The good news is that after six years of neglect, President Clinton now concedes that we need to prepare for the aging of the baby boom. The bad news is that he implies we can do this mainly by using huge budget surpluses to "save" Social Security and Medicare. For Clinton, the surpluses substitute for anything so unpopular as higher retirement ages or less generous benefits.
The White House puts the surpluses in excess of $4 trillion over 15 years. The trouble, of course, is that these are phantom. They exist only on paper, and no one can predict budget outcomes that far into the future. A case in point: In early 1997 -- only two years ago -- the Congressional Budget Office projected large budget deficits indefinitely. Since then, the economy and tax revenues have done better than expected; but these favorable conditions won't necessarily continue.
"Economists can't deliver the accuracy that politicians need," says Rudolph G. Penner, former head of the CBO. As Penner notes, small errors can cause large swings in the budget balance. The federal government spends about $1.7 trillion annually and collects a bit more in taxes. Suppose that spending and taxes are mispredicted by 2 percent each -- in opposite directions. These are tiny mistakes, yet they alter the budget balance by $70 billion. Wars, slumps and all manner of unforeseen events spoil forecasts. Even if big surpluses materialize, they alone will not cover the costs of an aging baby boom. We still face the usual choices: raise taxes to pay for future benefits; cut benefits; cut other spending; or relapse into deficits. Here's why. In 1997 federal spending was a fifth of national income (20 percent of gross domestic product). More than a third (8 percent of GDP) went for Social Security, Medicare and Medicaid, the three major programs for the elderly (Medicaid covers some nursing home care). All other government programs (from defense to schools to food stamps to scientific research) equaled about 9 percent of GDP. Interest on the federal debt was 3 percent of GDP. By 2020, the CBO expects Social Security, Medicare and Medicaid -- with present benefits -- to cost 13 percent of GDP. That's an increase of 5 percent of GDP. If nothing else changed, balancing the budget at 20 percent of GDP would require either that other government spending be cut by more than 50 percent or that overall federal taxes be raised by about 25 percent. The squeeze intensifies in later years, as costs for the elderly continue to rise. Like most projections, these are inexact. But they aren't wildly misleading, because they reflect firm population trends. In 1997 Americans 65 and over were 13 percent of the population. The Census Bureau estimates they will hit 16 percent in 2020 and 20 percent in 2030. And average health costs for the elderly are triple those of the non-elderly. Indeed, the CBO projection could be optimistic; it assumes a slowdown in health-cost increases.
Advertisem*nt
These dry numbers raise large moral, political and social questions. How much should workers (the main taxpayers) support retirees? When does old age -- in the sense of dependence on government -- begin? Should that be later than today's 65? Not only didn't Clinton discuss these questions but his proposals would dramatically favor future retirees over workers.
True, Clinton is correct that the budget surpluses are best used to repay the federal debt. This debt (the sum of past annual deficits) totals almost $4 trillion. If the surpluses expected by Clinton occur, all of it could be repaid. That would ease budget pressures by freeing up what's now spent on interest payments. In 1997, those interest costs totaled $244 billion. The potential savings argue strongly against Republicans' proposed tax cuts. But instead of a simple plan to pay down the debt, Clinton offered a baffling and complex program that also does many other things -- most of them undesirable. With $500 billion or more, it would buy common stocks for the Social Security trust fund: an unwise leap into the market whose effects (on stocks, on business performance) can't be foretold. Next it would channel $500 billion into personal retirement accounts; these might simply offset saving that people would do on their own. Finally, it would shift up to $700 billion of general tax revenues into the Medicare trust fund. These funds would then be lent back to the Treasury to retire federal debt.
What's astounding is that the White House would spend these funds even if the projected surpluses don't materialize. It's committing money that it doesn't have to pay benefits for tomorrow's elderly (the baby boom). Moreover, Clinton wants to raise benefits for today's and tomorrow's elderly by broadening Medicare's coverage and improving Social Security for widows. None of this comports with his pledge in the State of the Union: "Our generation {the baby boom} is determined not to let our growing old place an intolerable burden on our children and their ability to raise our grandchildren." Budget surpluses can help fulfill that pledge only if their uncertain nature and limits are recognized. They shouldn't relieve us of the responsibility for revising the social contract between the old and the young. The elderly live longer than ever; they are healthier and wealthier than ever. Retirement ages can be gradually raised, and the elderly -- or many of them -- can afford to bear more of the costs of federal retirement programs. Clinton should have started the revision. Instead he retarded the process with a program based on a glossy vision of the future in which nothing goes wrong (at least for 15 years). Clinton's aim was not so much to explain our problems and expose our choices as to convey the self-serving impression that, under his leadership, everyone can have everything for nothing.
