The MacNeil/Lehrer Report; Tax Compromise Time

ROBERT MacNEIL: Good evening. There was good news on inflation today. Consumer prices rose only four-tenths of a percent in April, because food and gasoline were cheaper. If that kind of increase lasted a whole year, the inflation rate would be down to 5.1 percent. So far this year it`s averaged 8.4 percent. At the same time today four major banks, looking to the uncertain future for inflation, raised their prime lending rates to 20.5 percent. One reason for uncertainty in financial circles is the question mark over what kind of tax cut will come out of Washington. On that front, the White House has started sending out quiet signals that the President is ready to back off his insistence on cutting taxes 10 percent a year for three years. That word has been circulating just as Mr. Reagan also softened on his proposals to cut Social Security in order to shore up the system`s shaky finances. On Wednesday, the Republican-controlled Senate voted 96 to 0 against such drastic cuts in benefits, and last night Mr. Reagan appealed for a bipartisan effort to reach a compromise. Tonight, the new spirit of compromise in Washington: what kind of tax cut and Social Security changes will it give us? Jim Lehrer is off; Charlayne Hunter-Gault is in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Robin, sparks flew about the administration`s entire package of 13 proposals aimed at saving the Social Security system some $46 billion. In general that plan calls for lowering benefits and tightening rules on disability payments for future recipients. It also proposed delaying for three months the annual cost-of-living increases, and curbing benefits to federal and some state employees who are in other retirement plans. Sweeteners in the plan would allow recipients 65 and over to earn unlimited outside income without penalty, and a promise for today`s workers of lower payroll taxes in the future. But that did not cool the heat, particularly that generated over reducing benefits for persons retiring before age 65. Yesterday, in a further effort to cool down some of that heat, Health and Human Services Secretary Richard Schweiker visited the House Select Committee on Aging. There he tangled with its 80-year-old chairman, Claude Pepper. Congressman Pepper, a Democrat with his own bill to salvage Social Security, led off the questioning.

Rep. CLAUDE PEPPER: Now you have indicated to me that maybe the administra- tion is willing to make a compromise in this area. My question is, can we not solve the problem of 1982 by a loan from the disability fund to one of the funds in the social trust for the 1982 period, and would you stick to a rule or a policy or a principle that you will not agree to any proposal that will cut the benefits of people on Social Security who paid into Social Security upon the dependence of the law of their land, and the assurance of their government that they`d get what the law promised?

Sec. RICHARD SCHWEIKER: Well, Mr. Chairman, I think it gets back to how we solve our problem. We all seem to agree that there`s a problem. I think your bill acknowledges there is a problem. But as I look over your bill, you propose to take $ 156 billion out of the general treasury, and put it into the trust fund. That is your solution. And I have a hard time with my solution, but I have a harder time with your solution because you--

Rep. PEPPER: But we are not cutting: that`s a proposal that we take 70 percent of the cost of Medicare and let it be borne by the general revenue fund because it`s providing health for the retired population of the country. But my problem is, you have chosen a solution which violates a sacred word of our President and our government and our Congress to the people of this country, and a policy followed to my own knowledge -- for 44 years since I`ve been here -- that no administration, no Congress ever proposed to cut the benefits assured by law to the recipients of Social Security.

Sec. SCHWEIKER: And let me say, Mr. Chairman, you propose a solution that takes $156 billion out of money we don`t have, increases the national debt -- increases the interest on it. We don`t have to cut benefits to anybody if we`ll just take $156 billion out of the Treasury and put it in a trust fund. That`s the easiest solution of all--

Rep. PEPPER: At least we never promised--

Sec. SCHWEIKER: --and also the most fiscally irresponsible.

Rep. PEPPER: --taxpayers we`d never levy taxes necessary to make Social Security sound. But what you are doing is violating our obligation to the people covered by Social Security by cutting the benefits we promised them, Mr. Secretary.

