August 16, 2004, 9:20 a.m.
Boom & Bust
Our day of reckoning draws near.

Cassandra, the creature from Greek mythology, was given the gift of prophecy but was cursed by never being believed. The closest thing we have today to a living Cassandra is financier Peter Peterson. He has been warning for decades that unchecked entitlement spending will bring on fiscal calamity. His latest book on the subject, Running on Empty, has just been published.

Peterson points out that our long-term fiscal situation was dire even before the Bush administration took office. It is a fantasy to think we could have preserved budget surpluses if only Republicans hadn’t cut taxes, engaged in the war in Iraq, or increased Medicare benefits. These things have all worsened our fiscal situation, in Peterson’s view, but even taken together they represent only a small part of a much larger problem.

That larger problem is essentially demographic, but is coupled with poorly designed entitlement programs. As long as we had a relatively young and growing population, the burden of paying for entitlements like Social Security and Medicare was manageable. But with the giant baby-boom generation aging and the labor force growing much more slowly, all of a sudden the day of reckoning is within sight.

The first baby boomer becomes eligible for early retirement at age 62 in just four years. If members of that generation take early retirement in the same manner that the current generation has, then almost 60 percent of baby boomers will start drawing Social Security benefits at the earliest possible minute. Thus, we will simultaneously see a sharp reduction in the labor force and an increase in government spending. The spending increase must be paid for by a shrinking pool of workers.

Not only is this bad for taxpayers, it is bad for retirees. Boomers taking early retirement will get 30 percent lower Social Security benefits for life than they would get if they only waited until age 66. Moreover, if they try to work after taking early retirement, they will lose $1 in benefits for every $2 they earn above $11,640. Those above age 66 can earn as much as they want and lose no Social Security benefits.

As Peterson notes, most baby boomers don’t have enough saved for a comfortable retirement even if they wait for full Social Security benefits at age 66. This is especially so given the rapid increase in life expectancy. If more than half of baby boomers foolishly condemn themselves to 30 percent less benefits, many are going to find that they are impoverished by the time they reach their 70s.

Despite all this, the Social Security program is in relatively good shape compared with Medicare. That program was already trillions of dollars in the hole before President Bush and a Republican Congress stupidly expanded it by adding a massive unfunded drug benefit.

Peterson correctly argues that the elderly who genuinely suffer from the high cost of prescription drugs could have been covered by a program costing a fraction of the one that was enacted. Instead, Republicans enacted a program that even covers those who already have drug coverage from insurance or employers. This was done, as Peterson puts it, “for the express political purpose of maximizing the number of seniors who take advantage of it.”

Republicans thought that for once they had outfoxed the Democrats. But instead they outfoxed themselves. According to new poll from the Kaiser Family Foundation, 47 percent of the elderly have an unfavorable impression of the new drug benefit, with only 26 percent having a positive one. Of those who say that the legislation will affect their votes in November, John Kerry is supported by better than a 2 to 1 margin. In terms of votes for Congress, Democrats are supported over Republicans by almost a 3 to 1 margin.

So the Republicans get less than nothing in return for selling their souls. If every Republican who voted for this monstrosity is defeated for reelection, they will only be getting what they deserve.

Getting back to Peterson, I think he is too pessimistic in one respect. Baby boomers are not likely going to retire to the golf course the way their parents did. A new survey from the University of Michigan finds that a high percentage of boomers expect to still be working full time after age 65. For example, among college-educated men, 43.7 percent expect to keep working, up from 33 percent in 1992. Every demographic group showed a significant increase in intention to continue working well after the traditional retirement age.

Even if boomers keep working, however, we still have a fiscal problem that needs urgent attention. It would be better to take care of it before a financial crisis forces action. But I am not optimistic that will happen.

— Bruce Bartlett is senior fellow for the National Center for Policy Analysis. Write to him here.

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