Washington: Retirement Wrangle

A bipartisan commission tries to tackle an old-age problem.

The [retirement] date of 65 was set in 1937 because that was your life expectancy," says Sen. Alan Simpson (R-Wyo.) of the Social Security program. "They hoped you'd die at 65 and then there really wouldn't be a lot of payout. Now a person retires at 65, or 70, and [you] have a life expectancy of 10, 11, 13 years--women [longer] than men--and that can't work."

Social Security's long-term insolvency is only one issue Simpson and the 31 other members of the Bipartisan Commission on Entitlement and Tax Reform are confronting. In December, the commission will recommend changes in the tax structure and in "entitlements," the automatic-spending programs that support retirees, the poor, and farmers, among others.

Such automatic spending is exploding. In 1963, nearly three-fourths of federal spending was discretionary, spent on such items as national defense, roads, and space exploration. By contrast, nearly half the 1993 federal budget consisted of spending on the four big entitlement programs--Social Security, Medicare, Medicaid, and federal pensions--plus interest on the debt. In another 10 years, more than 70 percent of the budget will be on automatic pilot.

Heading the commission is Sen. Bob Kerrey (D-Neb.), who refused to vote for President Clinton's 1993 budget unless the president promised to establish this commission. Although Kerrey made national health insurance the centerpiece of his 1992 presidential campaign, he has since become a trenchant critic of rampant entitlement spending, including any new health-care entitlement. And he hasn't ruled out another run at the White House; a September 1 Associated Press story reported that a prominent Democratic donor had approached Kerrey about challenging Clinton in 1996. If the commission is considered a success, it could fuel Kerrey's larger ambitions.

The commission's ideological mix includes Washington power-broker Rep. Dan Rostenkowski (D-Ill.), federal-spending critic Rep. Christopher Cox (R-Calif.), welfare-statist Robert Greenstein of the Center on Budget and Policy Priorities, and iconoclast Simpson.

Ideally, the commission will make specific proposals for President Clinton to incorporate into his fiscal 1996 budget proposal. But a deep division in the commission between tax raisers and benefit cutters, combined with the political explosiveness of both approaches, suggests that the commission's main role will be educational, not policy-making.

Consider some sober findings presented in the commission's initial report, released in August. Unless Congress changes the tax or benefit structures of entitlement programs, entitlement spending and interest on the debt will consume all federal tax revenue by 2012. And even if non-entitlement spending remains constant as a percentage of national income, by 2030 total federal spending will exceed 37 percent of GDP, compared with 22 percent now. While tax increases in the early '80s temporarily bailed out Social Security, by 2020 the program will run annual deficits that exceed $220 billion. And by the turn of the century, both Medicare insurance funds will be bankrupt.

Much of the commission's activity will revolve around Social Security, which Kerrey has compared to the high-voltage lines that power subways. The program, he says, is "the third rail of politics. Touch it and you're dead." Proposing benefit cuts for current or soon-to-be retirees would sound the death knell for most elected officials. Almost 15 percent of the population is 65 years or older, and older Americans vote more frequently than any other age group.

Longer life expectancies combined with generous, tax-funded retirement programs have made a new lifestyle possible. Retired persons can now expect to live independently of their children for a decade or longer. Says Rep. Alex McMillan (R-N.C.), one of the commissioners, "We have institutionalized retirement in my lifetime." But most "independent" retirees depend upon government programs, rather than private savings and investments.

If today's elected officials refuse to change retirement programs, however, Americans in the early 21st century will face an authentic economic crisis. Few of today's workers save enough to ease their dependence on government programs. The nation's saving rate, which averaged around 8 percent of GDP in the 1960s and '70s, has fallen to 5 percent. And in a paper presented before the American Council for Capital Formation this summer, Princeton University economist Douglas Bernheim cited low savings rates by baby boomers to assert that the lure of a retirement "safety net" may further reduce the likelihood that people will save.

