Reining in the Rich

By Dan Goodgame/Washington

He has been paying into Social Security since 1938 -- one year after workers began contributing to President Roosevelt's new program -- and amazingly, he pays into it still. At age 78, Harlow Savage prides himself on showing up at the office, dapper in his tweed jacket with walking cane, every workday morning at the engineering company that he founded in Bloomfield, Connecticut. If anyone has earned his retirement benefits, it would seem, it is Savage. But he doesn't see it that way. Though he still has Social Security taxes deducted from his six-figure salary, Savage and his wife also receive a monthly Social Security check of about $3,000. And that's what bothers him. He knows that he, like other Social Security recipients his age, got back all the money he had paid into the system, plus interest, within a few years of retirement and has been, in effect, on welfare ever since. He knows he is being subsidized by the 12.4% payroll tax being paid by employers and their younger and lower-paid workers, like his granddaughter Amanda Fargo, 21, who earns $5 an hour as a receptionist in a beauty salon. Savage approves of taxpayer subsidies for the elderly poor, but adds, "It's unconscionable . . . to take money away from these kids and give it to well-off people."

That sentiment is growing. A TIME/CNN poll last week found majority support for cutting the subsidies that upper-income Americans receive for retirement, health care, mortgage interest and farming. Relatively modest cuts in these giveaways, and in others for such favored industries as mining and oil drilling, could save the Treasury more than $40 billion a year, according to expert testimony gathered by the Bipartisan Commission on Entitlement and Tax Reform. The panel is scheduled to submit recommendations to the President this week. But the commission's chairman, Senator Bob Kerrey, a Nebraska Democrat, already stirred the pot last Friday when he and panel vice chairman John Danforth of Missouri, a retiring Republican Senator, proposed further reforms by raising the retirement age to 70, cutting the payroll-tax rate and requiring workers to invest the savings. Any money saved by such reforms could be used to reduce the budget deficit. But Washington politicians will be more tempted to cut taxes, especially in a way targeted to working families near the median income of $37,000 a year, whose real wages continue to slide despite robust growth in the overall economy.

Would-be reformers face fierce resistance to their efforts to curb entitlements to the well-to-do. The Republicans who now control Congress promise to cut taxes on the "middle class," but their definition extends to families with income of $200,000 a year. And the G.O.P. prefers to pay for new tax cuts by cutting spending on the poor and the bureaucracies that purport to serve them, rather than on upper-income Americans and business interests. Incoming House Speaker Newt Gingrich last week brushed off the inequities of Social Security and its projected insolvency, which he dismissed as "an abstraction that is 25 years from now." He added that it is "utterly irrational" to alarm retirees about entitlements before first reforming lesser categories of federal spending. President Clinton privately expressed similar reluctance to tackle welfare for the well-off because such a crusade would incur the wrath of interest groups influential among Democrats, including the elderly lobby, labor unions and the real estate industry.

Nonetheless, as they stepped up their search last week for ways to woo the angry middle class, Democrats and Republicans alike were forced to look beyond cuts in federal spending dedicated to welfare for the poor, most of whom are children. In contentious, closed-door meetings all last week, the Clinton Administration and lawmakers separately debated whether to target the much larger share of federal spending and tax subsidies that flow to corporations and upper-income Americans, mainly on the basis of political clout.

In one session, Labor Secretary Robert Reich warned the President that "Gingrich is on the verge of capturing the support of working-class people" and urged that Clinton move aggressively to win them back, according to other officials familiar with the meetings. The Republicans will be bold on some fronts, "but they aren't going to take on the wealthy and the special interests," Reich told Clinton. "We should sharply contrast Republicans, who want to cut taxes on capital gains for the wealthy, with Democrats," who want to help working people.

Despite support on some issues from Budget Director Alice Rivlin, the Reich faction seemed outgunned, at least for the moment, by an unlikely alliance of go-slow conservatives and go-slow liberals. Chief of staff Leon Panetta, departing Treasury Secretary Lloyd Bentsen and his designated replacement Robert Rubin, warned against rhetoric that might make the Administration appear "antibusiness." Panetta told TIME he gets "nervous" about heated rhetoric "on the left or the right."

