Retirement plans.

• Author: Henderson, Rick

The untold story of the budget battle: because "Mediscare" hasn't worked, privatizing Social Security has become possible. Here's how things might shape up.

Forget the acrimonious Beltway budget debate. Ignore the hysterics ginned up by the Democrat/union/seniors' lobbies over "extremist" Republican measures that would slash programs protecting "the elderly," "children," and "the environment." Something important has happened amid the screaming and the showdowns: Both political parties have agreed to put Medicare on an annual budget, ending its open-ended status.

The GOP's seven-year balanced-budget plan would get $270 billion of its budget savings - nearly one-third of the $815 billion the Republicans require - from reductions in projected Medicare spending. The White House initially countered with a proposal that would save $192 billion from Medicare over that seven-year period. All the Democrats' histrionics were based on a difference of $11 billion a year. You might find that much in loose change between the sofa cushions at the Department of Health and Human Services.

Before this year, had either political party proposed similar reductions in Medicare, the American Association of Retired Persons would have shut down the Capitol switchboard, led sit-ins at federal buildings, or asked its members to handcuff themselves to their representatives' desks. Weak-kneed politicians could have sought solace from welfare-state advocates on the left and right. After all, as recently as June of 1993, neoconservative icon Irving Kristol was chastising conservatives for attacking federal retirement programs. Writing in The Wall Street Journal, Kristol said "traditional conservative fiscal monomania" about entitlements "leads to political impotence and a bankrupt social policy....If the American people want to be generous to their elderly, even to the point of some extravagance, I think it is very nice of them."

Now all that's changed. Perhaps it's becoming possible (without ducking for cover) to publicly discuss major reductions in entitlements, which were believed to be the "third rail" of American politics as recently as a few months ago. As National Center for Policy Analysis President John Goodman points out, "The Republicans touched the third rail with [their Medicare reforms]. And nothing happened."

No matter how or when the current budget dispute works itself out, the failure of a few advocacy groups to use "Mediscare" tactics to cower wavering legislators bodes well for reforming Social Security, the 800-pound gorilla of retirement programs. Milton Friedman first suggested privatizing Social Security in 1962 - a proposal that for two decades had few adherents outside of libertarian and other free market circles. More recently, however, advocates of privatization have been heartened as several dozen nations, including Great Britain, Chile, and Singapore have at least partially privatized their retirement programs. Goodman echoes the attitude of entitlement watchers from free market and deficit-fighting groups when he says, "By the end of this decade, I think we'll see a national consensus among Democrats and Republicans that something needs to be done about entitlement programs for the elderly in this country. And by something, I mean major privatization."

It's no secret that Social Security is a fiscal time bomb, but those facts bear repeating. While 65 has been the Social Security retirement age since 1935, average life expectancy for 65-year-olds has increased from about 13 years in 1935 to 17.5 years today. By 2040, 65-year-olds are expected to live another 20 years. In 1950 there were 16 workers for every Social Security recipient. Now there are 3.3, and it's projected that there will be fewer than two workers for every recipient by 2030. And as the baby boomers retire, the number of Americans older than 70 is expected to double, from 24.1 million today to nearly 48 million in 2030.

Social Security now runs annual surpluses of about $50 billion. But those boomers will soon prevent Social Security from paying its own way. Sometime around 2010, the program will have to finance some of its benefits from general tax revenue, and those subsidies will have to increase continuously. To keep Social Security from dipping into the general treasury, between now and 2030 payroll tax rates would have to increase from the current 11.2 percent to nearly 20 percent.

This sobering news has helped temporarily deaden the currents on the third rail. For more than a decade, a majority of opinion-poll respondents have doubted that they would receive enough benefits from Social Security to finance their retirements. Over the past four years skepticism about Social Security's future has intensified. In a March 1994 Gallup poll, for instance, 46 percent of those surveyed strongly agreed that taxes would have to be raised "dramatically" to pay Social Security benefits in the future; 74 percent said most people could get more money investing their payroll taxes privately rather than relying on Social Security; and 71 percent expected to get less out of Social Security at retirement than they put in during their working years.

In November 1995, a poll conducted by the Charlotte, North Carolina-based polling firm GrassRoots Research, found even stronger doubts about Social Security's future. When asked what...