Sec. SCHWEIKER: Well, somebody`s going to be very unhappy when they figure they have to pay $156 billion more of taxes, Mr. Chairman. Now, let`s not kid ourselves. There is no easy answers, and simply to say we can take $ 156 billion out of the Treasury and solve all our problems, raise the benefits-- the situation`s the same-- that`s how we got into our mess today. Because we just fixed a little bit here, tucked a little bit there, pulled a little bit here, and now we can just borrow $156 billion, wave a magic wand, the problem will go away. That`s a very unfair, gross solution to this problem.

Rep. PEPPER: You don`t admit that you compounded the mess?

Rep. BARNEY FRANK, [D-Massachusetts]: What bothers me is your flat-out rejection of the suggestion that we might go to general revenue, and in particular your characterization of it as a shell game. It seems to me a legitimate policy option to consider funding some of the medical benefits, for instance, out of general revenues. When you flat-out reject it-- and I don`t think it`s a shell game if we honestly put forward that as an alternative way of financing. The problem I have is that by insisting on the rigid separation-- on rejecting absolutely any consideration of going to general revenues at all -- even by the method Ms. Fenwick suggests -- because clearly providing some kind of tax relief against Social Security payments shifts the incidence to general revenues. But what you`re doing is, on the one hand you tell us we can`t object to the reduction of the early option for retirement because we don`t have the money. Simultaneously, we`re seeing the most enormous increases proposed for de- fense. We`re seeing a proposal to continue subsidizing the Clinch River Breeder Reactor. We`re seeing continuation of expensive subsidies in other areas. I reject the notion that it`s a shell game for the Congress of the United States to say, "We want to make comparative judgments as to tax revenues coming from the same people," and of course they come from the same people, "as to whether or not restoring for several hundred million dollars a 40-year-old battleship is sacrosanct, but worrying about a 62- year-old who has put 40 years in on the assembly line, and for health reasons -- as Mr. Simon suggests -- might have to retire, is not a good idea. I don`t understand why it is not a good idea. I don`t understand why it is not a legitimate policy option to pose those against each other. And I think you reject even the possibility of talking about a humane retirement policy for people who worked hard and needed it, and you don`t let us look at the possibility that some of the other massive spending increases being proposed -- where the Treasury also doesn`t have the money -- couldn`t compete against them.

Sec. SCHWEIKER: Congressman Frank, let`s call it a tax. You`re proposing that we raise taxes to get the money. The money isn`t there, now--

Rep. FRANK: No, I`m proposing we cut some of the spending. Now don`t distort what I said. When I talk about Clinch River Breeder Reactor, and when I talk about restoring World War H battleships. I`m talking about saving money. I`m not talking about taxes.

Rep. MATTHEW RINALDO, [R-New Jersey]: Is the administration open to nego- tiation on all points on this issue, or are there certain provisions that would be consi-dered unacceptable?

Sec. SCHWEIKER: We have approached this problem from the very beginning in a bipartisan way. In fact, it was Congressman Pickle`s request to me to come up with an administration proposal so that we could work something out. We have 13 provisions in this bill, and they`re all negotiable.

MacNEIL: Until this week, President Reagan had been having his way virtually unim-peded in Congress, especially the Republican-controlled Senate. How much has that changed? Senator Robert Dole of Kansas is the Republican chairman of the Finance Committee with jurisdiction over Social Security and taxes. Senator, why has the admin-istration taken such a beating on its Social Security proposals, even from Republicans in the Senate?

Sen. ROBERT DOLE: Well. I`m not certain it look a beating from Republicans or Democrats in the Senate. After the fun and games, we all agree that we need to do something to not only patch up the system, but to protect its integrity in the long term. There was a lot of rhetoric, frankly some of it misdirected at the President. The Democrats have been in charge of the Senate for 26 years, and if we have a problem then certainly part of the blame is theirs. I commend the President for at least putting it out on the table. I don`t agree with some of the things he suggests, but at least it`s in the public domain. I think it makes it easier, along with the efforts of Congressman Pickle, to find some solution.

MacNEIL: And after some of the votes the President`s been getting in the Senate, to have his proposals greeted with a 96 to 0 sense-of-the-Senate vote is something at least of a battering, isn`t it?

