Keys to national security start with the economy, group says

Federal Reserve Chairman Ben S. Bernanke addressed the Dallas Regional Chamber last week.
Federal Reserve Chairman Ben S. Bernanke addressed the Dallas Regional Chamber last week. (Lm Otero/associated Press)
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Tuesday, April 13, 2010

Their assignment: Come up with a national security strategy for the United States. So a group of 15 military officers and government employees at the Industrial College of the Armed Forces studied the issue for months -- and decided that, first, consideration had to be given to the economy, which they found is heading toward disaster, even as the recession eases.

The economy, the Seminar 11 group agreed in its report last month, is "the foundation for everything else."

With the nation's yearly deficits running at about $1 trillion and the national debt expected to more than double by 2020, the group -- whose members included U.S. Army, Navy and Air Force officers; civilians from the State Department, Pentagon and U.S. Agency for International Development; and a Mexican Navy officer -- decided that tough actions should be taken beginning next year.

Its primary policy recommendation was to "constrain entitlements growth," and it suggested steps to take regarding the two biggest entitlement programs: Social Security and Medicare.

The group found, as others have, that the fundamental problem with Social Security is that over time, fewer workers will be paying payroll taxes to support many more retirees. The group reported that by 2017, an annual Social Security surplus will become an annual deficit. And by 2041, if no changes are made, the Social Security Trust Fund will run dry.

[A Congressional Budget Office projection released a week after the group's report showed that the trust fund is in even worse shape because of early retirements and high unemployment. It will run a $29 billion deficit this fiscal year -- seven years ahead of time. It will remain in deficit three more years before showing a surplus in 2014 and 2015, then going into the red again in 2016.]

The seminar group's four-step plan for change is straightforward. It wants to slow the pace at which benefits increase, tying their growth to the price index rather than the wage index, since wages tend to rise faster than prices.

Another proposal is to increase the scope of the Social Security payroll tax. Currently, the tax is applied to earnings of up to $106,800. Removing that limit would mean individuals making more than that would pay the 6.2 percent tax on whatever they make, and employers would pay their share on the higher salaries. One outside estimate is that gradually increasing payroll tax coverage to 100 percent of earnings would cover the projected deficits.

The group also proposed further increasing the retirement age. Under amendments to Social Security in 1983, the age for receiving full Social Security payments is slowly increasing to 67 by 2027. But because life expectancy has increased by 15 years in the 70 years since Social Security payments began, a faster and further increase to 69 would be a fair step.

The group also suggests "means testing" Social Security. One form of this is to provide lower payments to higher earners, thereby encouraging them to save more for retirement and possibly retire later in life.

The fixes for Medicare are no less drastic. The group points out that by 2030, the number of participants will increase 72 percent and the ratio of workers paying the Medicare tax per beneficiary will drop by 35 percent.

The group's three-step solution starts with increasing Medicare Part A payroll taxes from the present 1.45 percent paid by the worker and 1.45 percent paid by the employer to 1.6 percent each. The recently passed health-care bill increases the Medicare tax on individuals with incomes of more than $250,000 by .09 percent.

Another step the group recommends is to increase Medicare Part B premiums, and that too is already happening, based on the higher costs of the program.

The group's last proposal is to "institute means testing at the margins" for Medicare. The 2003 Medicare prescription drug bill implemented a form of means test: Individuals with higher incomes have to pay more for Part B coverage. And the Bush administration tried to get Congress to apply a means test to Part D, the prescription drug section.

Last week the group got some support from Federal Reserve Chairman Ben S. Bernanke. He told a Dallas audience that "to avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs and Medicare, less spending on everything else from education to defense, or some combination of the above."

The Seminar 11 group has compiled rough outlines of a solution.

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