Another faction, including Hillary Clinton and political adviser George Stephanopoulos, opposed measures that would offend Democratic interest groups. On every option proposed for cutting entitlement spending or tax subsidies or whole Cabinet agencies, "the arguments were essentially the same," said an official. Reich would urge that "we have to do something bold to win back the working-class white males who voted for us in 1992 and against us in 1994." Then the liberal fundamentalists would respond, the source said, that "we can't do that because it would offend ((the American Association of Retired Persons)) or the AFL-CIO or Jesse Jackson. We've got to stick with our base, because it's all we've got." At one point, Hillary Clinton grew annoyed at all the concern over white male swing voters and declared, "If they think the Clintons aren't helping them, let's just let them see what kind of help they get from their Republican friends." The Hillary-George faction, often joined by Panetta, counseled lying back and letting volatile conservatives like Gingrich and Senator Jesse Helms of North Carolina discredit themselves by lurching into extremist policies on such issues as welfare reform, abortion, school prayer and new tax breaks for the wealthy.

The President seemed inclined to accept the latter view, while adding just enough token initiatives to avoid looking like some Bushian defender of the status quo. Clinton, aides said, seemed determined to propose a $25 billion to $30 billion tax cut for middle-income families but accepted none of the options for financing it. As during his initial budget deliberations two years ago, he was worried that any attempt to limit tax subsidies, notably the mortgage-interest deduction, could be depicted by Republicans as another "tax increase" -- even if the savings were used to cut taxes on the middle class. Clinton entertained a proposal to pay for his tax cut with a "magic asterisk" -- a list of tough budget-cutting options from which the Republican Congress would be asked to choose, and for which they could take the blame -- a tactic Democrats derided as cowardly when it was employed by President Bush.

By week's end, Clinton had made no firm decisions. And his time was growing short. This Thursday, just a day after the Kerrey commission is to make its recommendations on cuts in entitlements and tax subsidies, Clinton is scheduled to deliver a TV address that aides describe as a major "repositioning" on tax and spending issues. Should he slip the date of that speech, it would fall in the holiday news doldrums. And starting the first week in January, Gingrich and company will take formal control of Congress and will dominate the agenda.

Kerrey and the commission staff have laid down a goal of keeping the budget deficit in check over the next 35 years, which requires action now to avert a looming entitlements-spending explosion. That goal is proving elusive. Kerrey and Danforth introduced their own proposal only to reveal wide splits among the 32 committee members. Those members range from Richard Trumka, president of the United Mine Workers, who criticized the Kerrey-Danforth proposal for relying too heavily on cutting benefits and not enough on tightening tax subsidies, to Representative Bill Archer, the Texas Republican who next month will assume the chair of the Ways and Means Committee and is a staunch defender of corporate tax breaks. Both Kerrey and Danforth told TIME they are skeptical they can marshal the requisite 20 votes necessary to forward a formal report to the President.

Perhaps Kerrey's most controversial proposal was to cut the employee's half of the Social Security payroll tax by 1.5 percentage points, to 4.7%, and to require workers to save that money in an IRA-style plan -- an idea immediately attacked by the elderly lobby as undermining the tax base of Social Security. The move was spurred by focus-group discussions conducted for the commission last summer. According to the results, which TIME has obtained, the Americans ages 20 to 50 in the focus groups said they had no confidence they would get their money back from Social Security. Hearing this, Kerrey saw an opening to outflank Gingrich on the issue of personal responsibility vs. Big Government, according to a commission source. "Let's ask people, 'What would you prefer, a payroll-tax cut that lets you invest the money, or would you rather trust your government?' "

Kerrey is sincerely disappointed in Gingrich, a Democratic Senator said, because he has watched him shift over the past year from a private enthusiast of entitlement reform to one who accepted the analysis of Senate Republican leader Bob Dole, who believes that trying to freeze inflation adjustments in 1985 so angered the elderly lobby that it cost Republicans control of the Senate in 1986. In an interview with TIME, Kerrey would say only that if Gingrich is willing to duck Social Security's problems because they are 25 years away, "don't give any speeches saying how concerned you are about your children and grandchildren." He added that Gingrich, "like many Democrats, calculates that he can't tell people the truth about Social Security."

