On the Chopping Block

By Richard Stengel.

Before a stunned Senate committee last week, Budget Director David Stockman, his voice full of scorn, derided the excesses of the military retirement system. "It's a scandal; it's an outrage," he said, adding that "institutional forces in the military are more concerned about protecting their retirement benefits than they are about protecting the security of the American people." Declared Stockman: "When push comes to shove, they'll give up on security before they'll give up on retirement."

Then, like a general who seizes his enemies' weapons and turns them against his foes, Stockman grabbed some labeled boxes brought into the hearing room by Democratic Senator Howard Metzenbaum of Ohio, who had planned to use them as props for an attack on the President's budget. Brandishing one that carried the word VETERANS in black letters on its side, Stockman suggested that the $18 billion military pension plan, which covers 1.3 million military retirees, is an expenditure that could go on the congressional chopping block. "I'll probably be in hot water for saying it," Stockman confessed, "but I'm going to say it because it's about time it was said."

Stockman's testimony, which also included an equally bristling condemnation of federal subsidies for farmers (see COVER STORIES), drew immediate return fire. Said Arizona Republican Barry Goldwater, the new chairman of the Senate Armed Services Committee: "I found Mr. Stockman's remarks about as distasteful as anything I've heard coming out of this Administration or any other." The following day the Veterans of Foreign Wars sent an angry telegram to President Reagan announcing: THE V.F.W. WILL NOT BE SATISFIED UNTIL THE 4-F DRAFT-DODGING STOCKMAN HAS BEEN FIRED AND YOU HAVE REPUDIATED HIS VIEWS. (As a Harvard divinity student, Stockman received a 4-D deferment during the Viet Nam War.)

The White House, under the so far cautious guidance of new Chief of Staff Donald Regan, nervously edged away from Stockman's declaration, though some in the West Wing secretly sympathized with it. The Budget Director, said Press Secretary Larry Speakes, "was expressing a personal opinion probably not shared by the President." Later, when asked in an interview with the Wall Street Journal whether he agreed with Stockman's view of military pensions, the President did not hedge. "No," he said, "I have to think this is a little different than any other pension program." Defense Secretary Caspar Weinberger was much tougher: he termed Stockman's broadside "insulting and demeaning."

But what Stockman had achieved with his astonishing bluntness was to draw dramatic attention to the notion that even the most hallowed of government expenditures deserved stern examination--if Congress had the nerve. Nor were his remarks inconsistent with the philosophy behind the President's budget, with its $51 billion in reductions of outlays for almost every domestic program except Social Security. Many groups who have never felt the full extent of the budget knife complained loudly about the proposed cuts. Congress has already more than hinted to the President that he will not get many of the reductions he has asked for, nor all of his proposed increases for the military.

Not everyone on Capitol Hill quarreled with what Stockman said. The military offers generous benefits: after 20 years of service a retiree draws one-half of his final pay as his yearly pension; after 30 years, that stipend rises to three-fourths. With the costs of the military pension system jumping from $7.3 billion in 1976 to an estimated $18 billion in 1986, Stockman's tocsin drew attention to a painful problem. Said Congressman Les Aspin, the Wisconsin Democrat who heads the House Armed Services Committee: "I would have said it differently, but Stockman is right. Military retirement is too expensive. The Pentagon has failed to grapple with this issue."

The Pentagon claims that the pension program is necessary to lure topflight recruits to the services. But critics assert that the plan encourages highly trained officers to retire early and start second careers. In 1983, 90% of military retirees were younger than 50, and some 200,000 of them were "double-dippers," who had taken new Government jobs. Currently, a lieutenant colonel in his mid-40s who retires with 20 years' service receives $20,480 a year. Critics of the system cite the 1984 Grace commission report, which said the military pension plan was six times as good as the best private-sector plan.

