Entitlements? Or Boomer Burden?

EXECUTIVE-DECISION MEMORANDUM

To: The President of the United States
From: D. N. Forser, Chief of Staff
Re: Entitlements? or Boomer Burden?
Date: April 22, 1996

Entitlements! A Boomer kind of word. The Spock-begottens are pretty much entitled to the Vault. Because there are so many of them, and they had so few (perfect) children--they also popularized the Pill--they are going to cost huge amounts to sustain until they pass on, no doubt after one last chant of "Hell, no, we won't go!"

If you doubt this is a national crisis, wait until the Boomers start talking (and talking) about it. Social Security is a transfer-payment program. Recipients are supported not by payments they made to the system during their working lives but by current payroll taxes on young workers. When Social Security began, in 1935, there were fifteen young workers for every recipient. When the Boomers retire, starting early in the next century, there will be only two young workers for every Social Security recipient. Unless changes are made in the system those two young workers, already saddled with financing the federal debt and deficits, will stagger under the Boomer burden.

This is the background to a debate that you would probably rather avoid in this election year. As you know there is a powerful lobby behind "middle-class entitlements" (as Social Security and Medicare, the payroll-tax-financed health-insurance program for the elderly, are misleadingly called--poor people get Social Security and Medicare, as do upper-middle-class and even rich people). When Bob Dole, as Senate majority leader, tried in 1985 to rein in Social Security, the electorate responded in 1986 by ending Republican control of the Senate. But if Ross Perot runs, as we think he will, he is bound to make entitlement reform a major issue in the campaign. You will gain points with the voters if you come up with a strong plan of your own.

Here are two possible options:

A. Take a public stand that the entitlement system is basically fine the way it is, and needs only a few minor changes.

B. Take a public stand that entitlements are eating up the national budget. The system needs to be substantially changed.

Mr./Ms. President, Social Security and Medicare are the great triumphs of domestic policy in the twentieth century. Before Social Security existed penury was the common lot of the elderly. Since the advent of Social Security the situation has been reversed; now poverty is rare among seniors. At roughly twelve percent, the poverty rate among seniors is too high, certainly. But compare it to the poverty rate among children, over twenty-five percent, and you can see the difference Social Security has made.

You must preserve this hugely successful program for future generations. The question is how.

Those who advocate "radical changes" have either never run for office or are not running for office again. As the Gingrich Congress discovered when it tried to make deep cuts in Medicare--sorry: Social Security and Medicare enjoy strong support not just from the "gray lobby" or among "greedy geezers" but across the generations.

The soft option builds on that support. The "hard" option threatens to dissipate it.

According to the trustees of Social Security, even with NO changes in the current program, Social Security can pay full benefits until 2030, when the last Boomers will be retiring. Beyond that, with NO changes, Social Security can pay seventy-five percent of promised benefits until 2050.

This is a not a crisis. It is a solvable problem.

To bridge the shortfall in benefits between 2030 and 2050 payroll taxes after 2030 would have to rise from 12.4 percent to seventeen percent. Add five percent more for Medicare and Medicaid. That comes to a five or six percent increase in employees' payroll taxes. And that is with no changes. Raise the retirement age slightly, increase the number of seniors in managed-care medical plans, adjust automatic cost-of-living increases so they don't outpace the real rate of inflation (as Senator Moynihan and Federal Reserve Chairman Greenspan have recommended)--make changes like these and that five to six percent increase in payroll taxes between 2030 and 2050 can be cut by a third or more, depending on how many changes are made.

This soft option requires no cuts in benefits. It requires no means testing. It requires no "privatizing" of Social Security. Above all, it requires no break with the political genius of Social Security: universality. Why have middle-class entitlements been generously increased and indexed for inflation while entitlements for the poor have either been cut absolutely, or (because they are not indexed) relatively by inflation? Because the middle-class entitlements are universal programs. Once you start down the road of means testing--euphemistically, "affluence testing"--you could end up destroying universality. Affluent seniors may demand to be let out of Social Security altogether.

Consider some recent history. In 1988 Congress passed and President Reagan signed a catastrophic health-care bill that required affluent seniors to pay slightly more for new benefits than the rest of seniors. There was a huge outcry. Congress had to repeal the bill the next year. There would be the mother of all outcries over means-testing.

