Justice Among Generations: Stocks won't spare us from cuts in Social Security and Medicare
The best thing we could do with last weekÛªs report from the Advisory Council on Social Security is to forget it. The report brims with bad ideas from ail along the political spectrum. Nohe'of the three proposals to invest vast amounts of Social Security funds (ultimately trillions of dollars) in the stock market is worth adopting. All would ÛÏnationalize" the stock market more than "privatizing" Social SqfjffttyÛÓwith unpredictable and, possibly, damaging consequences. And all obscure the central issue posed by an aging America. ItÛªs generational justice: How much burden should the old place on the middle-aged and the young, whose taxes mainly pay for government retirement benefits?</br></br>Sooner or later, cuts in Social Security and Medicare are unavoidable, because the alternativesÛÓhuge tax increases or peacetime budget deficitsÛÓare worse and probably politicalsÛª'.unacceptable. In general, we know what tg;((g;,raise retirement ages, tax Social Securi-ty/benefits fully, shift Medicare toward ÛÏmanaged care" and correct Social Security benefits for an overstatement of inflation in. the consumer price index. Changes need to be made, gradually so that today's retirees are only modestly affected and larger shifts (such as higher retirement ages) occur with ample warning.</br></br>Siphoning huge amounts of Social Security funds into the stock market wonÛªt erase the budgetary pressures. In practice, the government canÛªt pre-fund much of its future costs of the baby-boom generationÛªs retirement, even though thatÛªs the vague promise of all three council proposals. The costs are simply too large. To see why, consider spending projections for Social Security, Medicare and that part of Medicaid that pays for nursing-home care. All provide benefits for the elderly, and all are affected by the same aging trends. Common sense suggests they should be considered as a wholeÛÓand not as unrelated parts.</br></br>Together, these programs now account for nearly 40 percent of non-interest federal spending; they're already squeezing other important federal activities, from basic research to national parks. But the situation dramatically worsens in the next century, as baby boomers retire. In 1995 these programs cost about 7 percent of national income (gross domestic product). By 2025 they will costÛÓ unless changes are madeÛÓabout 13 percent, projects the Congressional Budget Office. Paying for them would require staggering tax increases (20 percent to 50 percent, depending on assumptions) or budget deficits. The projected increase for Social Security alone (1.3 percent of GDP by 2025) might easily be absorbed. The combined increases of all three programs, led by Medicare (up 3.5 percent), aren't.</br></br>The Advisory CouncilÛªs failure to consider the combined costaÛÓthough defensible in terms of its legal charterÛÓmake its report a poor guide for the future. Even for Social Security, its proposals donÛªt make sense, The idea is that if we save more now, we won't have to pay more later. Though true, this is misleading. To save more now, we have to consume less. Compulsory saving in stocks requires either tax increases or cuts in government spending. Two of the three plansÛÓ each mandating stock accounts for individualsÛÓadmit this. They would raise the existing