Shortly before George W. Bush was sworn into office, an aide to the incoming president called up Peter G. Peterson, a former secretary of commerce under Richard Nixon, to chat about the nation's finances. "You people have a God-sent opportunity," Peterson, one of the Republican Party's fiercest deficit hawks, told the Bush official. At the time, the federal government was awash in cash; after eight years of Bill Clinton's stewardship, the 10-year budget surplus stood at $5.6 trillion, and Bush's legislative challenge looked similar to the problem faced by Richard Pryor's character in "Brewster's Millions" -- finding ways to spend all that coin.
Despite the happy short-term outlook, though, Peterson reminded the Bush aide that the United States faced a frightening long-term balance sheet. This is the same doomsday scenario you've heard a thousand times before, and by now you're probably weary of it: As more than 70 million baby boomers begin retiring later in the decade, the Social Security and Medicare programs are destined to sink into multitrillion-dollar deficits, causing enormous hardships for younger Americans. Bush had a chance to avert disaster, Peterson told his aide. By using the immediate surpluses to fix the looming crisis, the new president could possibly solve "one of the largest fiscal challenges in our history."
But when the Bush official went to more senior aides with Peterson's advice, the answer came back as you'd expect: There would be no immediate effort to fix Social Security and Medicare during George W. Bush's presidency. "Sorry, Pete," the official told Peterson. "Tax cuts come first."
This is the story of Peter Peterson's life. Politicians and their assistants are always soliciting his advice, constantly appointing him to blue-ribbon panels and influential committees, forever congratulating him on his prudence and pragmatism. And yet they're always ignoring him, too. Everybody listens to Peterson, but nobody does what he counsels. As he describes in his brilliant new book, "Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It," he has offered the same practical advice for decades -- Reform long-term entitlements! -- to presidents and lawmakers of both parties. His words have gone almost universally unheeded.
The Democrats he encounters either refuse to believe that there's a problem with Social Security and Medicare, or they insist that it's a problem we can solve with a few small, painless tax increases and other legislative tweaks. Republicans concede there might be a problem, but they're not too concerned about it; for them, the government's inability to fund two massive social programs fits well with a small-government, libertarian ethos.
During the past 50 years, both sides have not only ignored the challenges ahead but have exacerbated them by more or less simultaneously approving giant tax cuts and spending increases. Thanks to their actions, we are all in profound trouble. As Peterson methodically lays out, when the tab comes due over the coming decades, Americans will face a grim choice: To pay for the retirement and skyrocketing healthcare costs of the baby boomers, taxes on future working Americans -- that is, on today's young people -- will need to be hiked substantially or benefits to the elderly will have to be drastically reduced. If no policy changes are made, in about 20 years or so "the whole dynamic spins out of control," Peterson says -- eventually, spending on Social Security and Medicare will consume such a huge percentage of national income that the nation's economy could "simply shatter." But we could be in trouble even before then: In a scenario that people like Robert Rubin, Warren Buffett, Paul Volcker and economists at the International Monetary Fund have recently been fretting about, our mountain of debt might soon lead foreigners to suddenly sour on the United States, causing the dollar to plunge, interest rates to spike, and global recession to follow. Volcker, the longtime chief of the Federal Reserve during the 1980s, tells Peterson that he sees a 75 percent chance of such a crisis occurring within five years.
None of this is news. The problems we face are the combined product of decades-old policies and long-foreseen realities -- rising healthcare costs, increasing life spans, falling birthrates, a falling savings rate, a tendency to import more than we export. Despite years of warning, we have, amazingly, done nothing to avoid disaster. The really frightening thing is that even during this election year, Americans -- the candidates as well as the voters -- remain largely indifferent to the crisis. "Running on Empty" is a tour de force; even if you disagree with Peterson's proposed solutions, the book makes it almost impossible to deny that we do have problems. But will anyone listen to Peter Peterson this time?
Though he remains an investment banker by day, for the past dozen years Peterson has mainly been occupied as the nation's unofficial fiscal Cassandra, a man who considers it his duty to puncture any temporary good feeling with warnings of the winter ahead. In 1992, he co-founded the Concord Coalition, a bipartisan group calling for "fiscal responsibility" in Washington. Since then, he has written several books outlining the coming entitlement disaster, each one carrying a more urgent title than the last: "On Borrowed Time" was followed by "Facing Up" and then the more plaintive "Will America Grow Up Before It Grows Old?" In 1999, in "Gray Dawn: How the Coming Age Wave Will Transform America -- and the World," Peterson seemed to put his foot down: "It's time to steer clear of feel-good policies we know are wrong," he lectured. "It's time to quit serving up a delicious assortment of free lunches -- and calling it reform. It's time to engage the real challenges of an aging society."