Sen. DOLE: Well, but except if you read the resolution, we call for bipartisan support. We indicated that we didn`t want immediate reduction of benefits for early retirees. We didn`t preclude phasing in reductions. So I guess it was at least a message to the White House not to go so fast. I think the timing was bad. but again, as Secretary Schweiker just indicated, they`re responding to requests from Congressman Pickle, the chairman of the subcommittee on the House side.

MacNEIL: You said you weren`t consulted. How did that happen?

Sen. DOLE: Well, I don`t know. I was notified, not consulted -- they`re words of art in Washington. I think had I been consulted, I might have been helpful to the administration.

MacNEIL: Some critics have said that the Reagan Social Security proposals were aimed more at helping to sell their tax program -- because they were brought out so swiftly -- than they were at reforming the retirement system, however needy that is. Do you have an observation on that?

Sen. DOLE: Well, I wouldn`t try to sell the tax program by bringing out this bear. I mean, trying to reform the Social Security system is going to be very difficult, and that`s why I believe the timing could have been delayed. But on the other hand, certainly members of the House have a right to request the administration`s response. Secretary Schweiker responded, and the fire storm was there. But we`ll work it out. The President`s very conciliatory. I believe with the responsible leadership in the House of Congressman Gephardt and others, we`re going to do this. And when we do it, it`s not going to be painless, but it`s going to mean that those who are now receiving benefits and those who receive benefits in the future are going to have more confidence in the system.

MacNEIL: Let me ask you a couple of specifics. You mentioned the proposal a moment ago that caused most of the commotion -- to reduce benefits to people who retire as early as 62 to discourage their early retirement, in other words. Is that going to stand in some form, do you think, in the final result?

Sen. DOLE: I would think there is a possibility in some form, maybe phasing it in as suggested in a bill that Mr. Pickle has introduced -- and others have -- in the House. That`s an option. One of the Democratic options -- waiting to retire from 65 to 68 -- to phase that in-- now. that would also cause problems. So anything we do which may or may not be responsible in the eyes of some, I believe helps us find a solution in the long run.

MacNEIL: But is looking in the area of in some way reducing benefits still- - is that going to be something that results in some form in a final bill, or is that just an anathema? Is that out of the question, to cut benefits? .

Sen. DOLE: If we can do it so it doesn`t affect those who have been planning on retirement -- if we can phase it in over a period of years, maybe starting down the road in 1985, 1990 -- yes, I think we can do that.

MacNEIL: To give some warning, in other words?

Sen. DOLE: Give some warning. Let people prepare for it. There are other things we can do. I frankly think we should take a look at the cost-of- living adjustment. The President says we shouldn`t do that, but again, he has given us the responsibility -- we share it with the President. We may do that even though he has indicated that he would not prefer that.

MacNEIL: I see, And what about the proposal we heard being debated there in the House committee about financing some of the shortfall from general revenues? Is that something acceptable to you?

Sen. DOLE: That will never fly. I mean, we don`t have any general revenues. That`s why we`re cutting spending. You know, the Treasury is broke for all practical purposes. And there`s only two or three ways we can do it. We can do it with general revenues; we can increase Social Security taxes; on the short term we can borrow from other funds, but that won`t take us very far; or we can reform the system. And i think the latter is the only responsible course.

MacNEIL: Well, thank you. Charlayne?

HUNTER-GAULT: Now for some reaction from the Democrats. For that we go to Representative Richard Gephardt of Missouri. Congressman Gephardt sits on the House Ways and Means Committee as well as its subcommittee on Social Security. Congress-man, how do you interpret the Senate`s resounding rejection of the proposals? As a battering? A beating? Or just what?

Rep. RICHARD GEPHARDT: Well, the outrage in the country, and in the Senate and in the House about the proposal is really aimed at the part of the proposal that says that there will be an increase in the penalty on early retirement beginning in 1983. Jake Pickle, who is the chairman of the subcommittee in the House, and others in the House including myself, have developed a bill that called for a similar proposal, as Senator Dole said. But we didn`t begin phasing that in until 1990. And I think the real outrage about this bill really centers on the idea that we would be taking benefits away from people on the eve of their retirement which is something we`ve never done.

