This year, the federal government will spend a little more than $1.4 trillion. Its revenues will cover less than 80 percent of this spending, leaving a deficit of more than $300 billion.
A huge majority of voters cast ballots for two presidential candidates who vowed to slash government red ink.President Clinton followed up his campaign promise by proposing a budget that modestly trims the deficit over the next five years. By 1997, his plan would require $90 billion a year in tax increases, $90 billion a year of cuts in existing programs and an extra $50 billion a year for new spending initiatives.
The claim that inspires widest sympathy is the one arguing that old people should not be harmed by tax increases or benefits cutbacks. Since the elderly are thought to be both poor and deserving, their claim appears well-earned.
I see three big problems with fully protecting current spending on the elderly. The first is easy to understand since it involves arithmetic. Any balanced program of tax increases and spending cuts must inevitably affect the elderly for a simple reason: A huge share of federal spending is concentrated on the elderly.
In 1990, programs for the old cost federal taxpayers $11,290 per person age 65 and over. Spending on the elderly consumed about 45 percent of all spending aside from defense and interest on the national debt. Not only is spending for the old very high, it is growing rapidly.
A second reason that deficit reduction cannot spare the elderly is that deficit reduction will require sacrifice from all middle-class and affluent Americans. Most of the elderly, like most of the rest of us, are members of the middle class.
Of course, many of the old would tumble out of the middle class if they were denied Social Security and Medicare benefits. But no one seriously proposes cuts of 5 percent, let alone 100 percent.
The tax increases and benefit cuts suggested by the president will not push older families into poverty. They will trim the after-tax-incomes of middle-class and wealthy older people, just as the net incomes of middle-and high-income non-elderly households will be cut.
Finally, some older people think it is unfair to touch Social Security or Medicare because these benefits have already been paid for through past payroll tax contributions. This impression is wrong.
While it is true that retirees have paid for part of the benefits they now collect, they haven't paid for a big percentage of them. A 65-year old worker who retired and received the average Social Security benefit in January 1991 has probably already collected in retirement benefits more than he or she paid in lifetime Social Security taxes.
If Social Security benefits were taxed in the same way as private pension benefits, about 85 percent to 90 percent of benefits would be taxed as ordinary income on federal income tax returns.
Higher-income taxpayers already pay income taxes on half their Social Security. The president has proposed an increase in the percentage of Social Security benefits that must be reported by higher income families. This will affect only about one in five Social Security recipients. Other recipients earn too little money to be affected.