While Congress was scrutinizing the proposed budget, so too were local officials and private citizens around the country adversely affected by the President's planned domestic cuts. In submitting his budget proposal to Congress, Reagan had noted, "The single most difficult word for a politician to utter is a simple, flat no." His budget utters that simple, flat no to a great many voters who pronounced a resounding yes to Ronald Reagan on Election Day: to middle-income parents who want to send their children to private colleges, to businessmen who depend on loans to help them export products, to office workers who commute by train, to retirees who are concerned about ; rising medical costs, and even to the violinist with the city orchestra who needs extra time to rehearse Beethoven's Fifth. The new budget would make some of its largest reductions in programs that have generally benefited the middle class. Moreover, with drastic cuts and the outright elimination of a variety of programs that aid states and cities, local governments will be hit hard at a time when many of them are just recovering from Reagan's first-term cuts. New Jersey's Republican Governor Thomas Kean tersely described the budget cuts as "unacceptable, harsh, not fair, not right."

Although some budget trims seemed obviously aimed at the middle class, such as cuts in funding for the National Endowment for the Arts ("We're trading ballet for bombs," said William Murphy, former director of the United Performing Arts Fund of Milwaukee), other reductions would hurt both lower- and middle-income families. One example: the President's budget seeks to rein in Medicare, which after Social Security is the Government's largest and fastest-growing entitlement program. By freezing reimbursements to doctors and hospitals at their present levels, the President would cut some $5 billion from projected 1986 costs. Such a reduction would immediately touch the pocketbooks of physicians who treat Medicare patients. Fair enough, perhaps, but it would also have a detrimental impact on the elderly and retired who depend on a service that would be likely to decline in quality. Says Jack Meyer of the American Enterprise Institute: "There is no immediate financial pinch. But what you get is cheapened service."

The budget also calls for an increase in the cost of Medicare premiums paid by retirees: they would rise from 25% of the total cost of medical expenses to 35% after five years. Says Meyer: "That's not a lot for the well-to-do, but for the average elderly citizen, it's substantial." States that have large pockets of the elderly, such as Florida and South Carolina, are particularly concerned about the limits the budget will also place on federal Medicaid payments, which are given only to the poor. The new plan would cap federal payments to states at $1.3 billion less than at present.

The Administration's proposal to reduce and restructure student aid and guaranteed student loans is also encountering resistance. The student-loan program has become a virtual lifeline for many middle-income families, and currently one out of every two freshmen receives some federal aid. Reagan would like to cut the program by nearly a fourth, claiming that it helps too many affluent families send their children to expensive private colleges. The President would cut off grants, direct loans, and subsidized jobs for students from families whose adjusted gross income exceeds $32,500. The budget would reduce loans by nearly $4 billion over the next three years and would place a $4,000 annual ceiling on aid to all students.

Katharine Hanson, executive director of the Consortium on Financing Higher Education in Cambridge, Mass., calls the proposed reduction in student aid "disastrous." She estimates that 60% of all students receiving federal funds would be affected. At Oberlin College, for example, half of the 2,700 students have guaranteed loans. According to James White, director of financial aid at Oberlin, half of those would be ineligible for borrowing under the new guidelines. As a result of the reductions, says Ernest Smith, director of financial assistance at the University of Miami, "students might start adhering to the 'shop-down' theory, where they make decisions not on what the college offers but on what they could afford to pay."

Businessmen, a class previously spared from Reagan's budget cuts, would feel the pinch under the President's new proposals. The budget would effectively extinguish the 32-year-old Small Business Administration, squeezing the availability of loans for start-up enterprises and snuffing out what some have called America's last bastion of middle-class entrepreneurship. The budget would end the SBA's general lending program, at a saving of $1.5 billion. Although thousands of fledgling businessmen have taken advantage of the SBA's $4 billion-a-year loan-guarantee program, there is a surprising dearth of support for it among small, independent businesses. The National Federation of Independent Business found in a survey of its 500,000 members that roughly two-thirds would not be at all perturbed by the shuttering of the SBA. What does disturb a legion of briefcase-toting executives, though, is the proposed end of Government subsidies for Amtrak, the national passenger railroad (see ECONOMY & BUSINESS).

