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David Gergen engages Pete Peterson, a founding president of the Concord Coalition, author of Will America Grow Up Before It Grows Old: How the Coming Social Security Crisis Threatens You, Your Family, and Your Country.

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DAVID GERGEN, U.S. News & World Report: Pete, your friend, Warren Buffett, calls you a modern-day Noah. And, in fact, in your book, you write, "The implications of aging will dwarf all our other serious problems, from race to national security. How we deal with aging may determine how these other issues ultimately play out." Tell us what worries you so much at this moment.

PETER PETERSON, Author, "Will America Grow Up Before It Grows Old?": I meant there in a social and an ethical and an economic sense, obviously, it may not compare with the proliferation of weapons of mass destruction and falling in the hands of terrorist, but other than that one, I think that is the case. The situation here is that the American people have only the vaguest understanding, something called the boomer generation. They know it’s coming, but, as I talk across America, they really don’t understand which dimensions. Let me give you a few. The 76 million boomers are 52 percent larger than the previous generation. And since we all like metaphors that are direct and visual, we’ve all been to Florida. In about a quarter of a century the entire country will look--will become a nation of Floridas on average in terms of percentage of senior citizens and will age thereafter. The number of elderly will double, as will the Social Security retirees, for example. And this is roughly like adding a new California, a new New England states, all of them, composed of nothing but senior citizens.

DAVID GERGEN: California and the New England states combined.

PETER PETERSON: Combined--of additional elderly.

DAVID GERGEN: What does this age wave mean for us economically and politically in larger terms?

PETER PETERSON: Well, I talk in this book about transformations, and I list quite a number of them. Let me just take several of them. We’re going to see a transformation in the whole definition of work and retirement. Up to now, David, we’ve been brought up with the idea that we’re "entitled"--that awful word--to spend about a third of our lives in subsidized leisure and retirement. We geezers are simply going to have to work longer, but if that’s going to happen, we’re going to have to confront certain myths. I argue that in the same way that the business community and the non-profit community has been fighting racism as a bias in the workplace and sexism, I would predict the next one is going to be agism, by which I mean the commonly held notion that the elderly don’t want to work and they don’t need to work and they aren’t able to work and, besides, there’s nothing for them to do--that idea is wrong on all counts. That’s going to require a major change in the way we view senior citizens, how we retrain them and retrain them. Another transformation is on the health ethics side of things. I suppose ethics doesn’t come very convincingly from an investment banker, but I’m giving a shot at it.

DAVID GERGEN: Especially here in Washington.

PETER PETERSON: Here in Washington. We spend much more on health care than the rest of the world, and one of the reasons that so much of it is high-tech, high cost that has some benefit but in some cases not a lot. This is particular intense with the old old because we spend, as I’m sure you know, much much more than the rest of the world on the last few months of life. Since it is my argument that these health care costs with the trebling and quadrupling and so forth are not sustainable, we’re going to have to face some very tough issues that we’re not really prepared to even discuss now--who lives, who decides, how do we decide. And the "r" word for rationing I predict is going to become even more toxic than liberal.

DAVID GERGEN: My impression--and it’s anecdotal--is that while the AARP is opposed to some of the changes you’re talking about and adamantly opposed, that many of its members, many older Americans, in fact, do want to work, at least work part-time, longer than 65.

PETER PETERSON: About three fourths say they’d love to do some paid work.

DAVID GERGEN: And if the society made room for them and found ways for them to be creative about this, there would be a lot of them that would want to work, and that a number of them do not want to be--have their lives prolonged unnecessarily by a lot of heroic measures and medicine, that they’re quite realistic about that.

PETER PETERSON: Well, there’s a fascinating statistic. About 90 percent of the people, when living wills were explained to them, said, gee, that sounds like a sensible idea. Less than 10 percent have one, and among the many reforms that are more cultural in nature would be to get us--many more of us--on living wills, just to take one small example.

