Letters -- September 1996
America Growing Old
Peter G. Peterson ("Will America Grow Up Before It Grows
Old?" May Atlantic), to correct his vision of future "Social
Insecurity," would have us all, and the elderly in particular, start
sacrificing now. The sacrifices he demands, largely cuts in Social
Security and health care and a general reduction of consumption, are based
on the false premise that the aging of our population makes them
By the year 2030 -- when, proclaimers of the apocalypse tell us, the Old Age and
Survivors Trust Fund will "go bankrupt" -- we will have only about three people
of working age (from twenty to sixty-four) for every one who is sixty-five or
older, as against five now. The program could be kept solvent all the way to
2069, according to the fund's trustees, by adding less than 2.2 percent to
payroll taxes. Many other allocations of revenue could set this right without
draconian payroll-tax increases from the current 12.4 percent to 17 or 22
percent, or "about 35 to 55 percent of every worker's paycheck" if we include
Medicare, which Peterson indicates will be necessary if we do not tighten our
The increase in the proportion of the elderly is a real issue, but it has to be
balanced against a decline in the proportion of dependent young. The total
ratio of dependency, including young and old, will by the fund's "intermediate"
projections have risen only six percent by 2030. That leads to the important
and relevant question not of what is in trust funds but of how much output will
be available to share among the population. What Peterson and many others seem
to forget is that the bread the elderly or anyone else eats must be produced by
those who are working; we can't eat money or savings accounts, no matter how
much they are increased now or in the future.
Fortunately, though, even the modest rate of growth of one percent a year in
output per worker -- no more than our slow growth over the past twenty-two
years -- would increase total output per worker by 42 percent in thirty-five
years. That would be enough to provide for a 33 percent increase in goods and
services for every man, woman, and child, regardless of age, even after
allowing for a six percent increase in nonworking dependents.
Peterson is right in urging measures to increase growth -- a growth in output of
two percent per worker would give us 90 percent more for everybody in
thirty-five years. But many of his proposals are counterproductive. Forcing us
to consume less will not necessarily increase investment; if we don't buy that
new car, a form of investment in itself, GM is likely to invest less, not more.
And economists increasingly recognize that the path to growth lies in
investment in human capital -- in education, in health, in research, and
in providing a safe environment in inner cities and in suburbia where we can
all realize our full potential.
William R. Kenan Professor Emeritus
Peter G. Peterson's suggestions concerning living wills lack the
thoughtful argument of the rest of his article. Peterson asserts that an
increase in the use of living wills would reduce the 30 percent of the Medicare
budget that is spent in a patient's last year of life. Although beforehand
knowledge of our death might be useful, living wills are popular not because
they hasten death and reduce medical bills but because they provide unconscious
patients with a measure of autonomy. This ranges from taking all means
necessary to prolong life to ruling out certain interventions in certain
situations. Increasing the number of living wills may not have the effect
Peterson desires in the absence of incentives to persuade people to opt for
less costly intervention.
Recognizing this, Peterson makes an egregious suggestion: that we "perhaps even
provide financial incentives to maintain [living wills]." If the purpose of
such incentives is to persuade people to forgo costly intervention, little
would remain of autonomy. Many people already agonize over the burden they
present to their families, which influences their decisions about treatment at
the end of life. We should not further encourage people to accept an earlier
death because of the cost of medical intervention.
Peter Peterson's latest version of "the sky is falling" reflects our
impressive proclivity for treating what should by any standard be a national
triumph -- a longer-lived, healthier, more financially secure elderly
population -- as an unmitigated disaster. Some of his points are indeed well
taken, but his statistical overkill should be a red flag warning the reader to
beware of the intermingled ad hominems, personal predilections proffered
as revealed truth, and subtle detours around less-supportive evidence.
