Why is Social Security being considered for cuts?

An often-repeated assertion in the debt-ceiling talks is that Social Security must be cut if the deficits are to be reduced.

This raises many questions among those who have paid into the program all their working lives and who expect an unquestioned return on that investment. They resent being told that they are living at the expense of the taxpayer like some welfare recipient receiving an "entitlement." Isn't Social Security a separate program? After all, it has its own revenue source, the payroll tax, and its own spending formula based upon total taxes paid during the recipient's work life.

Why is Social Security on the chopping block as if it were just another program in the federal budget? If it is separate from the rest of the budget, how can cuts in it reduce the deficit? What's the connection?

Although not a perfect analogy to private insurance, Social Security is an insurance plan that takes in premiums and pays out benefits that protect people against poverty in old age.

But, unlike the premium on a private insurance policy, the payroll tax is involuntary; participation in Social Security is required of most workers and the "premium" is the payroll tax.

Social Security is an important component to retirement financing for most people, and for 35 percent of recipients, it is their sole retirement income.

Why then is it part of the negotiations to bring greater balance to the federal budget?

In part, it is ideology. To those who favor a reduction in the size of government regardless of how that is accomplished, anything that is expensive and operated by the federal government is fair game. They strongly believe in the supremacy of the private sector in providing all but a few services.

For these people, it does not matter that Social Security has much lower administrative costs than its private counterparts. Even when it is shown that Social Security has other advantages, such as the progressive benefit scheme in which higher income payroll taxpayers cross-subsidize the lower income ones, its opponents still prefer to cut the program.

Would such cuts save money? Social Security was designed as a "pay-as-you- go" system in which current workers pay for current retirees in the expectation that when they retire, future workers will pay for them. Thus, each generation invests in the next one in a spirit of reciprocal responsibility to one another. This is not a one-way transfer from young to old; each generation inherits the physical and knowledge capital from the preceding one. And, it worked for 75 years, until the baby boom.

When the system started in 1935, there was no way to forecast the baby boom that followed World War II. But in 1983 the Reagan administration calculated that within a few decades a large number of boomers would retire and the then-payroll tax would be insufficient to pay the benefits.

As a result, the payroll tax rate was increased, creating a surplus of cash which Social Security used to buy special U.S. Treasury bonds, to be held in reserve, in the "Trust Fund," as an obligation of the nation as a whole to the Social Security System. The reserve was to build to over $2.2 trillion of bonds.

When needed, the bonds would be sold back to the Treasury by Social Security in exchange for cash to supplement the payroll taxes to pay the retirees their checks on schedule.

Reagan economists estimated that the bond sales would be needed about 2018, but due to the current recession the payroll tax revenue became insufficient eight years earlier than planned, and the system had to start redeeming the bonds.

Where did the Treasury get the cash to do that? From the same place the Treasury gets any of its money — taxes and borrowing. So it is through the bond redemption plan that Social Security impacts the federal budget today.

Only by slowing the bond redemption can changes in Social Security help cut the deficit. The only ways to do that are by increasing the payroll tax rate or by raising the eligibility age for full benefits and-or having a less generous inflation adjustment formula. All these options are political minefields.

Kroncke is associate dean in the University of South Florida College of Business; Holahan chairs the department of economics at the University of Wisconsin-Milwaukee.

THE NEW YORK TIMES