HUNTER-GAULT: So you don`t see the entire package as a total wash at this point?

Rep. GEPHARDT: No, I think that I also have questions about some of the disability proposals, but I think the proposal on reducing the replacement rate -- in other words, the rate at which we replace people`s wages after retirement -- is a very good proposal, and one that would really help the system in the long term, would have a little help in the short term. I think our problem in the next five, six years is to come up with a rather great amount of revenues through new taxes, through general revenue, or through cutting benefits, to try to get us through what could be a very serious shortfall about 1983 or `84. The amount of that shortfall depends on your economic assumptions.

HUNTER-GAULT: What about House Speaker Tip O`Neill`s statement that the proposals were really a sneak attack on the total Social Security system as a whole? I mean, do most Democrats -- including yourself -- feel that way?

Rep. GEPHARDT: A lot of Democrats feel that way. I` m not sure that I would character-ize it as a sneak attack. Jake Pickle and other members of the subcommittee have asked the administration repeatedly over the past few days to make a proposal. And it`s my view, and I think it`s Mr. Pickle`s view, that we can`t legislate in this area unless we reach a bipartisan compromise. It`s too volatile. It`s too emotional. It`s too tough an issue for one party or the other to take on with the other group really criticizing every move that`s made. So hopefully we can reach a bipartisan compromise in the next few weeks.

HUNTER-GAULT: Well, the reports are, though, that administration moved so quickly in order to head off a bill that was being developed in your subcommittee. I mean, what`s in that bill that would be worrisome to the administration?

Rep. GEPHARDT: I don`t think that was their view. I think they brought forth the bill because they had been asked to do that. We don`t have a lot of time to legislate. I don`t think we can pass a bill in an election year next year; we`ve got to do it this year. We`ve only got a few months left, really, in this year to process a bill through the House and then through the Senate, and then to have it signed by the President. We had a need to pass something to cut benefits to reach our budget goals, and while we were doing that we wanted to go ahead and do the long-range bill this year so we didn`t have to wait til next year, believing that in an election year you just politically can`t deal with Social Security.

HUNTER-GAULT: Congressman Pepper was proposing the idea of using general reve-nues in some way, but Senator Dole just said that that can`t do it. What`s your feeling about that?

Rep. GEPHARDT: Well, we`ve had a bill in the House that`s called for some amount of genera! revenue going into the health fund -- into the Medicare fund. I think a way that may be acceptable to Republicans -- although we haven`t tried it yet -- is to cut a series of benefits in the future having some effect in 1982 and `83. One of the things would be to hold back on the CPI -- to change the index we use from the CPI to another index that`s more accurate than that. That would save some money in the near term. And then if we would have problems in `82 or `83 or `84, we`d be able to borrow some amount on a month-to-month basis from general revenue with the idea that we`d do enough cuts in the short and the long term that all that money would be paid back, and be paid back very quickly. I think what we`re seeing with the system right now is the problems that are caused because of a very changing economy. We`ve had high interest rates, unemploy-ment jumping up. There`s no way to actuarially set this fund up over a long period of time with a volatile economy, and make sure that you`re always going to have enough money in each month. I think what we need to do is to make some major cuts in benefits over the near and long term, but couple that with the right to borrow some general revenue on a month-to-month basis to get you over those hump periods.

HUNTER-GAULT: Briefly, Secretary Schweiker says that the administration is willing to discuss reductions in future cost-of-living increases. I think Senator Dole said some COLA adjustments might be possible, too. I mean, do you see that as a good starting point for a compromise?

Rep. GEPHARDT: I do. I think when you approach the next five years, you have to make a decision. Are you going to cut benefits for people that are about to come in the program on the eve of their retirement, or are you going to cut benefits generally for everybody that`s receiving benefits now? I think it`s more equitable to make a minor adjustment in the people that are receiving benefits now, especially if you can argue that you`re changing to an index or an escalator to take care of inflation that`s more accurate than the one we`re using today. I`m convinced, and I think a lot of people are convinced, that the CPI overstates inflation. And if we can find an index that accurately tells us what inflation is, I think everybody would agree that that would make sense. It would also save us the money in the near term.

