PERSPECTIVE ON A GRAYING AMERICA : The Baby Boom Will Bust Us : Simple math demands rethinking entitlements for the elderly, most of whom already can and should work past 65.

Bill Clinton (born in 1946) and Al Gore (1948) make a big point of being a new generation of leaders. If they are serious, they will prepare for the retirement of their own generation, the baby boomers (the 75 million Americans born between 1946 and 1964). The first boomers won’t hit 65 until 2011, but we can’t sensibly cope with the graying of America by simply waiting for it to happen.

To ask a President to peer that far into the future may seem fanciful. It shouldn’t. In 1990, one in eight Americans was 65 or over. By 2020, that age group will be nearly one in five. Already, programs for older Americans (Social Security, Medicare and other health and retirement programs) represent about a third of federal spending. This share will explode when the baby boom passes 65. We should control these costs, while also encouraging people to work longer.

As America ages, we can’t afford to have such a huge part of our adult population--much of it healthy--dependent and unproductive. There are already tensions between retirees and workers. The conflicts will intensify. What’s at stake is the social contract that says how much people are responsible for themselves and how much society cares for them in old age.

Any discussion of these issues must discard the worn notion that people instantly become “needy” at 65. They don’t. A new Census Bureau report (“Sixty-Five Plus in America”) by demographer Cynthia Taeuber makes this plain. Consider: Only 10% of Americans between 65 and 74 need help with normal activities (dressing, bathing, eating); 64% of married couples over 65 have incomes exceeding $20,000 (about half have incomes over $35,000); three-quarters of the over-65 population own their homes.

But the census report also reminds us that many older Americans--especially the very old--are quite vulnerable. Nearly half those over 85 need help with daily activities. Significantly, this age group is expected to double, from 3 million in 1990 to 6.1 million in 2010. Nearly half of African-American married couples have incomes under $15,000. Women live longer than men and fall victim to chronic illness and low incomes. The conclusion seems obvious: Government aid should go more to those who need it and less to the old as a group.

Clinton and Gore should prepare us for these new social realities. A starting point is reducing today’s budget deficits. They bloat the government’s interest payments, which now represent one dollar in seven of spending. Lower deficits today will mean a lower interest burden tomorrow. That will make it easier to spend more on the elderly in the 21st Century.

But immediate deficit reduction isn’t enough. Unless we attack the long-term causes of higher spending on the elderly, we will ultimately be overwhelmed. Government will be forced to raise taxes sharply, cut benefits dramatically or accept truly monstrous deficits. Just because this grim prospect lies in the fuzzy future is no reason to ignore it. Unfortunately, what needs to be done to avert this calamity would be hugely controversial:

* Control health costs. Only a tough national program can tame runaway costs. By 2000, health spending could reach 18% of the economy’s output, up from 13% in 1991 and 6% in 1965, according to the Congressional Budget Office. And that’s before the impact of the baby boom.

On average, someone over 85 has health costs six times higher than someone under 65.

* Raise Social Security’s retirement age. We over-subsidize people who are healthy and self-reliant. The normal retirement age is scheduled to rise to 66 by 2009 and to 67 by 2027. That extension is too small and occurs too slowly; it should go to 68 or 69 by 2010. Early retirement--with reduced benefits--would occur at 65 or 66, instead of today’s 62 or 63. Those prevented from working by injury or illness would get disability insurance.

* Tax Social Security. Two families with, say, $35,000 of income should be taxed similarly, whether the family head is 38 or 78. Yet only a small part of Social Security is now taxed.

The argument against taxing Social Security it is based on the myth that it is a pension, the benefits paid from recipients’ own contributions. Not so. Social Security is welfare. Benefits are financed from the payroll tax on workers. Most of today’s beneficiaries receive far more than they ever paid in taxes.

* Prevent pension fraud. Pension rules are so lax that companies are tempted to make pension commitments they can’t keep. The government, through its Pension Benefit Guarantee Corp. (PBGC), must then pick up much of the cost. The PBGC has already estimated that its future costs could exceed its insurance fund by $18 billion. But Congress sat on reforms that would force companies to increase pension contributions. Without reform, we invite an S&L-like; debacle.

The point is not simply to control government spending. It is to demolish the rigid distinction between “the old” and everyone else. Government policies herd anyone over 65 into a protected class, taxed lightly and discouraged from working. For example, any earnings above a small amount result in a loss of Social Security benefits. Naturally, this deters people from taking jobs. This penalty, too, should be abolished.

Most older Americans should not pass abruptly from “work” into “retirement.” It isn’t good for them or the country. They should be able to mix jobs and leisure, much as young Americans do.

Clinton and Gore can prove that they believe in the long view. Their task is to alter policy without terrifying today’s older Americans. Either we will deal with a graying America, or it will deal--harshly--with us.