Entitlements test legislative resolve
Dependence on entitlement programs is dragging down federal, state and local budgets and could result in irreparable harm if left unchecked.
But reforming the system is considered political suicide, because it would mobilize labor and the elderly, two major voting blocs. "Scapegoating entitlements is both dangerously naive and likely counterproductive," says Lane Kirkland, president of the AFL-CIO.
Instead, he suggests that America's corporations be responsible for meeting the expected entitlement crisis in the coming decades. Congress "should consider the tax breaks given to corporations, which equal billions of dollars of losses to the U.S. treasury each year," he says.
The federal government is indeed trying to tackle this problem head on. The Bipartisan Commission on Entitlement and Tax Reform, formed in November 1993 by President Clinton and made up of 32 lawmakers and private citizens, has defined the magnitude of the dilemma and will make specific recommendations to Congress this term.
"It's time for the interest groups to quit saying `Not me' and start saying `Here's how,'" says Sen. Bob Kerrey (D-Neb.), chairman of the commission.
According to the commission, whose preliminary findings were approved by all members except one union representative, the entitlement fund, which pays Medicare, Medicaid and Social Security benefits, will be bankrupt in the year 2029. Entitlement spending, which now consumes 60 percent of all federal outlays, will take up 72 percent in the next 10 years when the first baby boomers begin retiring, the commission says.
That will increase the budget deficit from its current $200 billion level to $385 billion.
As the deficit increases, interest rates will rise, hurting American business. Those deficits are debilitating because they absorb national savings that otherwise could be used to spur economic growth. "If low savings rates continue, the U.S. can expect lower growth and lower real income in the future," says Robert Reischauer, director of the Congressional Budget Office.
Already the national savings rate has fallen precipitously since budget deficits began to soar in the 1980s; in 1980 such rates were 7.7 percent, and today they are 1.7 percent. Higher deficits would reduce that rate even more, the commission says.
Alan Greenspan, chairman of the Federal Reserve Board, says increasing corporate taxes is not a viable solution. Higher corporate rates could not begin to dent future entitlement obligations, he says.
Moreover, such taxes would eventually choke off economic growth and reduce the tax base.
The committee understands that the problem must be corrected now. According to its report, changes being examined include increasing the retirement age to 70, excluding Social Security benefits for households earning more than $100,000 a year and taxing benefits at 100 percent for households with incomes higher than $50,000 a year.
Already, as part of the 1993 tax bill, lawmakers revamped Social Security by raising the retirement age from 65 to 67 before full benefits can be received and increasing taxes on benefits for the high-income elderly.
Whatever happens, it is clear that pitting the elderly against the middle class is a dangerous business.
Michael Boskin, former economic advisor to President Bush, says the situation could lead to, "a confrontation between workers and retirees … that will create the greatest polarization along economic lines since the Civil War."