HUNTER-GAULT: Is that the major area for compromise?

Rep. GEPHARDT: I think it is, and I think with a few of the other items that are in the President`s bill and some other items that have been considered in both the House and the Senate in the past, we can come up with a compromise bill that we can pass in the House and in the Senate.

HUNTER-GAULT: How soon?

Rep. GEPHARDT: I think we can do it before the August recess. We may not finish it altogether until this fall, but I think by this fall we can do it.

HUNTER-GAULT: All right. Robin?

MacNEIL: If that was-- Senator, if that was the most fruitful area for compromise in the Congress, do you think that the President would really hate it so much to have the Congress work that out and hand it to him even though he was on the record during the campaign as opposing changes in the cost-of-living adjustment?

Sen. DOLE: Well, I think it would do a number of things, and let`s just say that was in a package. Then I think the President could probably accept that. He wouldn`t have-- he would have the choice of no improvement this year, or accepting something he might not want along with other things that he might want. But I believe that-- I believe we can work it out. I`m pleased to hear Congressman Gephardt as a responsible member of that commit-tee indicate that it should be bipartisan. This is a very sensitive area, and I believe the fun and games that were engaged in in the Senate-- they didn`t solve anyone`s problems, and as long as the people who may be watching this show or others know there`s a real problem, then we can start addressing it.

MacNEIL: You both seem to agree that in some form some of the benefits of Social Security recipients either immediately or in the future -- are going to be reduced as a result of the financial stringency. I wonder -- quoting Henry Aaron, who is a liberal economist at the Brookings Institution, who said that these proposals give the last rites to the idea of a Social Security safety net -- has some line been crossed-- Congressman Gephardt, has some moral line been crossed now that breaks faith with the past, in your mind?

Rep. GEPHARDT: Well, it depends on what you do. I think if you cut off a benefit substantially on the eve of someone`s retirement, you have broken a safety net. But if you are simply trying to make the cost of living escalator an accurate one, I don`t think that breaks a safety net. If you`re trying to reduce a bit the replacement rate from 42 percent to 38 percent, I don`t think that breaks the safety net. Let me just give you one fact: in 1972, before Congress increased Social Security benefits, the replacement rate was 31 percent. And in seven years after that change was made, we went from 31 percent as a replacement rate of average worker wages to about 47 percent. In 1977, when we increased the tax many times, we brought that replacement rate back to 42 percent. Now the President proposes taking it to 38 percent. I think that makes sense. We`ve got to decide what we can pay for. I voted for the taxes to be increased in 1977 and in the 10 years after 1977. that will raise taxes on the American people by $317 billion.

Sen. DOLE: And we were told, I think, at the time, that would make the system sound until the year 2010.

Rep. GEPHARDT: That`s right. And it hasn`t because of the economy. We just have to decide what we can afford.

MacNEIL: All right. Well, thank you, gentlemen. Charlayne?

HUNTER-GAULT: In the few minutes we have left, can we talk about taxes? The conservative Democrats have put forward a proposal that will call for a three-year cut, 5 percent in the first year, and 10 percent in the next two. Is that the kind of compromise that is likely to come out?

Sen. DOLE: Well, I would say that I think there is a spirit of compromise. I don`t suggest the President has indicated that he may do that, but I think he`s willing to listen. I have a-- I am a good friend of the chairman of the Ways and Means Committee -- Congressman Rostenkowski. We`re going to meet next Wednesday. I met this afternoon with the Secretary of the Treasury, Don Regan. I can tell you, and I think on a positive note, that there`s a lot of discussion by sincere people in both parties to reach a compromise. And I would hope it would be three years. I think that will force us to reduce spending, and take less money away from taxpayers. But again, that`s one of the areas that needs to be focused on.

