up in OASDI trust funds that would result from a 6.13 rate would make it unnecessary to meet the short-term concerns about financing through a variety of special and non-traditional means. In addition to inter-fund borrowing, other methods which have been proposed include: (a) combining the OASI and DI trust funds; (b) authorizing borrowing from the general fund; (c) introducing a counter-cyclical financing formula that would provide limited general revenue support for the program during periods of relatively high unemployment; and (d) putting back into the law a general revenue guarantee contained in the statute from 1944 to 1950 as follows: "There is also authorized to be appropriated to the trust fund such additional sums as may be required to finance the benefits and payments provided under this title."

Personally I support all these proposals as reasonable additions to the law, designed to meet unexpected emergencies over the long run, but I recognize that they are controversial and it certainly would be best not to have to rely on them in the near future to provide assurance that all benefit payments would be made as due. If resort to these methods is said to be necessary to meet short-run problems, it adds to the impression that social security is not well enough financed.

3. The 6.13 rate for the cash benefit part of social security is sufficiently high so that the ad hoc increase in the maximum earnings base now scheduled for 1981 could be rescinded. Instead the maximum earnings base for 1981 could be allowed to rise only to the same extent that average earnings in the country rise. This is the method of adjusting the maximum earnings which keeps the base at the same relative point it is today and is both the method used in the recent past and the one which under present law would be applied after 1981.

The scheduled ad hoc increase in the maximum earnings and benefit base is controversial because it increases payments to social security disproportionately for those who earn above the $25,900 maximum in effect this year. While everyone earning below $25,900 will pay on higher earnings as earnings go up, under present law those at the upper end will pay proportionately more. The law specifies that in 1981 the maximum earnings and contribution base will rise to $29,700, whereas it is estimated an adjustment to increases in earnings would raise the base to only $28,200.

The ad hoc increase is also controversial because in the long run it increases benefits for the higher-paid more than would otherwise be the case, and, therefore, in the opinion of some, undesirably enlarges the scope of social security at the expense of the role of private pensions and private voluntary savings.

4. Based on current-cost financing principles, there would be no need for the increase in the OASDI rate to go up in steps as now called for in 1981, 1985, and 1990. The 6.13 rate would be building surpluses throughout the rest of this century and a further increase would not be needed for at least 25 years or so, if at all. 5. I agree with the Advisory Council that it would be desirable to have a social security tax schedule in the law that would fully finance the program according to the best estimates available over the entire 75-year period for which the long-range estimates are customarily made. It is the absence of such a schedule which now causes journalists and editorial writers to emphasize that social security does not have enough financing to cover all costs in the long run. The facts that the deficit is not estimated to occur for 50 years and that estimating costs some 50 years from now is a highly speculative business are frequently lost on the reader; the story just comes out that social security is underfinanced. For the cash benefit program, a contribution rate of 6.13 well into the next century, and a rate of 7 to 7.5 from then on would meet the costs as now estimated over the whole 75-year period. I believe this is worth doing even though it is true, of course, that as one approaches the effective date for the higher rate it would need to be modified. First of all, if present estimates were exactly correct, it would undoubtedly still be desirable to stretch out the increases in terms of a current cost financing formula, just as we have in the past, rather than have such an abrupt rise in rates and a big jump in trust fund accumulations. Secondly, it would become clear as one nears the turn of the century that the actual long-range costs of the program would be somewhat different than