With the growth of grass-roots deficit-reduction organizations like the Concord Coalition and Lead or Leave, citizens are learning more about entitlements and tax subsidies for the comfortable class. Some examples:

Social Security subsidies

Because of rapidly rising benefits, the average person who is retired today got back all the money he or she paid into Social Security, with interest, in about seven years. By contrast, the average man now 30 years old will pay $56,000 more into Social Security over his working life than he will withdraw in retirement. "I'm not expecting to see any of the money I've paid into Social Security," says Joel Holzwasser, 39, an executive with his family's Boston-based auto-parts firm. He adds, "People of means like my father should not be collecting money from Social Security." Not surprisingly, his father Harry, age 70 and semiretired in Boca Raton, Florida, sees things differently: "I feel entitled to everything I put in for 47 years."

Health-care subsidies

Like Social Security, the Medicare program pays benefits for medical treatment to all retirees, regardless of their income, and retirees collect far more from Medicare than they paid in taxes to the program. A needs test of these subsidies, even a modest one, would net $1.1 billion a year. In addition, the tax break for employer-provided health-insurance costs the Treasury $90 billion a year and discriminates against workers whose employers don't provide insurance. "I pay for my own insurance, and I pay taxes," says James Ten Broeck Jr., 29, a self-employed lawyer in Chicago. "Those who work for a company get a break that I don't get. That's unfair." Limiting the tax break to the value of an average-cost health plan would save the Treasury $21 billion a year.

Agriculture subsidies

Programs initiated to help small farmers during the Great Depression now pay almost half their benefits to farmers who earn more than $100,000 a year. Vance Ehmke, who grows grain on 2,400 acres in Dighton, Kansas, collected more than $40,000 in subsidy payments last year but observes, "We're getting more and more market oriented." Subsidies from farm programs, he says, "are going down whether we like it or not." A package of reforms suggested by congressional budget experts would save $4.3 billion a year.

Housing subsidies

Fewer than 20% of the poor receive federal housing aid, but a large majority of those who earn more than $100,000 a year do so, through tax deductions for payment of mortgage interest and local property taxes, which together cost the Treasury $70 billion a year. Nearly a third of those tax subsidies go to the 5% of taxpayers who earn more than $100,000 a year. Limiting the deduction to mortgage debt of $300,000, down from $1 million currently, would net $4 billion a year and affect only 1% of taxpayers. One of those affected would be Larry Johnson, a financial planner who holds mortgage loans worth $400,000 on his home in suburban Chicago and his A-frame cedar vacation home 100 miles west in Lake Carroll. "If it weren't for the tax breaks," he says, "I don't think I would own both homes."

Oil, gas and mining subsidies

Special tax breaks for depletion of mineral reserves and for expensing of drilling and mining equipment could be repealed to save $2.2 billion a year.

Inheritance

When a wealthy person dies and leaves stocks and other property to his or her heirs, there is no tax on the appreciated value. Ending this break and taxing capital gains at death would save the Treasury $7 billion a year.

A more elegant and sweeping solution, backed by House Republican leader Dick Armey, is a "flat" tax, which would abolish all or most deductions and levy the same lower tax rates on all individuals and businesses with the same incomes.

Harlow Savage's granddaughter Amanda would welcome any reforms that offer her generation a brighter economic outlook and eventual retirement. "I don't think I will be able to live half as well as my grandfather or father," she says. She plans to return to college next semester but hears from friends that even a degree often leads only to a low-paying service job. Also, "I wonder if I will be able to afford children. And what am I going to be able to offer them?" Those are the flesh-and-blood questions behind the numbers and the political maneuvering in the entitlement debate.

CHART: NOT AVAILABLE

CREDIT: NO CREDIT

CAPTION:If money is saved by cutting government programs, should the savings be used to cut middle-class taxes, to reduce the deficit or to increase spending on other government programs like job training

Most Social Security recipients receive additional payments beyond what they personally paid into the system. These additional payments come from taxes paid by others. Would you favor requiring recipients with higher incomes to give up some of these additional benefits?

Do you favor:

Reducing the tax deduction for interest paid on home mortgages?

Requiring Medicare recipients with higher incomes to pay for a larger share share of their medical expenses?

CHART: NOT AVAILABLE

CREDIT: By Suneel Ratan

CAPTION: ARE THEY ENTITLED?

TIME's estimation of what four hypothetical familes reap from the government, according to calculations by San Antonio accountant Steven Bankler.

With reporting by Greg Aunapu/Miami, Ann Blackman and Suneel Ratan/Washington and Leslie Whitaker/Chicago