The Federal Deficit as an Issue this Presidential Election
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ANNOUNCER: We’re ready to begin.
PAUL SOLMAN: Alumni of Washington D.C.’s Gonzaga High at a recent charity golf event to raise scholarship money for their Jesuit School. Most of them are aging baby boomers barreling toward retirement at a time when the federal budget has swung back into deficit after years of surpluses. That is, Uncle Sam’s again spending more than he takes in and will soon be spending way more for the boomer’s Social Security and Medicare benefits. Both candidates for president have said the deficit is a problem. Both have promised to cut it in half.
PRESIDENT GEORGE W. BUSH: I’ve proposed a plan, detailed budget, that shows us cutting the deficit in half by five years.
SEN. JOHN KERRY: And I’ve said as a pledge I’m going to cut the deficit in half in four years.
PAUL SOLMAN: But even if you believe the candidates– and there is some reason to doubt them…
DEBATE MODERATOR: But I didn’t hear one thing in the last three and a half minutes that would indicate how either one of you do that.
PAUL SOLMAN: …A huge question lingers: Will halving the deficit do much to solve the bigger problems just a few years off? You probably guessed the answer- – no– which we’ll spell out in a bit. But first, a bit of perspective: The current deficit is running some $400 billion a year. Sounds like a hefty piece of change. But, says Dan Mitchell of the conservative Heritage Foundation:
DAN MITCHELL: The important thing to realize is in an $11 trillion economy, in a world where $2 trillion of capital changes hands every day, even a “big” change in the deficit is like a drop in the bucket.
PAUL SOLMAN: Now, the idea that today’s deficits have a very small effect on the economy is highly controversial. Both candidates, as we said, promise to cut today’s multi- billion dollar deficit in half, but neither has spelled out any detailed plan to address tomorrow’s obligations — Social Security and Medicare for the baby boom. Those promises amount to tens of trillions. Cutting today’s deficit won’t make much of a difference. And that brings us to the meat of this story: The problem that lies so ominously ahead, as articulated by the author of the new book, “Running on Empty,” President Nixon’s Secretary of Commerce and for decades one of Wall Street’s most eminent bankers, Pete Peterson.
PETER PETERSON: The ultimate test of a moral society is the kind of world it leaves to its children. And as I think about the concept that we’re slipping our own kids and grandkids a check for our free lunch, I say we’re failing the moral test.
PAUL SOLMAN: Peterson became a public scold back in the ’80s, when deficits first became an issue.
SPOKESPERSON: You owe the United States Government in round numbers $50,000. (Baby Crying)
AD SPOKESPERSON: If federal deficits continue at their current rate, it’s as if every baby born in 1985 will have a $50,000 debt strapped to its back.
PAUL SOLMAN: But though ads like this may have opened the eyes of viewers, it didn’t exactly scare them straight.
PETER PETERSON: Talking about boomers retiring in the 1980s, in the year 2010 and 2020, it must have seemed like forever to them. It’s not forever now; 77 million boomers are about to retire, and that begins in five years.
PAUL SOLMAN: Financial planner Jim Durkin’s clients are among the 70-some-odd million.
JIM DURKIN: Our shots are like Social Security. They’re coming up short.
PAUL SOLMAN: As Durkin’s clients near retirement age, they ask him: If they retire early, should they start taking lower benefits at age 62 or wait until they’re 65 or even 70, when the payments rise? Durkin’s answer?
JIM DURKIN: A bird in the hand is better than a bird in the bush. And you know, if you are pessimistic about the long-term future of Social Security, as I think a lot of us should be, you know, maybe it makes sense to take it now.
PAUL SOLMAN: But wait a minute: Isn’t there money salted away for the baby boom’s retirement, a trust fund started in the mid- 1980s? Well, there is a federal building in Parkersburg, West Virginia, and it does contain the Social Security Trust Fund.
PAUL SOLMAN: This is it?
MAN: This is it.
PAUL SOLMAN: This is the lockbox we heard so much about in the campaign four years ago.
AL GORE: I will keep Social Security in a lockbox.
GEORGE W. BUSH: Because we are lock-boxing the payroll taxes, our promises to the senior is going to be kept.
PAUL SOLMAN: But all we’ve been locking in the box are copies of IOU’s that we, the people, owe to ourselves. And another $11 billion.
MAN: That’s correct.
PAUL SOLMAN: And another $11 billion. So this is like $100 billion in this folder.
MAN: That’s correct.
PETER PETERSON: I think the trust fund belongs well up there in American oxymorons because it shouldn’t be trusted, and it’s not funded. What you’ve been doing is not stashing money away. You’ve been stashing IOU’s away. We’ve already spent that money for things that had nothing to do with Social Security. And that’s the dirty, big secret that we’re keeping from the American public. My father, my immigrant father went to his deathbed thinking that the Social Security trust fund was like his savings account, that somebody had taken that money and set it aside. The melancholy news is, the brute news is that money has been spent.
