Will America Grow Up Before It Grows Old? by Peter G. Peterson
Will America Grow Up Before It Grows Old? How the Coming Social Security Crisis Threatens You, Your Family, and Your Country
by Peter G. Peterson
Random House. 237 pp. $21.00
Peter G. Peterson, a Wall Street banker, a former Secretary of Commerce (under President Nixon), and a founder of the Concord Coalition, a Washington advocacy group of deficit-hawk heavyweights, has for fifteen years been crying out—less in the wilderness than within the capital Beltway—about the precarious fiscal position of the U.S. government. Will America Grow Up Before It Grows Old? is his third book devoted to the impending crisis he sees facing us. In it he argues that unless dramatic changes are introduced into Social Security, Medicare, and the tax system, our social safety net will collapse, and with it the nation’s ability to prosper.
Despite the tone of intense urgency sounded throughout this book, and epitomized by the alarm rung in its subtitle, it would be wrong to dismiss Peterson as the Chicken Little of the Washington/Wall Street establishment. Using an array of statistics and color charts to buttress his argument, he mounts a powerful case that the entitlement programs of Social Security and Medicare cannot be sustained as they are—the sky, he maintains convincingly, really is falling.
Seventy-six million baby boomers in the labor force currendy pay taxes into the Social Security system. As this generation ages and leaves the employment market, the demands on our national retirement system will rise to an unprecedented degree. At present, slightly more than one in ten Americans is over the age of 65. By 2040, the proportion will be one in four. We are turning inexorably into what Peterson calls “a nation of Floridas.”
With fewer workers paying for the benefits of a greater number of retirees, the Social Security trust fund will begin to run a deficit by 2013. Within 40 years after that, it will have accumulated a shortfall of more than $1 trillion. Yet despite this yawning budgetary gap, and despite the widespread conviction that Social Security payments are not enough in any case to provide a comfortable retirement, the bulk of today’s workers save woefully little. From these low savings rates, Peterson concludes that Americans are “in denial” about the crisis lurking around the corner.
Much of Peterson’s book is therefore devoted to laying out a detailed program to reconcile the nation’s books. He recommends a switch from an income- to a consumption-based tax; a constitutional amendment to balance the federal budget; stricter limits on Medicare spending; raising to 70 the age at which one becomes eligible for Social Security; and ultimately creating a mandatory retirement fund that would be private and portable.
By far the most contentious element of his plan is to phase out Social Security benefits for those making in excess of $40,000 a year, a figure slightly higher than the national median income. Those earning more, he suggests, should forfeit 10 percent of their benefits, and then an additional 10 percent for each extra $10,000 in annual income they receive. These steps would generate enough revenue, Peterson estimates, to replenish the Social Security trust fund and even leave it with a modest surplus by 2030, the year the last of the baby boomers will have reached 65.
Some of Peterson’s proposals are less revolutionary than the tenor of his book suggests. Congress, for example, has already raised the age at which seniors become eligible for benefits, though to 67 rather than 70. Tax reform of every variety, including a consumption tax, has been on the table for over two years and will continue to be vigorously debated, if not enacted, in the years ahead. Social Security has begun to lose its reputation as the dreaded “third rail” of American politics, electrocuting the careers of those who propose fundamental change; in the Senate’s last session, a bill partially privatizing the system was introduced and respectfully considered. It is hard to imagine that any presidential candidate in the year 2000 will be without some proposal to address the problem of runaway entitlement spending.
What truly is radical about Peterson’s approach is his plan to impose a means test—he calls it an “affluence” test—on Social Security recipients, with (as noted) a view to reducing benefits for those earning more than $40,000. This would undoubtedly go a long way toward restoring the program to financial health, but it would have other far less desirable consequences as well.
For all its fiscal problems, the universal structure of Social Security, in which everyone who “contributes” is entitled to receive its benefits, has been a major source of the program’s success. Social Security has not engendered the class distinctions or perverse incentives that have plagued virtually every other American social program. It operates with remarkable efficiency, and with little evidence of fraud or abuse, despite the colossal bureaucracy administering it. And not incidentally, its payments to the elderly have done more to reduce poverty than any other governmental effort.
None of this is to say that Social Security’s pay-as-you-go system, in which today’s workers pay for the benefits of today’s retirees, should remain intact. The system is unsustainable. But it does suggest that restructuring it is as much a political question as a fiscal one. Social Security’s popularity and political viability would hardly endure if it were transformed into a welfare program for the poor, paid for by the middle class. Yet that would be precisely the effect of Peterson’s plan.
The penalty on middle-class and well-to-do taxpayers would be considerable. To the 11.5-percent payroll taxes now paid by employees and employers to support Social Security would be added an additional 5-percent payroll tax to fund Peterson’s mandatory private-pension system. Not only would this new tax discourage job creation and crimp economic growth, it would dramatically increase the tax burden on middle-class Americans while decreasing the benefits they receive. Peterson calls this a sacrifice. Most taxpayers would call it confiscation.
In short, both Peterson’s means test and the measures accompanying it would save Social Security from deficits only by destroying it politically.
But that is not the only flaw in Peterson’s approach. Even in the case of the sensible goals he recommends—such as replacing Social Security with a system of privately controlled retirement funds—he never formulates a realistic political strategy to arrive at them. To him, resistance to reform is merely evidence of a political culture dominated by special interests, and of a public so lulled by tax cuts and deficit spending that it believes it can have its cake and retire, too. The need to reach compromises and take incremental steps, and the fact that his own plan could never survive the path through congressional committees, are merely proof to him that our democracy is failing. America, as he suggests in his title, needs to grow up.
But growing up, in this case, seems to mean dispensing with representative government. Peterson notes without a critical word that Chile’s much-praised, privately run social-security system was established under a dictatorship; the political figure he cites most approvingly is Lee Kuan Yew, the authoritarian leader of Singapore, who has suggested that parents sue their children for support before daring to apply for government benefits. Obviously, Peterson is not calling for anything resembling dictatorship in the United States, but his preferred mode of policy-making is still the blue-ribbon commission or the distinguished panel of experts that will come up with a sweeping, top-to-bottom plan—his plan, that is—to be enacted without change or qualification.
Whether this faith in comprehensive plans proposed by experts is justified remains, of course, very much an open question. But it is worth pointing out that in just the past four years, we have seen two attempts to introduce massive policy changes by means of a single, all-encompassing plan. The first was a national health-care plan that proved a political catastrophe for the Democrats. The second was an attempt to ram through massive cuts in federal spending that left Newt Gingrich and the Republicans with wounds from which they have not yet recovered.
Peterson seems to have drawn no lessons from these debacles, both of which show that all-or-nothing attempts at reform tend to end in nothing. While he has performed a public service in calling attention to the approaching fiscal crisis, he has not much advanced our discussion of the really acute problem, which is how, within the constraints of our untidy, imperfect democracy, we are to get from A to B.