Consider the Medicare-Medicaid flap, which is less a matter of ill-advised
Entitlements than a symptom of our continuing fundamental health-care
distress. That distress could easily be alleviated by a move to some variation
of the widely misunderstood -- and often deliberately
misrepresented -- "single-payer" format, with universal coverage based on
universal rating, without the distortions created by the appallingly
inappropriate promotion of health care as "an attractive investment
Few know that the Congressional Budget Office confirmed that such a program
would cover more people for more conditions at lower cost than any alternative.
Edward Marshall Nielsen
Peter Peterson continues his campaign of many years to cut Social
Security and Medicare benefits for seniors already in retirement and to portray
seniors as a greedy bunch who are living off the next generation.
Tens of millions of seniors made retirement decisions based on individual
written assurances from the federal government as to the monthly payments they
would receive if they chose retirement. To reduce such payments to retirees
when they are older, less healthy, and can no longer go back to the jobs they
once held is not only a betrayal by the government but also a default pure and
simple. Rather than default on millions of seniors, perhaps we should look into
another option -- defaulting on our debt. After all, sales of federal bills,
notes, or bonds to investors are nothing more than a promise to repay. Those
promises have no more status than the promise to retirees that they would
receive a specific monthly benefit. If one can be broken, so can the other. If
we defaulted on even a portion of our debt, we could immediately bring the
budget into balance.
San Diego, Calif.
Peter Peterson's lucid and alarming article appears to omit one partial
solution to the future funding problem which not only has precedent (in the
case of Medicare) but also would serve to mitigate the extreme regressive
nature of Social Security withholding: do away with the maximum taxable Social
Security wages limit and tax individuals a flat Social Security tax no matter
what they earn in wages!
As the situation is now, it is the middle middle class (those who barely make
the Social Security maximum taxable wage) that subsidizes not only the working
poor but also the rich, who presumably have less need for Social Security
income to supplement their retirement income. If we can finally admit that the
trust fund and pension aspects of Social Security are really nothing more than
a tax, why are we not insisting that when the Michael Eisners of the world make
$200 million in wages and compensation in one year, they pay more in Social
Security taxes than the middle manager at AT&T who makes $65,000 a year?
Currently, people at both salaries pay about $4,500 a year in Social Security
taxes. Surely we all have an interest in the security, both social and
otherwise, of our elderly. Why shouldn't the burden of aiding the have nots be
shared proportionally by the haves and the barely haves in society?
Philip J. Guarco
Upper Montclair, N.J.
Peter Peterson's focus on the growing forest of Social Security and
Medicare entitlements is useful, but myopic with regard to the individual
plight of many of the seedlings beneath: modestly paid current wage earners
whose disposable income and political flexibility are now being stunted by the
regressive funding of such entitlements. Thus when he recommends that all
workers be required to contribute four to six percent of their pay above FICA
and Medicare payroll taxes, for a total payroll tax of 16 to 18 percent, and
acknowledges that such a requirement "would decrease the consumable portion of
each paycheck," he is proposing a fiscal remedy that would be crushing even in
combination with his proposed reforms.
Consider, for example, an unmarried self-employed taxpayer earning a
near-median income of $30,000. This taxpayer is not eligible for relief through
the earned-income tax credit, and is subject to combined federal taxes of about
26 percent of his or her gross income (15 percent in Social Security and
Medicare taxes and 11 percent in income taxes, after a credit for half of the
employment tax) and more than seven percent in state income and sales taxes.
For such a taxpayer, an additional six percent tax could reduce after-tax
income to roughly 60 percent of earnings, or $18,300. It is very difficult for
such a middle-income, self-employed person to eat, pay rent, and run a business
on $1,500 a month, let alone set aside savings for retirement.
Rather than be subjected to greater tax burdens, such earners should be given
some tax relief from the regressive payroll tax. Such relief could include
creating a floor or standard deduction against the payroll earnings of the
self-employed, substantially raising the $62,700 ceiling for determining the
taxable payroll earnings of all wage earners, and limiting that current ceiling
to indexed inflation when determining the base for maximum benefits.