If the affluent pull out of Social Security and Medicare these programs will become "welfare."

Absent payroll taxes from the affluent, Social Security and Medicare programs face a real fiscal crisis. The poverty rate among the elderly would shoot up, the quality of medical care, perhaps even life expectancy, would drop. The twenty-first century would oversee the trashing of the twentieth century's great domestic policy triumph.

Don't start down that road, Mr./Ms. President. If you want more-affluent seniors to pay more, don't change benefit formulas. Increase the taxes they pay on their benefits. Currently, couples with incomes above roughly $32,000 (exclusive of Social Security) pay taxes on 85% of their benefits. Increase it to 100%--make well-off seniors pay taxes just like the rest of us, on 100 cents of every dollar earned. There will be an uproar, but it will pass. And the key to Social Security, universality of contributions and benefits, will be preserved.

Mr./Ms. President, you have said that you want to balance the budget, decrease the national debt, and increase national savings. To meet these goals you will have to make major cuts in government spending. It is time for you to approach the third rail of American politics--entitlements for the middle and upper classes. The enormous costs of entitlements are crippling our economy--and the Baby Boom generation hasn't even hit retirement yet. During fiscal year 1993 the U.S. Treasury doled out $800 billion in entitlements--more than half of the entire federal budget! Little is left over for the investment in infrastructure, business, and education that is necessary to reverse the downward trend in productivity levels and living standards. And the budget crunch is only going to get worse.

Soon after the first of our nation's 76 million Baby Boomers become eligible to receive their checks, in around 2010, these programs will start running a deficit of hundreds of billions of dollars--and the much-smaller "bust" generation will have to pick up the slack--through sharply raised taxes, disappearing benefits, or both. The Social Security administration says that it has enough assets to remain solvent until the year 2030. But its "assets" consist of the taxes it expects from future generations. By 2040 the number of Social Security beneficiaries will double; what's more, since life expectancies have gone up, people are collecting for years longer than the founders of these programs ever envisioned. People may argue that they're only taking out what they put in, but the figures show that an average one-earner couple who retires today will get back $310,000 more from Medicare and Social Security than they contributed. We cannot support this system without changes, and these changes will become more painful the longer we wait.

Franklin D. Roosevelt enacted the New Deal to protect Americans from poverty, and today entitlements are helping 20 million Americans stay above the poverty line. But only one out of eight dollars the federal government spends on entitlements even reaches those under the poverty line. And, as of 1991, households with incomes of $100,000 or more were actually receiving slightly more in benefits than those with incomes of under $10,000. There is no reason, Mr./Ms. President, that the future of entitlements for the poor should be threatened because we are unwilling to take them away from the rich.

Mr./Ms. President, you have to start making these changes now, while the Republicans have control of the House and Senate. You and the Republicans in Congress are in agreement that the budget should be balanced within the decade. But this agreement, while important, doesn't even do anything to shrink our huge national debt. You can either chip away indefinitely at small programs like Head Start, the National Endowment for the Arts, and school-lunch programs or you can begin reform of a much bigger source of our country's debt: the entitlement programs.

The following two measures could save hundreds of billions of dollars each year. Enough to balance the budget. Enough so that the country could increase its investment in business and work towards increasing productivity.

• First, all entitlements should be given out on the basis of need: the more money one has, the smaller a percentage of entitlements one receives. Those with incomes below a certain level would not be affected by this change, preserving the true purpose of entitlements.

• Second, the age when people become eligible for Medicare and Social Security benefits should be slowly raised until it reaches seventy, to reflect higher life expectancies. With this plan you will be reducing benefits for everyone, so no one interest group will be pitted against another. The American people can be persuaded of the necessity of this plan. In fact in a recent opinion poll by the Concord Coalition "67 percent of respondents said they would support reductions in Social Security benefits to higher-income households, and 77 percent would support reductions in Medicare benefits."

The issue of our inability to pay for the entitlement system we've created may not yet be a crisis. But on this issue the country cannot continue burying its head in the sand. You can either be remembered as the President who had the courage to face the fact that our spending on entitlements is not sustainable or as one of the many Presidents who let the opportunity to reform the ballooning entitlement system slip by.

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