PAUL SOLMAN: So, the U.S. is taking in more money for Social Security than it pays out, spending it for other purposes and putting away IOU’s to pay itself back when the boomers retire. But when the time comes to pay the benefits to the boomers, there are only two ways to turn those U.S. Government IOU’s into cash: Pay them off by raising taxes or borrow the money. But that just means issuing new government IOU’s to pay off the old ones — a whole new tsunami of borrowing. Not a very appealing option. But neither is raising taxes by trillions a year. Or, as President Bush’s former chief economist Glenn Hubbard puts it:
GLENN HUBBARD: We would have to raise taxes across the board, not just payroll taxes, every tax for everybody by 50 percent. And I think that helps paint the picture of why an adjustment has to be made here.
PAUL SOLMAN: Now when Glenn Hubbard says “an adjustment,” he means cutting benefits, or, as he delicately puts it:
GLENN HUBBARD: Your Social Security benefit over time would be perhaps less generous than it is today.
PAUL SOLMAN: Not to mention what would happen to Medicare. In fact, such cuts might not have to be that drastic. According to the New York Times in a recent editorial, raising the retirement age slightly but regularly while lowering benefits for wealthier recipients would do the trick if combined with modest tax increases. But as mild as such adjustments may seem to some, at the charity golf event, even the generous alumni of Gonzaga High were loath to take any hit at all.
JOHN GAUGHAN: Well, I think that I’d be pretty upset about that. You know, I think we made a deal a long time ago, and, you know, whatever… whatever you signed up for, you ought to get.
RICHARD COLLINS: Everyone pays a certain amount, and everyone’s entitled to receive from that.
PAUL SOLMAN: These boomers are nearing retirement age, and, the data show, older Americans tend to vote more. So, retirees may successfully vote to resist benefit cuts, just as we’ve all resisted salting money away for the promises we’ve made so far.
PETER PETERSON: Official sources say that we have somewhere between $45 trillion and $74 trillion of unfunded obligations.
PAUL SOLMAN: “Unfunded” meaning there’s nothing.
PETER PETERSON: There’s no money set aside there, that somebody else in the future has to pick them up. The entire net worth of America is $42 trillion. So, technically speaking, you might say if this were a corporation, we’re technically bankrupt.
PAUL SOLMAN: But we won’t admit we’re bankrupt until we’re forced to– when the baby boomers are drawing their benefits and the younger generation can’t afford to pay for it.
PAUL SOLMAN: Now Pete Peterson’s wife is Joan Ganz Cooney, who created the Children’s Television Workshop, which, in turn, created, yes, Sesame Street, one of the great investments America has made in its younger generation. But when Cooney’s husband looks down the road, he sees trouble in Big Bird land.
PETER PETERSON: I would guess Oscar the grouch is going to become a major figure on Sesame Street ( laughs )
OSCAR THE GROUCH: Whatever it is you want, the answer is no!
PAUL SOLMAN: That is, if the Sesame Street generation winds up having to bankrolling Peterson’s retirement, America will be one unhappy neighborhood.
PETER PETERSON: If old fogies like me are going to get all the resources, let’s face it, that’s about the past. Sesame Street is about the future in the ultimate sense, but so is elementary education and science education, engineering education. And that’s the key point that we’ve got to understand here. If we don’t cut down these utterly unsustainable obligations, it’s our kids that are ultimately going to pay the price.
PAUL SOLMAN: Young versus old: The generation war Peterson has warned of for years. And yet, out on the links, we heard something a little bit different, because we asked the youngest alumni for their reaction to the coming crisis in Social Security.
PAUL SOLMAN: Are you counting on it when you retire?
PAUL SOLMAN: How about you?
MAN: No, I don’t think we’re going to get it.
PAUL SOLMAN: Any Social Security?
MAN: Absolutely not.
PAUL SOLMAN: Not a dime?
MAN: Not a dime.
PAUL SOLMAN: These 35-year-olds say almost none of their peers are counting on Social Security. Instead, they’re saving for retirement on their own. They may not be thrilled about it, but they sure aren’t plotting a generational war. On the other hand, they can afford to save for themselves, says service station owner Andrew Durelli. It’s America’s working stiffs he’s worried about.
ANDREW DURELLI: People work for me and make $6.50, $7.00 an hour. They can’t save. They don’t have… they’re working from day to day. They don’t have the money to save in case Social Security’s not there. But a chunk of their money is going to Social Security to pay for what’s needed now. So when they get there, don’t they deserve something?
PAUL SOLMAN: It also suggests a slight variation on Pete Peterson’s theme.
SPOKESPERSON: Let us review these figures for you.
PAUL SOLMAN: Not the war between young and old warned of for so long, but a more traditional economic conflict between those well-off enough to be on course for a comfortable retirement and those not on the course at all– because they can’t afford to be here or to save for the future. It’s an issue neither candidate seems to be addressing. In the debates thus far, Social Security itself has yet to come up, though President Bush has elsewhere suggested funding private accounts. But Pete Peterson says that will only add to the deficit. As to John Kerry’s commitment to balance the budget to save for the future, Peterson says he can’t evaluate the long-term plan because it hasn’t been spelled out in any detail. Perhaps both men will make their positions clearer Wednesday night.