Of course, nobody in power did anything to engage such challenges, and in the face of the overwhelming legislative apathy, Peterson could do only what he's done before -- write another book. In "Running on Empty," he is more anxious than ever -- sometimes, it should be noted, to the point of irritation. Peterson can come off as a know-it-all grandfather, an eat-your-spinach type whose prudence and rationality and nostalgia for a time when American politicians acted a lot more maturely bring the reader to the brink of wondering, Will this guy ever let loose? Can't he abide any of the pleasures of big government, or the thrill of a smaller tax bill? Some liberals will no doubt think him unfeeling, seeing as he regularly rails against the excesses of federal entitlements. Conservatives will call him untrue, a traitor to the cause of tax cuts, a RINO, or "Republican in name only," the label that tax cutters have come to apply with devastating effectiveness to any Republican who questions the prudence of gutting the government.
But Peterson's harsh tone is easy to forgive. Indeed, it is a delight: Somebody needs to teach our leaders a bit of responsibility, and Peterson, who is both well-schooled in the facts of his case as well as a gifted and relentless rhetorician, is exactly the sort of lecturer we need. He sounds like a grown-up, and if he's sometimes a bit too exasperated, it is only because the kids have behaved so badly.
As Peterson sees it, the politician who's behaved worst of all is Bush, for whom Peterson once had high hopes. In addition to advising his aides during the campaign, Peterson also met Bush a couple of times before he became president, and he implored the candidate to make fiscal reform the mission of his presidency. Reform is a "moral issue," Peterson told Bush during one of their meetings. After guiding the candidate through the official projections of the huge payroll taxes and debt that tomorrow's generation would inherit from today's, Peterson writes, "I told him that if looking out for our children's future was a definitive test of our morality, then long-term tax cuts, particularly for us fat cats in the room, should wait until entitlement reform had been completed." This was apparently not something that Bush wanted to hear. Bush "visibly stiffened, as though hit in the gut," Peterson writes. "I don't think tax cuts are immoral," Bush replied, ending the conversation.
"It was there and then that I realized that to George W. Bush, tax cuts were an obligation driven by faith, not a policy guided by evidence," Peterson writes. In this belief, Bush is representative of just about every member of the modern Republican Party (the exceptions are John McCain, who adoringly blurbs Peterson's book, and a few other blue-state Republicans in the Senate). To Peterson's chagrin, the post-Reagan GOP has wholly abandoned the party's age-old obsession with "fiscal responsibility" in favor of what Peterson calls "an indulgent fiscal philosophy" that cuts taxes without any care for the consequences. "For 'supply-side' Republicans, the pursuit of lower taxes has evolved into a religion, indeed a theology that discards any objective evidence that violates the faith."
Supply-siders believe that when a government cuts taxes on citizens, people see an increased incentive to work, save and invest, thereby leading to faster economic growth. Sometimes they're right: When John F. Kennedy lowered the top tax rate from 91 percent to 70 percent in 1963, or when Ronald Reagan lowered the 70 percent rate to 50 percent in 1981, revenue from the wealthiest Americans did increase. But "there's plenty of empirical evidence that when marginal tax rates are not high, the efficiencies you gain by cutting them may be modest and the impact on economic activity may be ambiguous," Peterson points out. If your tax goes down from 39 percent to 35 percent, you could possibly decide to work more -- but you might also not change your behavior, or you could work a bit less. We saw this on a national scale in 1993, when Bill Clinton increased the top marginal federal income tax rate from 31 percent to 39.6 percent. Supply-side theory would have predicted a decline in economic activity in response to such a tax hike, but of course what we saw instead was a boom in "jobs, hours, savings, investment, and productivity -- a chapter in economic history that never appears in supply-siders' texts."
But even if Bush's supply-side ideas prove true, and lowering tax rates do somehow lead to a permanently faster-growing economy (a highly, highly dubious proposal), the resulting gains will not set us free from our liabilities in Social Security and Medicare. Social Security benefits are directly indexed to wages, Peterson points out. If the economy turns red hot as a result of Bush's tax cuts, current workers will receive higher wages, and consequently, they'll pay more in taxes, thereby helping the government support current retirees. But when today's workers retire, the government will award them benefits according to how much money they earned while they were working -- and since they're earning more today, they'll receive larger checks tomorrow. Republicans often argue that affording the long-term liabilities will be simple -- we can just "grow the economy" through supply-side tax cuts. But because Social Security (as well as, more indirectly, Medicare) benefits are linked to economic growth, "higher productivity growth cannot possibly save today's pay-as-you-go retirement systems," Peterson concludes.