DAVID GERGEN: Let’s talk about this. This book can often be a mind-numbing exercise, with the dollars and cents aspects of Social Security and Medicare, because if you added 40 additional--million additional retirees to the rolls of Social Security, we now spend about an average of $10,000 per beneficiary for Social Security.

PETER PETERSON: Right. Right.

DAVID GERGEN: The costs of that are gigantic. How big are the costs, and how do we deal with it?

PETER PETERSON: Well, you remember Everett Dirksen, who said a billion here and a billion here, it’s real money. We’re now talking about trillions, David. I’ll give you several numbing numbers, if that’s what you want.

DAVID GERGEN: Not too many. Not too many.

PETER PETERSON: Okay. One of the mind-numbing numbers is promises we’ve made for benefits in excess of the taxes we’ve provided. The fancy word for that is unfunded liabilities. That number is about $10 trillion for Social Security and federal pensions, $17 trillion, if you add Medicare to that.

DAVID GERGEN: That’s on top of the public national debt--

PETER PETERSON: Right.

DAVID GERGEN: --that we’re passing on to the next generation.

PETER PETERSON: Right. Now, if you want to live annual deficits, everybody says they want balanced budgets in the year 2025. If you take Social Security and Medicare by the base case assumption, which is usually optimistic, you’re looking at a number between 1 1/2 and 2 trillion dollars a year. And our old friend, Herb Stein, used to say, "If something’s unsustainable, it tends to stop," because those are going to be very hard to finance, except at huge interests costs, and the tax increases would be quite extraordinary to pay for them.

DAVID GERGEN: So the younger generation, if you actually--if you actually required the younger generation to pay for them, you said in your book that their taxes would go up 35, 45 percent. That would be FICA taxes, the Social Security.

PETER PETERSON: Yeah. The payroll taxes, as you know, David, are the biggest tax by far for most middle Americans. And if you want to balance the books, which everybody says we want to do, instead of do big financing, depending on which of the two scenarios, if you take Social Security and Medicare together, it would be somewhere between a third and a half of pay. At the present time, it’s about 16 percent or thereabouts, so it’s a doubling to trebling of taxes.

DAVID GERGEN: That won’t happen. I know this is unfair to you, but in about a minute or so, could you summarize what you think the solutions would be, the two or three major things we ought to do.

PETER PETERSON: We’ve got to gradually increase the retirement age. I would do it over 20 years, three months a year, to give the boomers time. The reason it’s not such heavy lifting, frankly, to reform Social Security is the boomers don’t expect to get it, and they’ve got time to prepare, and all we need to do for the current retirees is to cut the benefits for fat cats like myself, and that would take care of it. But increasing the time and age is the most important thing we ought to do. The vast percentage of Americans support the idea of reducing the benefits for those of us who don’t need them, and then preserving the safety net. I’ve designed something I call an affluence test. I don’t cut the benefits, except for people above the median income. I would lose most of my benefits, which is okay with me, and most people like me. We ought to do something about the cost of living allowances. What is the rationale for young workers having their after-tax wages fall while their parents are going up?

DAVID GERGEN: But there’s one other element to this very quickly, and that is to increase the savings rate of those people, so when people retire, they’ve got something that they can rely on.

PETER PETERSON: You’re on the key point, and that’s going to be a transformation of moving from a consumption economy to a saving. If we’re going to cut the benefits of the publicly subsidized type, the private sector has to save more, and we’re going to have to do that through changing the tax system. And I think we’re going to have to move gradually toward a system of privatized retirement accounts. I don’t want the government getting their hand on this money. I want that money really saved and invested in the real economy. If we do those things together, and give the boomers time--you know, the typical person retiring today--that’s the boomer--has only $12,000 in net financial assets. And yet, their expectations are extraordinary.

DAVID GERGEN: Pete, this debate is just beginning. I know Jim Lehrer and others here are going to look forward talking to you in the future many times, but thank you very much.

PETER PETERSON: My great pleasure to see you again.

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