HUNTER-GAULT: You said you met with Secretary Regan this afternoon. Is there any indication, though, that the administration is willing to give up on this 10-percent-per-year. three-year tax cut?

Sen. DOLE: Well, I think I could characterize our visit without repeating what was said as an indication that there is movement. Now, you know there`s a lot of running in place in this town, but I think this is real movement.

HUNTER-GAULT: Congressman, what do you think, just on the issue of a Democrat -- the conservative Democrats` proposal? Is that something that will fly among the other Democrats?

Rep. GEPHARDT: I`m not sure that it will. I don`t know that I know all the provisions in their proposal. I think that the concern Democrats have is about the effect on the deficit. I`m sure many Republicans have that concern, too. We`ve seen interest rates go back to 20 percent, and we certainly don`t want to do anything to keep them at those levels because we`re threatening the savings and loan industry and the home building industry, and the auto industry, and we`ve got to structure this tax bill so that we can bring interest rates down, and try to hopefully get the deficit down, especially in 1982. And I think those will be goals that will be shared on both sides of the aisle. The question is, can we reach an agreement that will achieve those goals?

HUNTER-GAULT: Well, is it your sense that the meeting with Congressman Rostenkowski indicates that he is willing to give up on the one-year idea that he has been wanting to hold the line to because of the deficit problem?

Rep. GEPHARDT: I don`t want to speak for him, and he`s not in concrete, I don`t think, on that issue. I think he wants to continue talking, and see if we can reach a compromise; I think the Democratic members on the House Ways and Means Committee want him to do that. We`ve had a number of caucuses, and talked to him.

HUNTER-GAULT: But where would it be? I mean, you`ve all talked about compromise, but I mean, where would you--

Sen. DOLE: We`re really not that far apart. I think as I see it, as chairman of the Finance Committee. I think we can demonstrate to the American people and the financial com-munity, we might be able to do in 30 days what would normally take us five months. I mean, we`re that close as I see it, with the White House, and with the Democrats -- I`m talking about the regular Democrats as well as those who broke with the regular Democrats on the budget vote -- and members of the Senate. So it`s my hope that we could have a multi-year proposal somewhere between $40 and $50 billion that we can add certain features -- like start addressing the marriage penalty, some incentive for savings, bring that top rate on unearned income from 70 to 50 [percent], and there are a couple of other items -- but if we can do that in one package, we could demonstrate to everyone that we`re serious about compromise. Bipartisanship is not a bad thing.

HUNTER-GAULT: Do you think you`re that close?

Rep. GEPHARDT: I think we could be that close. I haven`t been a part of the negotia-tions, but I think there is room to find an agreement. I think the big hang-up will be the multi-year aspect, and how that is brought into play. Some have suggested triggers on the out years. Maybe there`s a way to work that out.

HUNTER-GAULT: What about the notion of a two-year?

Rep. GEPHARDT: That`s another possibility. There are infinite possibilities.

HUNTER-GAULT: Is it a possibility the administration might appreciate?

Sen. DOLE: That`s a possibility, but I really believe you want to put the pressure on the Congress, the more I think about it, and want to demonstrate to the financial community that we mean business, you go for the three years -- a three-year tax cut -- you help the taxpayers; you put the pressure on Congress to reduce more spending in those out years. Otherwise, if we-have a one-year bill, we won`t cut as much spending next year. If we have a two-year bill, we`ll drop off in the third year. Plus the fact that`s what the President wants, and he`s the President. He was elected President; he wants a three-year program.

HUNTER-GAULT: Is there any other proposal floating around at this point that--

Sen. DOLE: Probably about 100 in the Senate--

HUNTER-GAULT: But the rest of my question was, that could realistically be brought in to fill this breach? In about 30 seconds.

Sen. DOLE: I doubt it. I think we`ve got the makings of a good agreement, and if we all stay steady on the course, we can do it.

HUNTER-GAULT: Congressman, you don`t think the heady feeling that some of the Democrats may be experiencing as a result of what happened on Social Security is going to make compromise any more difficult right now, do you?

Rep. GEPHARDT: No, I don`t. I think we`re back to the issues that are present on the tax