The budget would also dissolve the Export-Import Bank, which helps finance foreign trade by U.S. corporations. The Administration wants the private financial community, not the taxpayer, to help companies like General Electric, Bechtel Group and Westinghouse finance their sales abroad. The ^ financial community contends that the end of ExportImport would hamper international traders who are struggling against a strong dollar, subsidized foreign competition, and a growing U.S. trade deficit.

Low-income families, already bruised by the sweeping reductions of Reagan's 1981 budget, would be hurt by slashes in the Aid to Families with Dependent Children program. AFDC, the main cash welfare plan, would be cut by $175 million out of an expected total of $7.4 billion. In addition, the budget would bar payments to ablebodied parents whose youngest child is 16 or older. The budget would exclude nutrition grants for school breakfasts and lunches to families of four whose income exceeds $19,000 a year.

The loudest laments about the budget are coming from the cities and states. The President would entirely eliminate federal revenue sharing, forcing state and local governments to assume greater responsibility and power, a guiding tenet of the Administration's philosophy since its earliest days. The end of the 13-year-old program of revenue sharing would save $3.5 billion. According to Governors and state legislators, the death of revenue sharing would wound states and localities where they can least afford it, in basic outlays for such services as police, education and sanitation. Massachusetts Governor Michael Dukakis, whose state is in a better position than most to weather such cuts, decries the proposal as "a cruel joke." Says New Orleans Mayor Ernest Morial, the president of the U.S. Conference of Mayors: "In the name of deficit reduction, the budget proposes to cut or eliminate nearly every federal investment of benefit to the cities."

The loss of revenue sharing would abruptly discontinue mass-transit operating subsidies (causing transit fares to rise almost everywhere). Subsidized housing construction for the poor and elderly would be severely crunched, as would development block grants and job training. In many states, the check from the Federal Government goes directly to the dayto-day operating costs of such services as community hospitals and fire departments. Says Mayor Coleman Young of Detroit, a city that gets nearly 12% of its $1.58 billion budget from the Government: "If the budget is enacted, we would be faced with a new set of priorities: Do we cut off your right or left leg?" Without revenue sharing, Detroit would have to forgo a much needed plan to rehire 700 laid-off policemen. Milwaukee would lose $12 million in federal funds. Says Wallace Burkee, director of that city's community development agency: "That's worth 350 policemen."

Many local officials find it puzzling that the President wants to do away with Urban Development Action Grants (UDAGs), which cities often use to finance development projects, hotels and convention centers, thereby stimulating economic growth. Says Henry Miller, an administrative officer to Atlanta Mayor Andrew Young: "I find it ironic that Reagan would want to cut out UDAG, because it is one federal program that is entirely consistent with his belief in public-private partnerships." City officials in Cleveland say that over the past five years $34 million in UDAGs were the catalyst for $168 million in private investment.

The Administration's proposed budget does not tamper with Social Security, but Senator Robert Dole and other Republicans, intent on further reducing the deficit, are contemplating an assault on that program, as well as on Reagan's other untouchable, defense. Dole says the Republican plan for Social Security will be a one-year elimination of cost of living increases for pensioners, part of a larger budget package that would include other domestic cuts and reductions in the military. While many, if not most Congressmen agree that cuts must be made somewhere, plenty of Republican lawmakers believe that along with deep domestic cuts, there must be significant reductions in military spending.

"The President sees this budget as his last opportunity to restructure fundamentally the Government and reduce its size," said Stockman last week. "We have made our choices. They are difficult. They are controversial. But there aren't many good alternatives." Congress is just not going to take Stockman's word for that.

With reporting by Christopher Redman and Barrett Seaman/ Washington, with other bureaus