Panel Offers Bitter Pill to Slow Runaway U.S. Spending : Economy: Staff of bipartisan tax and entitlement commission recommends some harsh remedies. The idea is to stem government outlays.

How about increasing the eligibility age for Social Security and Medicare to 70?

Or cutting federal and military pensions by 10%? Or trimming welfare to families and crop supports to farmers by 25%? Or increasing federal income taxes on every family with taxable income over $38,000 a year?

Those are some of the politically explosive choices being offered by the staff of a bipartisan commission struggling with the nation’s runaway federal spending problem.

A package of options, all of them sure to generate anger and anguish among constituents and politicians alike, was unveiled Monday by the staff of the bipartisan Commission on Entitlement Reform and Tax Reform. The staff options issued Monday will be used by commission members for discussion at their next meeting on Friday and at their final meeting and voting session the following week.

The commission, co-chaired by Sens. Bob Kerrey (D-Neb.) and John C. Danforth (R-Mo.), is to deliver a report to President Clinton by Dec. 15 on the best way to control entitlements--programs including Social Security, Medicare and federal civilian and military pensions that currently account for 47% of the federal budget but threaten to consume virtually the entire budget by the next century.

By the year 2012, spending for entitlements and the national debt together are projected to consume all tax revenues collected by the federal government, assuming that current tax and spending rates continue. This would leave nothing for everything else in the federal budget: defense, interstate highways, scientific research, the national parks and other programs.

The commission’s goal is to develop proposals to restrain the federal deficit to its current relative size of about 2.3% of the nation’s economic output.

The cost of entitlement programs is difficult to restrain because they are largely open ended--people are “entitled” to the aid if they meet eligibility rules, such as having served 20 years in the military or having paid Social Security taxes and reaching age 65.

Two problems are at the heart of the issue. The aging of the baby boom generation threatens the future solvency of the Social Security system. And rising medical costs are driving up spending for Medicaid, which helps the poor, and Medicare, which aids people over 65 and disabled people of any age.

Social Security is in surplus now. More tax revenues are being taken from workers than is being spent for retirees and the disabled. But current estimates show that the retirement fund will run out of cash in the year 2029.

Of more immediate concern is Medicare, the program that helps people over 65 and disabled people of any age pay doctor and hospital bills. The hospital trust fund will go broke in 2001 under current spending rates. A separate fund for doctor bills is largely financed by general tax revenues.

Outlays for Medicare, and the Medicaid program for the poor, now consume about 3.3% of the nation’s economic output, a figure that will virtually explode to 11% by 2030 unless spending is slowed.

The answers are easy on paper: raise taxes, cut benefits or take some of both approaches. But getting there will be very hard, especially for a new Republican majority in Congress, whose leaders have declared Social Security off-limits and untouchable and are calling for tax cuts, not increases.

Although the commission has tax reform in its title, critics are irritated that it has not given any detailed consideration to tapping other potential sources of revenue, such as cutting back the tax deduction for home mortgages, or reducing the deductions for employer contributions to pensions and medical insurance.

The proposed changes in the staff report would begin in the year 2000, giving Congress and the President some room to maneuver.

The report provides three sample packages.

Package 1 attempts to avoid tax increases by trimming the growth of benefits. By the year 2034, the age of eligibility for Social Security and Medicare would be raised in stages to 70. Benefits would be reduced for those with more than $40,000 a year in other pension or investment income. Federal pensions would be pared by 10%, Medicare beneficiaries would pay more for services. Other entitlements, including welfare and farm price supports, would be cut by 25% and their growth capped.

Package 2 avoids significant reductions in benefits, but demands big tax changes. Social Security payroll rates, now 12.4% and split equally between worker and employer, would rise to 13.4%. The Medicare payroll tax, now 2.9% divided among workers and companies, would rise to 4.4%.

The plan would limit tax deductions to 15% regardless of a family’s tax bracket. The 15% rate now applies to joint returns with taxable income up to $38,000, the lowest current tax rate. A family in the 28% bracket saves $28 for every $100 in deductions.

Package 3 is a combination of reduced benefits and tax hikes. It would raise the retirement age to 68, impose some increase in payments by Medicare recipients, slightly reduce Social Security benefits for middle- and higher-income workers and their spouses, and cut back itemized tax benefits.