PERSPECTIVE ON ENTITLEMENTS : Limits Now to Keep Economy Sound : We can begin by means-testing Medicare benefits and instituting mandatory savings accounts for retirement.

The relentless growth of entitlement programs looms as a major obstacle to the long-term health of the U.S. economy.

Over the last 25 years, expenditures for Social Security, Medicaid and Medicare have expanded dramatically. Indeed, the government is now borrowing substantial funds simply to support increases in entitlement spending. As a result, the federal government no longer has the means to make significant investments in new initiatives to support economic growth, such as extensive job-training efforts or major new infrastructure projects.

Even worse, continuous increases in entitlement spending eventually may limit our ability to maintain adequate funding for programs like defense that are fundamental to basic government.

The impact that entitlement programs have had on federal spending is astounding. The portion of the federal budget devoted to basic government functions (justice, defense, agriculture, education, legislative, transportation, interior and Veterans Administration) decreased from 58% of federal spending in 1967 to 33% by 1992. These same programs are expected to make up less than 25% of the budget by 2004 when Social Security, Medicare and Medicaid will equal $1.2 trillion or nearly 50% of total federal spending.

Unfortunately, this spending is done with little regard to need or fairness. Less than 20% of entitlement spending finances means-tested programs (programs that help those who most need them). The average person retiring in 1990 will receive back more than 2 1/2 times what he or she contributed in Social Security payments plus interest.

But the unfairness of Social Security pales in comparison to the Medicare program. The average person retiring in 1990 will receive back in benefits more than five times his or her contributions to Medicare, with interest. And Medicare costs are projected to increase from $158 billion in 1994 to $434 billion by 2004.

Clearly, our country’s budget priorities are being set with reckless disregard for future generations.

However, if we act now, relatively simple steps can be taken to improve the fairness of current entitlement programs and to ensure that the federal government has the financial capability to perform its basic functions and to make investments in future economic growth.

Two fundamental reforms are needed.

* Means-test Medicare benefits. Make recipients, depending on their income, pay a portion or all of the costs of the Medicare insurance they receive.

* Institute mandatory individual savings accounts that are funded by a 5% payroll deduction.

Under this plan, Medicare insurance would be paid using a means-tested formula whereby eligible families with incomes of $15,000 to 40,000 would pay a percentage of their premium costs, beginning with 10% at $15,000 and graduated in increments to 100% at $40,000. Families would pay a tax equal to the value of the Medicare insurance they received. Income from all sources would be included in this calculation.

It is important to recognize that, under the present Medicare system, the government provides medical insurance for recipients who have contributed very little money relative to the benefits they receive. Therefore, making Americans with retirement incomes greater than $40,000 pay their own way is much more fair. The current highly regressive Medicare system taxes poor workers to pay benefits to elderly Americans who are in many cases quite affluent. This change in the Medicare program would save about $75 billion a year by 1996.

Mandatory individual savings accounts would force all Americans to save significantly for their retirement. The 5% payroll tax paid by each worker would be invested in a private, qualified investment program chosen by the employee. When a citizen reaches retirement, funds in the account would be used to pay retirement income and 100% of Medicare premiums. When or if the account is depleted, Social Security payments would begin. By forcing savings now, we would immediately begin to accumulate funds to dampen the expected growth of Social Security expenditures as baby boomers retire.

The savings-account program combined with reforms in Medicare would over the next decade dramatically slow the growth of entitlement spending. A vested retirement program would have many other benefits. Entitlement spending 25 to 30 years from now should actually begin to decline as a percentage of the federal budget, providing even more resources for investment in economic growth. The accounts would increase national savings, thereby decreasing the cost of equity and debt capital. By removing the specter of long-term deficits, driven by entitlement spending, the dollar would have an improved investment outlook.

But most important, individual savings accounts, combined with real reforms in the Medicare system, would give hope to young Americans that the system is sound. It would be made sound in the only credible way--by making all of us more personally responsible for our retirement.