So the commission may actually risk the wrath of retirees' advocacy groups and suggest one positive proposal: Increase the retirement age. Last year, the Cato Institute's William Niskanen and Stephen Moore proposed increasing the retirement age by two months a year indefinitely. If implemented in 1995, the retirement age would rise to 66 by 2001, 67 by 2007, and so on. While this change would reduce Social Security spending by less than $10 billion over the first five years, it would save hundreds of billions of dollars in the long run. And this incremental change will barely disturb the plans of those persons nearing retirement. Rep. J.J. Pickle (D-Tex.) introduced a bill in April that would start such a gradual rise.

Also in April, Rostenkowski introduced a bill that would slightly reduce next year's cost-of-living increase, alter the long-term benefit formula, and raise the retirement age for people born after 1960 from 65 to 67. The bill would increase taxes on Social Security benefits for people earning more than $25,000 a year and raise payroll taxes slightly in 2020 and 2055. Several commissioners commented favorably on Rostenkowski's proposals at commission meetings.

Those moderate changes could make a huge impact on Social Security's solvency. In a report prepared for the advocacy group Citizens Against Government Waste, former Treasury Department undersecretary Gary Robbins projected that the gradual increases in retirement age Pickle proposed would reduce Social Security's long-term deficit by 50 percent. Rostenkowski's benefit cuts would reduce the Social Security deficit by another 25 percent.

Free-market economists and a few conservative commissioners, however, oppose taxing benefits as a way to "means-test" entitlement programs. Robbins and the Cato Institute's Moore argue that higher taxes on payrolls and benefits would retard economic growth and make entitlement programs less solvent.

For instance, the Concord Coalition's President Peter Peterson, a commission member, advocates a draconian form of means-testing for high-income retirees. He would impose an additional 7.5-percent tax on all benefits that go to households with incomes above $35,000, and increase the tax rate by 5 percent for each extra $10,000 of income.

Though Peterson claims to favor policies that boost savings rates, the Cato Institute's Moore says this plan would "punish people for saving. Most people get their retirement incomes from personal savings." Moore argues that means- testing programs through tax increases would push working Social Security recipients out of the workplace and make individuals more dependent on tax-funded retirement programs. Peterson, Moore says, "really doesn't think incentives matter."

Taxing Social Security benefits isn't the only tax increase with support on the commission, however. At the commission's opening meeting in June, left-liberals, led by Greenstein, United Mine Workers Union President Richard Trumka, and former Rep. Tom Downey (D-N.Y.) urged the group to confront "tax expenditures," such as home-mortgage and business-expense tax deductions. The liberals asserted that wealthy Americans unfairly benefit from those tax exemptions and that cutting them could raise federal revenue.

During their opening statements, Cox, Rep. Bill Archer (R-Tex.), and Sen. Malcolm Wallop (R-Wyo.) challenged that idea. "The underlying rationale of the tax-expenditure concept," Archer said, "is that the government owns all of the earnings and wealth of all Americans, and that it is only through the grace of government, determined by Congress, that they get to keep any of it."

As the discussion between commissioners became testy, Kerrey and his co-chairman, Sen. Jack Danforth (R-Mo.), tried to defuse the situation. "One thing Bob and I have assumed, Danforth said, "is that in whatever we do, net increases in taxes are not going to be a part of it."

In ideological contrast to the tax raisers, Cox and Wallop take the most radical approach of anyone on the commission: They want to challenge the concept of entitlement. At the first meeting, Wallop said, "The commission will succeed only if we end the fantasy that individuals and groups of Americans have a right to, are entitled to, the benefits financed by federal tax revenue." He refused to endorse the commission's initial report because it did not include a statement saying that no one has a constitutional right to the income of another.

For his part, Cox proposes subjecting the entire federal budget, except for Social Security and interest on the debt, to annual review. Federal spending programs would have specific price tags attached, and Congress would have to approve the price. Cox says that entitlement programs "aren't really uncontrollable--they're just uncontrolled."

Such proposals will be unlikely from this or any other "independent commission." Notes Moore, who was a staff member on the deficit-fighting 1989 National Economic Commission, "The only way these commissions work is when they do not have too-ambitious agendas and [when] they can find areas [for reform] with nearly universal agreement."

For now, look for the commission to do no more than tinker with the status quo. As one source close to the commission put it: "We have two [political] parties--one that's for expanding the state and one that passionately defends the existing statism but wants no more."

Rick Henderson is Washington Editor of REASON.