Can't Live With `Em, Can't Live Without `Em

In the beginning--1935, that is--there was Social Security, which helped millions of citizens avert a destitute old age. In 1965, Social Security begat medicare, which ensured that the elderly's basic medical needs would be met. Americans now see guaranteed--and largely free--health care as a fundamental right for those aged 65 and over.

In 1992, there are "entitlements"--uncontrollable budgetary monsters that swallow up almost half of all federal spending and threaten to consume $1 out of every $7 produced by the U.S. economy by the year 2000. Politicians from President Bush to Ross Perot to Paul Tsongas have proposals to tame entitlements. And economists worry that the ballooning federal budget deficit, now estimated at $331 billion for fiscal 1993, can't be shrunk without getting a grip on entitlement spending. "This is what's going to eat us alive in the none-too-distant future," warns Urban Institute economist Isabel V. Sawhill.

There's just one problem: Those beloved programs for the elderly and those voracious entitlements are two sides of the same coin. More and more, the federal budget is dominated by a few huge programs whose spending is on automatic pilot--not just Social Security and medicare, but medicaid, veterans' benefits, and civil service and military pensions (charts). The defense budget is shrinking, and spending for law enforcement, education, and other government programs is subject to tight caps. So the struggle to control the deficit comes down to one stark question: Are Americans willing to pay more taxes for growing entitlement spending, or will they accept cuts in some of the nation's most popular and entrenched programs?

That simple question has no simple answer. Entitlement payments reflect America's moral commitment to its retirees, to its poor and disabled, to its farmers, and to the men and women who have risked their lives to defend their country. But those payments' unchecked growth--especially the soaring cost of health programs--poses massive risks not only for today's economy, but for future generations. After growing up in an America where deficits choke off savings and investment, today's children will face an even greater burden when their parents, the baby-boom generation, start to retire in just 18 years.

SMALL CHANCE. Politicians are condemned if they cut entitlements and swamped by deficits if they don't. Just ask George Bush. In 1986, then-Vice President Bush watched the Republicans lose control of the Senate after GOP leaders briefly pushed a plan to trim Social Security cost-of-living adjustments. So in his 1990 "budget summit" with Congress, President Bush declared Social Security off-limits, but he agreed to cut medicare by $60 billion. Retirees bombarded Congress with protests, and lawmakers beat a hasty retreat, cutting the projected savings by a quarter. To make matters worse, entitlements have since grown faster than predicted, wiping out $216 billion of the deal's hard-won $500 billion in deficit savings.

Now, Bush has come back with a plan that tries to straddle the issue--a "mandatory spending growth cap." While his call for a taxpayer checkoff for deficit reduction is attracting attention, the centerpiece of Bush's budget-control effort is an attempt to squeeze $293.7 billion out of entitlements over five years. Bush's plan would not touch Social Security but would let average benefits for all other entitlements rise only at the overall inflation rate. After a two-year transition, that would cut those programs' average growth through 1997 to 4.6% a year, down from a projected 8.1%.

The political prospects for the plan are grim. Earlier this year, the Senate soundly rejected a similar proposal, even before anyone spelled out the hard details of what would be cut. Drawing on a Congressional Budget Office (CBO) report and other sources, the White House has compiled a list of 130 "illustrative" spending cuts, ranging from tighter rules on school lunches to higher premiums for medicare patients (table)--but hastens to say that Bush doesn't support most of those ideas. And even if Congress adopted them all, the savings would fall short by $70.6 billion, or almost one-quarter, of the cap's five-year target. Taxes on benefits could close that gap, but Bush is once again forswearing tax increases.

NO SOLUTION. The weak spot in the Bush plan is the problem of health care spending. Thanks to rapid medical inflation, medicare and medicaid are the fastest growing major federal programs. To meet Bush's proposed cap, Congress and the Administration will have to slash benefits for medicare and medicaid recipients. If they can't do so, they will have to chop other programs by $216.6 billion, a 20% cut.