Many supply-siders won't be too upset if, instead of making it easier for us to cope with the coming wave of retiring seniors, tax cuts only bury the nation in red ink. That's because some of them like the red ink. According to Peterson, some in the Republican Party are fond of privately espousing the Reagan-era "starve the beast" theory of governance; they see the deficits caused by tax cuts as a way to shrink the size of government or force a reform of entitlement programs. That theory would be easier to swallow if Republicans themselves had shown any restraint during the past few years of ballooning budget deficits, but they have not. Bush, Peterson notes, isn't starving the beast -- he's fattening it. Under Bush and the Republican Congress, spending has gone through the roof. Domestic discretionary outlays (excluding the tab for "homeland security") have increased by 7 percent annually during Bush's presidency, and the practice of earmarking bills for special projects in lawmakers' home districts -- delivering "pork" -- has reached record levels. Yet Bush has done nothing to rein in the spending; he is on track to become the first president since John Quincy Adams to serve a full term without vetoing a single bill.
While there is much in Peterson's book to keep Bush bashers smiling -- "This administration and the Republican Congress have presided over the biggest, most reckless deterioration of America's finances in history" could make a nice T-shirt -- the author is equally critical of Democrats, many of whom have not yet accepted the idea that entitlements for seniors will need to be radically reformed in order to stave off disaster. While Democrats have recently tried to paint themselves as the more fiscally responsible party, Peterson can't see much responsibility in their record. The party's leading lights offer few solid plans to bring the budget back into balance -- indeed, the majority of the budget proposals floated by this year's slate of Democratic presidential contenders would have deepened the deficit, Peterson notes.
Worse than that, "Democrats regularly short-circuit any prudent examination of the single biggest spending issue, the future of senior entitlements, by castigating all reformers as heartless Scrooges," Peterson writes. "No national candidate who says the affordability of these entitlements is a problem ... has a prayer of winning a primary." As proof, Peterson points to Howard Dean, who learned the hard way that to his party, entitlements for seniors constitute a sacred cow. In the mid-1990s, when Dean headed the National Governors Association, he supported a plan to reduce the annual growth rate of Medicare -- an effort he has defended as a way to keep the program solvent. For his troubles, John Kerry and Dick Gephardt attacked him for weeks during the Iowa caucus contest, accusing Dean of siding with Newt Gingrich and against poor defenseless seniors. "I'm not going to use Medicare as a means to balance the budget ... on the back of seniors," Kerry began saying on the stump.
How does Kerry plan to tackle the projected deficits in Social Security and Medicare? One is hard-pressed to determine his policies on these programs. Neither is mentioned on the "Issues" page of his Web site, and digging a little further reveals few details (Kerry's "Four-Step Plan to Restore Medicare" consists of such bromides as "Kerry will strengthen drug coverage for those who have it -- not make it worse.") During his years in the Senate, and in the campaign, Kerry has repeatedly pledged to "secure" Social Security and Medicare, though he's offered few ideas about what his plan would look like. He has made clear, however, that he sees little need to overhaul the nation's entitlements -- like many other Democrats, Kerry seems to believe that future crises can be avoided by instituting a few modest changes.
In January in a primary debate held in Iowa, Kerry declared: "We did protect Social Security in the United States Senate, and Social Security is safe and sound well into the next two decades or more. With very minor changes, with a strong economy, the next generation will have Social Security. I will never privatize Social Security. I will never try to extend the retirement age for Social Security. And I will not cut any benefits for Social Security."
The idea that Social Security is "safe and sound" for the next couple of decades and is in pretty good shape for even "the next generation" is a central pillar of Democratic establishment thought. There is a kernel of truth to it. According to the latest data from the trustees who oversee the Social Security trust fund, the 75-year "actuarial" deficit in Social Security is $3.7 trillion, meaning that the program can be put into balance if the government begins taxing workers an extra 1.9 percent. (A recent report from the Congressional Budget Office puts the required tax increase at just 1 percent). Raising taxes by an extra 1 or 2 percent might be painful, but we can handle that, Democrats argue, especially if the payoff will be a sound Social Security system.
But looking at Social Security in a vacuum is, Peterson argues, not especially helpful when considering the long-term balance sheet of the nation. For one thing, seniors require more than just retirement income. They also need medical care, a whole lot of medical care. And due to generally rising health industry costs, the Medicare program is in much worse shape than Social Security, with a 75-year actuarial deficit of more than $15 trillion, the funding of which would require significant payroll tax increases.
Then, to make things really bleak, try considering time periods beyond 75 years (because our children's children will also be entitled to the entitlements). Over what accountants call an "infinite time horizon," the United States faces $45 trillion in "unfunded liabilities," according to a projection by economists at the American Enterprise Institute. The International Monetary Fund puts that number at $47 trillion. The Brookings Institution has it at $60 trillion. The trustees for Social Security have it at more than $72 trillion. Needless to say, it is highly unlikely that these spectacular shortfalls can be fixed by the sort of minor changes John Kerry favors. "Closing this gap would require massive adjustments in either tax or spending programs," the IMF has said. The agency added: "The longer-term fiscal deficit is also associated with a severe intergenerational balance" -- meaning, as Peterson translates it, "This approaching train wreck is a clear and present danger to our kids."
