Running On Empty?

Cassandra was a creature from Greek mythology that was given the gift of prophecy, but cursed by never being believed, even though her predictions were always correct. The closest thing we have to a living Cassandra is financier Peter Peterson, who has been warning for decades about an impending fiscal calamity from unchecked entitlement spending. His latest book on the subject, "Running on Empty," has just been published.

Mr. 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 an unnecessary war, or increased Medicare benefits. These things have all worsened our fiscal situation, in Mr. Peterson's view, but even taken together they represent only a small part of a much larger problem.

That larger problem is essentially demographic, 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 aging of the giant baby boom generation and a labor force that is 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 percentages as the current generation of retirees, then almost 60% of them are going to start drawing Social Security benefits the minute they can. Thus we will simultaneously see a sharp reduction in the labor force and an increase in government spending that must be paid for by a shrinking pool of workers.

Not only is this bad for taxpayers, but it is bad for retirees. Boomers taking early retirement will get 30% 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 Mr. 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% less benefits, many are going to find themselves impoverished by the time they reach their 70s.

And yet, despite the problems of the Social Security program, it is in relatively good shape compared to 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.

Mr. Peterson correctly argues that those elderly genuinely suffering 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 covering even those who already had drug coverage from insurance or employers. This was done, as Mr. Peterson puts it, "for the express political purpose of maximizing the number of seniors who take advantage of it."

Republicans thought they had outfoxed the Democrats for once, but instead they outfoxed themselves. According to new poll from the Kaiser Family Foundation, 47% of the elderly have an unfavorable impression of the new drug benefit, with only 26% having a positive one. Of those who say that the legislation will affect their votes in November, Senator 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 in return for selling their souls, Republicans have gotten less than nothing in return. If every Republican who voted for this monstrosity is defeated for re-election, they will only be getting what they deserve.

Getting back to Mr. Peterson, I think he is too pessimistic in one respect. I think baby boomers are not 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% expect to keep working, up from 33% in 1992. Every demographic group showed a significant increase in their 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 do so before a financial crisis forces action. But I am not optimistic that will happen.