Jonathan S. Gellman
New York, N.Y.
Peter J. Peterson replies:
Robert Eisner's proposal, a permanent hike in the Social Security
payroll-tax rate from 12.4 to 14.6 percent, is a solution only if we enact it
this year, if we pretend that all the mythical trust-fund surpluses are genuine
savings, if we disregard the huge cash deficits that Social Security would run
after the trust fund peaked (more than $350 billion yearly in 2030, even with
Eisner's tax hike), and if we ignore the even larger projected shortfalls for
Medicare and Medicaid. The first assumption has a zero probability, and the
second is especially astounding. Mr. Eisner claims that the future wealth
generated by my proposed increase in savings invested in the real economy
(plant, equipment, and R&D) is somehow illusory. We "can't eat money or
savings accounts," he says. But here he supposes that the future wealth
generated by interest earned on trust-fund assets (in other words, government
bonds the interest payments on which merely come straight out of taxpayers'
pockets) is somehow genuine.
Mr. Eisner seems to imply that spending less on children will compensate for
spending more on the old. This overlooks the monumental fact that the
government spends far more on each American aged sixty-five or over than it
does on each American under age eighteen. At the federal level, in fact, the
ratio is now at least eleven to one. Yes, future working adults could to some
extent sustain their own after-tax living standards by spending less on their
children or by not having any children at all. In order to keep rewarding the
past, apparently, we are to negate our own future. I find this line of
reasoning utterly grotesque.
I apologize to Gregory Fahy for the misunderstanding. I propose to offer people
a very modest reward for maintaining a living will -- period. One survey shows
that 89 percent of Americans think a living will is a good idea, yet only nine
percent say they have one. I expect that most people would use such wills to
express their natural aversion to costly and painful intervention when there is
no reasonable chance of survival. There would certainly be no requirement that
they do so.
Edward Nielsen suggests that a single-payer system is a painless cure for our
health-care-cost problem -- without acknowledging that this solution, like any
other, requires that someone consume less. Canada's single-payer system, for
example, has only one eighth as many MRI units per capita as the United States.
Does Mr. Nielsen believe that government rationing is, by definition, painless
Sy Forman is wrong in implying that there is no difference between changing
Social Security and defaulting on the national debt. Social Security is not and
has never been a property right. Its underlying statute states (and the Supreme
Court has agreed) that its benefits can be changed at any time without
compensation -- and over the past forty years Congress has repeatedly done just
Philip Guarco, like many others, urges us to think of progressive ways to boost
future tax revenues. But eventually this approach turns government into a
revolving door for funds coming from and going to the same middle- and
upper-income households. At some point we have to stop and look at progressive
ways to cut future spending increases. That's what my proposed affluence test
Jonathan Gellman raises a critical issue:how are median-earning households
likely to respond to a plan that requires them to put aside a few percent more
of consumable income?Almost by definition, these are households for which we
could not provide any sizable direct subsidy (because there are so many of
them, the cost would be prohibitive). Yet these are also households whose
financial situation no one would call comfortable or easy.
The key, I believe, is to stress what Mr. Gellman overlooks. This new
contribution, though mandatory, is not a tax; it is not even what the Clinton
Administration, when defending its federal health plan, liked to call a
"premium." From first to last this contribution is personal, common-law
property, payable into an interest- or profit-earning fund the full value of
which the worker will ultimately consume (or bequeath). The tradeoff is
clear: in exchange for consuming somewhat less in the near term -- the unavoidable
first step in raising savings rates -- most Americans will gain the immediate
assurance that (as FDR once said, inaccurately, about Social Security) "no damn
politician" will ever be able to take away these new contributions and that the
system's long-term funding problems have been solved.
Copyright © 1996 by The Atlantic Monthly Company. All rights
The Atlantic Monthly; September 1996; Letters; Volume 278, No. 3;