What distinguishes their plan is that it deals with the government’s huge support for older Americans, which is the basic cause of the deficits. Since the mid-1960s, our national government has undergone a revolution. Support for the elderly has over-taken defense as the costliest federal function. This spending now represents a third of the total, while defense’s share is 21 percent and falling.
Few elected officials talk candidly about this, because no one wants to offend older voters. The problem is usually described obscurely as “the explosion of entitlements.” Well, entitlements are mainly social security, other retirement programs and Medicare. In 1995, these and other programs for the elderly will cost more than $500 billion in a budget of roughly $1.5 trillion.
Unless this spending is controlled, it will be impossible to end budget deficits without crushing tax increases. As the baby boom ages, the problem will only get worse. What’s needed is not a quick fix but a basic change in policy to reflect today’s social realities. Many older Americans, financially well off, are simply much less deserving of government support than they used to be. This is not the 1930s or even the 1960s, when they were automatically considered needy.
To deal with this, the Concord plan -adopting an idea of former commerce secretary Peter Peterson, who will explain it in a forthcoming book–would reduce government support for the elderly as their incomes rise. Under the proposal, all government benefits would be gradually cut once family incomes hit $40,000. For every $10,000 in extra income, benefits would drop 10 percent. The reduction -would stop at $120,000, and everyone would be left with at least 15 percent of today’s benefits. Although all Americans would be covered, the elderly would be affected most.
Consider a couple with cash income of $45,000, including $15,000 of social security. They also have Medicare coverage worth $5,000 (this is what Medicare would cost if it had to be bought as private insurance). Their income, including the value of Medicare, would be counted as $50,000; of that, $20,000 comes from the government. They would lose 10 percent of the government payments that cause their income to exceed $40,000. That’s $1,000 (10 percent of the $10,000 over $40,000). Medicare coverage would continue, but the wealthier elderly would have to pay more for it.
We need to realize that lots of people who are quite comfortable receive hefty government payments. In 1990, about 6 million families with annual incomes exceeding $50,000 received $81 billion in government benefits, according to the Congressional Budget Office. Of this, nearly $70 billion reflected programs primarily for older Americans.
The budget deficit in the year 2000 is now estimated at just over $250 billion. The Concord plan would phase in its entitlement reduction over six years and also gradually raise the normal social-security retirement age to 68 by the year 2006- a desirable change that reflects the fact that we live longer and are healthier. Together, these measures cut the projected deficit by $84 billion. The rest would be covered by:
Ending or paring back unneeded programs, such as the rural electricity subsidies, and reducing defense spending ($36 billion in savings);
Cutting other entitlements such as farm subsidies ($35 billion);
Raising taxes $71 billion (the gasoline tax would increase by 50 cents a gallon and the mortgage-interest deduction would be limited to $20.000 annually for a couple).
With interest savings-because the government would borrow less-the plan would balance the budget at the turn of the century. Taxes and spending would both equal about 20 percent of our economy’s output, the gross domestic product. This would represent a modest tax increase from the current Clinton budget (taxes are now 19 percent of GDP) and a major spending cut (spending is 23 percent of GDP). No one would endorse every detail of the plan. For example, it doesn’t end some unneeded federal spending, such as farm, cultural or maritime subsidies. Still, it breaches the critical issue and balances the budget without optimistically assuming health reform will instantly cut spending.
The plan will surely be condemned as an attack on the old by younger Americans like me (I am 47). Nonsense. These are the kinds of rules that should apply to my generation when we retire. We are living longer: we should work longer. Those of us who can support ourselves should receive less. But we shouldn’t wait 15 or 20 years-and some trillions of dollars more of federal debt-to make changes that are already amply justified.
We will also hear groans that “I contributed to social security and deserve to get back what I put in.” Well, this didn’t happen in the past and won’t in the future. Most present retirees receive far more than they paid in social-security taxes. Workers with average earnings who retired in 1980 got back all their taxes, including employer contributions plus interest, in less than four years. But new retirees (who have paid higher taxes longer) get back less. The payback for someone retiring in 1993 is 14 years; for someone retiring in 2015, the projected payback is 25 years (that is, probably after they’ve died).
Americans need to recognize social security and Medicare for what they are: massive income transfers between workers and retirees. We need to lighten the load on workers by providing less for the affluent aged. This would amount to rewriting the social contract, as Tsongas, Rudman and Peterson suggest. If we don’t, the chances of ever cutting the deficit to zero are just that - zero.