Federal health spending has already been squeezed: The CBO estimates that medicare would cost an additional $61.5 billion, or 42% more, in fiscal 1993 if not for strict limits placed on hospital stays and reimbursement. But the government's savings have come largely at the expense of the private health insurance system: "Hospitals are losing 10% or more on every medicare admission, but they're making it up from private-pay patients," says Stuart H. Altman, chairman of the Prospective Payment Assessment Commission, which reviews medicare spending for Congress. That "cost-shifting" has in turn worsened health costs for employers, whose insurance premiums are rising 12% a year.

Proposals by the Presidential candidates to reform health care won't solve the entitlements problem. The White House has a plan, but it fails to tackle hard issues of cost control. And while Democratic candidate Bill Clinton envisions big savings from improved administration and tight spending limits, he proposes to spend those savings on extending coverage to the 34 million Americans who don't have health insurance.

NEW BIRTHRIGHT? For a glimpse of what it might take to rein in entitlements, look at former Presidential candidate Perot's recently published plan. That proposal, drafted by former Carter budget official John P. White, didn't say how it would achieve its five-year medicare target of squeezing $83 billion from doctors and hospitals. But elsewhere, the Perot plan is specific. Upper-income workers would pay medicare taxes on their full salaries, not just the first $130,000. The elderly would pay $30 billion in higher taxes on Social Security benefits and $38 billion in added medicare premiums. Civil service and military pensioners would see their cost-of-living adjustments held to two-thirds of the inflation rate. All told, cuts in and taxes on entitlements make up about one-third of Perot's planned five-year savings of $754 billion.

Of course, Perot can afford to be tough: He dropped out of the Presidential race the day after White presented him with the details. In fact, the only advocates of specific entitlement cuts seem to be former politicians. Ex-Presidential candidate Tsongas is teaming up with retiring Senator Warren Rudman (R-N.H.) and Commerce Secretary-turned-investment banker Peter G. Peterson to offer a tough budget proposal, which they expect to unveil on Sept. 15. Entitlement cuts will be a major part of their plan, Tsongas promises, because "they're a core test of political courage."

Beyond today's budget problems, Tsongas frets that the entitlements are pushing America "to the verge of generational warfare." Today's workers are building up Social Security surpluses--but those are invested in government bonds that future taxpayers will have to redeem to pay benefits when the baby boom generation starts to retire after 2010. Tsongas' group, the Concord Coalition, calculates that today's 18-year-olds will see 30% of their paychecks diverted to Social Security benefits by the time they reach their mid-40s. "Young people haven't figured out what their obligations are going to be--but when they do, they aren't going to sit back quietly and pay it," Tsongas says.

That realization will come too late to help today's politicians with their budget woes. Polls show that more than 60% of Americans, young and old, support higher spending on Social Security. Other entitlements are almost as popular. Indeed, as the spreading use of the very word "entitlements" shows, more and more Americans see these programs as a part of their birthright. "We got the elderly out of poverty and ransomed our economy in the process," observes Perot aide White. "Now, people think that entitlements are guaranteed in the Constitution somewhere." It will be excruciatingly hard to convince them otherwise.

      Over the next five years the federal government will spend about $4.3 trillion 
      on entitlements. The Congressional Budget Office has estimated the impact of 
      measures to trim that bill:
                                                        Five-year savings, 1993-97
      SPENDING                                                Billions of dollars
      Setting cost-of-living adjustments for Social Security and
      other programs at two-thirds of CPI                         $56.7
      Freezing medicare payment rates for one year                 14.9
      Reducing farm-support target prices                          13.3
      Making medicare recipients pay 20% of nursing-home costs     11.9
      Tightening eligibility for disability aid to veterans        10.3
      Increasing medicare premiums for upper-income recipients      9.6
      Restricting school lunch subsidies for well-off children      4.3
      Requiring students to pay student-loan interest while
      still in college                                              4.3
      Collecting more from assets of medicaid nursing-home patients 1.4
       Five-year revenues, 1993-97
      REVENUES                                               Billions of dollars
      Taxing Social Security benefits as private pensions:
      -- For all beneficiaries                                    $111.5
      -- For upper-income beneficiaries only                        29.1
      Taxing half the insurance value of medicare:
      -- For all beneficiaries                                      51.4
      -- For upper-income beneficiaries only                        26.8
      Imposing medicare tax on salaries above current
       $130,000 cap                                                  27.8