Handling the Budget Bulge Gracefully

Would anyone pay $91 for a 3-cent screw? Or $511 for 60-cent lamp? The Pentagon would, according to the Grace Commission Report. Formally dubbed the "President's Private Sector Survey on Cost Control" (PPSSCC), the Grace Commission was pressed into action in early 1982 and by the end of 1983 had produced 47 reports, totaling 23,000 pages of cost-cutting recommendations for the federal government. And all this only scratches the surface, says industrialist J. Peter Grace, who directed the house cleaning.

Asked by President Reagan to study how to "root out waste and inefficiency in the federal government," Grace enlisted 161 business executives and professionals, who in turn recruited over 2,000 private-sector volunteers to probe for potential government savings. The commission was not to try to shape policy nor to propose the elimination of specific services or agencies. Although these ground rules heavily circumscribed the economies the commission could recommend, it still proposed 2,478 measures that could garner savings of $424 billion in the first three years of implementation.

The commission does not claim that the savings could all be achieved at once even with the best will. But it figures that the recommended measures would eventually produce savings not only of $424 billion but of more billions on into the future. The report starts with $46 billion in fiscal 1985- that's a seeming drop-in-the-bucket 5 percent of the federal budget forecast for 1985 under present policies. But by 1990, with Grace's savings, Uncle Sam's outlays would be $1,200 billion, or 27 percent less than the $1,633 billion forecast without the commission's cuts. And by the year 2000, outlays would be just over $3 trillion. Staggering as that number seems, it is still 44 percent less than the status-quo forecasted budget of $5.5 trillion.

These calculations are based first on a summing of cost-accounts estimates of what the commission admits are numbers of varying reliability. It insists the budget projections derive from conscientious and conservative estimates but admits imperfection: "Although PPSS has tried to be consistent and technically accurate in its calculations, its figures are of necessity, of a planning rather than a budget quality." Given the proven inadequacies of "budget-quality" numbers in recent budgets, there is room for great skepticism about "planning-quality" numbers! Moreover, the complexity of the numbers is magnified, since predictions are made by applying them to a complex long-term econometric model of the US economy, although the commission used a model devised by the well-respected economic forecasting firm Data Resources, Inc. Some will say the model inadequately accounts for various supply-side effects; others, that no model can properly account for such effects. In any case, the model does show the economy behaving better with the Grace Commission policies, with lower annual inflation and higher economic growth. In constant 1983 dollars, the report projects federal outlays growing 47 percent from 1983 to 2000 compared to 114 percent under the status quo. By the turn of the decade, the budget deficit would be reduced to about $30 billion a year from the present $195 billion.

The Grace Commission recommendations mean that dramatic reductions in the federal deficit could be accomplished without increasing taxes. Grace himself underlines the significance of this for taxpayers. Already, Grace notes, we have "runaway taxation." And while many taxpayers are keenly aware of the growing tax burden, they may not realize that "100% of what is collected is absorbed solely by interest on the federal debt and by federal contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from government."

Despite ever-increasing taxes, government revenues have failed to keep pace with the explosion in expenditures. The national debt now stands at $1.4 trillion. The federal deficit, at $195 billion today, is more than 100 times larger than it was less than 20 years ago. And by the year 2000, the Grace Report estimates that the federal debt will be $13 trillion- that's a debt of $160,000 per current taxpayer!-and "the interest alone on this debt [will] be $1.5 trillion per year."

The Grace Report contends that the sizable savings proposals it recommends can enable us to avoid this horrendous scenario. But where are all the projected savings to come from? Eliminating so-called program waste accounts for 37.9 percent of the savings recommendations, while weeding out personnel management and system failures together make up 57.1 percent of the total projected savings. Of course, these categories may not be as clear-cut as they sound. What is "waste" and "inefficiency" in some eyes is "policy" in others-and policy changes had been declared off-limits to the commission. Many of the suggested savings will no doubt meet fierce resistance on that very score.

Take the biggest source of waste found by the Grace Commission-federal retirement programs. The government spent some $40 billion on pensions in fiscal 1983 and is likely to be spending $228 billion by the year 2000 given present policies. But, notes the commission, the government's pension programs are enormously more generous than private-sector retirement arrangements. They allow retirement on full pension much younger-at age 55 in the case of the civil service and at age 40 in the case of the military, compared to age 63 or 64 in the private sector. This cuts both ways, reducing the years of contributions, while increasing the years of payout. Full protection against inflation is provided in the government retirement arrangements, whereas the average private-sector pension scheme provides two to three percentage points less than full protection against increases in the cost of living. Finally, government pensions are based on average income in the last three years of employment, a significant advantage over the five-year base commonly used in business. Finally, vesting provisions and credit for years of service favor retirees from government over those from business.

Historically, more-generous retirement benefits were to compensate for supposedly inferior pay. Less pay, more security was the trade-off. But as the Grace Commission points out, the Federal Salary Reform Act of 1962 significantly changed the basic premise by mandating "comparability" of salaries. Naturally, it did not touch pensions. Indeed, these have steadily improved under pressure from federal employee unions.

A private-sector worker on a preretirement salary of $25,000 typically gets around $266,000 in private-sector pension plus Social Security in his or her retirement years. By comparison, the civil servant gets $542,000 and the military retiree $1,072,000. At higher salary levels the advantage favors federal retirees even more dramatically. At a preretirement salary of $50,000 the private-sector pensioner gets $398,000, the ex-civil servant $1,085,000, and the veteran $1,679,000. In short, the civil servant's retirement arrangements are two to three times as generous as the private-sector employee's, and the military's arrangements are over four times as generous.

The Grace Commission separately investigated the question of how civil-service pay compares with pay scales in business.

The "comparability survey" of pay, position for position, regularly conducted by the Office of Personnel Management usually shows government pay lagging, but those who conduct it doubt its validity. That's partly because the positions and jobs are rarely the same. But the Grace Commission found that there's much more top-heaviness in government and less resistance to "grade creep"-people getting their positions upgraded. Seventy-two percent of middle-and upper-management government employees are at GS-11 level and above, compared to 26 percent of private-sector personnel at comparable levels. The average grade of a federal employee was GS-5.2 in 1949, GS-8.0 in 1974, and GS-8.5 in 1981. It appears that federal blue-collar workers are better paid position by position, that white-collar workers are somewhat less well paid, and that top-level government executives are very much less generously paid than their private counterparts. But different promotion rates modify this picture.

In any case, the real issue in pay is always whether good enough people can be attracted and retained at existing pay rates and other benefits to do the job. By this measure, the federal government grossly overpays since, according to the Office of Personnel Management, there are around 10 qualified applicants for each federal job. Only at the very top executive levels is there a case for pay raises to attract and keep qualified people.

There is more overspending in the federal retirement program than the sums attributable to improved pay scales. Government employees get unnecessarily rich taking their early retirement and their generous pensions and taking on second careers, which then give them access to Social Security and often a second, private pension plan. Grace suggests that the cost-of-living adjustment (COLA) be 70 percent of the consumer price index for former employees without Social Security and 33 percent of inflation for those with access to Social Security. Retired military would fall into the second category.

Foreign service officers have a retirement system almost as generous as the military and can retire on full pension at age 50 (no doubt to compensate for the wear and tear of the international cocktail circuit). Grace proposes that pensions of foreign service officers be cut back to the level of civil service pensions.

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