Last December, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act, which provides, according to the lawmakers who support it, much-needed prescription drug benefits to needy seniors who rely on the government for healthcare. Seniors had long been pressing for such an expansion in Medicare, and the legislation had been a main policy goal of Democrats; in persuading (just barely) members of his own party to go along with a drug plan, Bush was widely considered to have scored a major political victory, possibly winning over many seniors to the Republican Party in November. The bill was, Peterson notes, a huge shift for the GOP, which has traditionally resisted expanding entitlement programs. This was the compassionate side of Bush's conservatism -- yes, he was a Republican, but he was nevertheless willing to call for what Peterson deems "the largest legislated entitlement expansion since the heyday of the Great Society."
The drug bill is fantastically expensive. Shortly after the law was enacted, the White House put the 10-year price tag of the plan at $535 billion (substantially more than the $400 billion it had allowed Congress to believe the bill would cost). But because drug prices are rising sharply, and because Americans are retiring at an increasing rate, the program is projected to become more and more expensive as time goes by. In its second 10-year period, the plan will cost "well over $2 trillion," Peterson notes. According to the trustees who manage Medicare, by the year 2078, the program's spending on prescription drugs will grow to 3.4 percent of the economy -- close to what we currently spend on defense. Because the plan includes large gaps in coverage that Congress is expected to fill later, the figure could rise even more than that.
Most Democrats in Congress voted against the White House's prescription drug plan. (John Kerry missed the vote while campaigning, though he opposed the bill.) Among other things, they noted, quite reasonably, that because the federal government was signing up to pay for large quantities of prescription drugs, it should have forced drug makers to lower the cost of medication, something the president's bill expressly forbids. Purchasing drugs at a discount would have allowed better coverage for seniors at a better price for the government. It is not clear, though, how much more cost-effective a Democratic plan would have been -- plainly, when you're talking about offering a huge number of senior citizens prescription drug coverage, you're talking about a lot of money, whatever discounts you manage to secure.
Should the nation really be providing all senior citizens -- even wealthy ones -- with access to prescription drugs? How much of senior citizens' healthcare should the federal government be responsible for? Given the long-term problems we face, can lawmakers really justify adding another open-ended entitlement to the books, one projected to steadily eat up more and more of federal spending? And if we're spending money, isn't it better to pay for the healthcare of children rather than seniors? These are, to be sure, indelicate questions; in America, senior citizens are sacrosanct, and suggesting that caring for all of their needs -- especially their health needs -- might simply be too expensive is, politically, way beyond the pale.
This is, however, a discussion we've got to have, Peterson says. The industrialized world is in the midst of a profound demographic shift, with seniors steadily increasing as a share of the population and younger people steadily declining. "Been to Florida lately?" Peterson asks. "You may not have realized it, but as you gazed upon the vast concentration of seniors there -- nearly 18 percent of the Sunshine State's population -- you were looking at our future. By the mid-2020s at the latest, the United States as a whole will have an age structure as old as that of Florida today." As this occurs, it seems only reasonable that we discuss, frankly and openly, how we should spend our resources.
Currently, most federal benefits are awarded to seniors; the average older person, Peterson says, "receives seven times as much in benefits as the average child (and this includes all child-related outlays, even nonbenefits like education)." As seniors begin to make up an increasing share of the population -- as the nation begins, in other words, to look like Florida -- this imbalance should start to worry us: We will be spending an increasing share of our money on what Peterson calls the past -- on people who've already lived their lives -- rather than on the future. Is this the America we want?
The ideas that Peterson proposes to fix this situation are complex, as you'd expect when dealing with such a mammoth problem. He suggests a mix of tactical measures (such as re-indexing Social Security benefits to the price level rather than to wages, or "affluence-testing" benefits, so that the wealthy receive less money than the poor) and broader, strategic changes to government. He wants to reform the way we write budgets, the way we draw up congressional districts, the way we fund campaigns. Not everyone will agree with all of his proposals, and some people -- especially liberals -- might disagree with all of them. Though he is comfortable with criticizing conservatives, Peterson is at heart a Republican, and his solutions are firmly planted in Republicanism; he is fond of market-based mechanisms, and he is not a fan of trial lawyers.
But Peterson's specific solutions aren't as important as the problems he diagnoses. The fiscal outlook is untenable. We are in trouble. Something must be done. "It will take a rare combination of bold presidential leadership and enlightened bipartisanship to forge a reform program equal to the challenge," he says. The trouble is, that leadership is nowhere to be found.
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