DATE: Wednesday, July 30, 1997              TAG: 9707300458

SECTION: FRONT                   PAGE: A4   EDITION: FINAL 

TYPE: Focus 

SOURCE: BY R.A. ZALDIVAR, KNIGHT-RIDDER NEWS SERVICE 

DATELINE: WASHINGTON                        LENGTH:  173 lines

FOCUS: THE BUDGET DEAL LEADERS OF BOTH PARTIES SEE A BRIGHT FUTURE, AND THEY HOPE VOTERS WILL SEE ITTHAT WAY, TOO. BUT THE REALITY IS A GOOD DEAL DARKER: HARD CHOICES ABOUT THE BABY BOOMER'S RETIREMENT YEARS WERE PUT OFF FOR LATER.

When history takes a hard look at the budget deal between President Clinton and the Republican Congress, it may well be recorded as an elaborate political stage play, not an exercise in hard choices.

That's because lawmakers stopped short of tackling the truly historic challenge: how to cover the pension and health-care costs of the baby boom generation in retirement.

With or without the 1997 budget agreement, the combination of a strong economy and government spending controls in previous laws is shrinking the deficit so quickly that it could reach zero as early as next year, say private economic forecasters.

``Anybody who says, `We are finally balancing the budget,' that's political theater,'' said Sen. Bob Kerrey, D-Neb., an advocate of major changes in retirement programs. ``The budget will be in balance by Oct. 1, 1998. The question is, can we keep it in balance?''

Once the baby boomers start retiring, Medicare and Social Security costs could make balanced budgets disappear like a mirage. The oldest of 78 million boomers will become eligible for early retirement just 11 years from now, in 2008.

But last weekend, negotiators dropped the Senate plan to raise Medicare premiums on upper-income retirees, avoiding a significant structural change in the $200 billion-a-year program. And early on, Clinton turned down a proposal to trim cost-of-living adjustments in Social Security checks and income tax brackets. Most economists believe the index used to make those adjustments overstates inflation, causing the government to pump out too much in Social Security and collect too little in taxes.

Private forecasters say Kerrey isn't just blowing smoke when he predicts a balanced budget as early as next year.

Economist Kurt Karl of the WEFA Group in suburban Philadelphia said a balanced budget is quite likely. And Cynthia Latta, who oversees budget issues for DRI/McGraw-Hill in Lexington, Mass., estimates the 1998 deficit will be below $50 billion, ``almost within the margin of rounding error'' in a $1.7 trillion budget.

New government estimates for 1997 are due next month, and they are expected to show a smaller deficit than assumed by the budget negotiators as their starting point.

``Tax collections are very strong, the spending cuts put into place in the last 10 years are pretty effective, and the growth of medical spending has been fairly low,'' said Karl.

The budget deal actually may make it a little harder to reach balance quickly because it calls for tax breaks and spending increases that take effect right away, while postponing significant spending cuts until the year 2000 and beyond.

That sends a mixed message for the long term. It says that controlling the deficit is important, but it also says tax cuts and some spending increases are appropriate before the job is finished.

``We are giving away most of the savings in reduced taxes,'' said economist Robert Reischauer, former head of the Congressional Budget Office. ``This is a package that's wrapped in budget-balancing paper, but inside the box are large tax cuts and a significant reduction in Medicare payments to providers. That's 90 percent of it.''

Both the 1990 budget agreement under President Bush and the 1993 law under Clinton yielded bigger savings. In inflation-adjusted terms, the 1990 deal reduced the deficit by $593 billion over five years, according to Congressional Quarterly magazine. The 1993 agreement reduced it by $487 billion over five years. This year's deal would reduce the deficit by a little more than $200 billion.

The public seems to be skeptical. An ABC News/Washington Post poll earlier this month found that nearly 80 percent of Americans doubt the budget will actually be balanced in five years. An earlier survey by the Pew Research Center found that 90 percent believe Americans will be paying higher taxes in the year 2000.

But Kerrey said the 1997 budget deal ``isn't completely without merit.'' He said he hopes it will prompt Congress, the president and the public to begin considering the long-term changes that are needed in retirement programs.

The problem is basic and hard to escape: the number of retirees on Social Security and Medicare will rise from 30 for every 100 tax-paying workers now to 49 for every 100 workers in 2030. Unless benefits are scaled back, the rising tax burden would be ruinous to workers and employers, who finance Social Security and Medicare with their payroll taxes.

``We've got a set of retirement programs that we can now afford,'' said Martha Phillips, director of the Concord Coalition, which advocates reducing government benefits for people with more than $40,000 in retirement income.

``When you look out into the future,'' Phillips continued, ``there is no way working-age citizens are going to be able to finance this package of retirement benefits. If you ignore that, all the hard work on the deficit will go up in smoke.'' MEMO: THE DEAL'S WINNERS AND LOSERS

Here's a look at how some people would fare under tentative budget

agreements between President Clinton and congressional leaders:

FAMILIES WITH CHILDREN

Winners: Families with incomes up to $110,000 would get a tax credit

of as much as $400 for each child age 16 and younger next year, $500 per

child in 1999 and after. For families with incomes between about $17,000

and about $28,000, the tax credit would come as a refund to offset

Social Security and other federal taxes. For families with incomes

between about $25,000 and $110,000, the credit would be used to reduce

federal income tax bills.

Left out: Those with incomes less than about $17,000, who have no

income taxes to reduce, and those with incomes higher than $110,000, who

both parties figured can fend for themselves.

COLLEGE STUDENTS

Winners: They would get tax breaks, including a maximum $1,500-a-year

tax credit for tuition and costs for the first two years of college and

a phased-in, maximum tax credit of $2,000 a year for the second two

years of college.

INVESTORS, HOMEOWNERS

Winners: Single homeowners could make up to $250,000 profit on a

house without having to pay capital-gains tax, and couples could make up

to $500,000 tax-free. Currently, homeowners can defer the capital-gains

tax as long as they buy another home that costs at least as much, and

then can make up to $125,000 tax-free after they're 55 years old.

Also, investors in stocks, bonds and other assets would pay a top

capital-gains tax of 20 percent on their profits, down from 28 percent.

The cut would be retroactive to May 7, 1997. Any profits on investments

made after Jan. 1, 2002, would be taxed at top rate of 18 percent.

Left out: Investors might have enjoyed a further tax break -

exempting profits that only reflect inflation - under Republican

proposals. They were blocked by President Clinton.

ELDERLY ON MEDICARE

Winners: Beneficiaries would pay higher premiums, but get better

coverage for cancer screening and diabetes management, as well as more

managed-care plans to pick from. Hospital trust fund solvency is

extended until 2006. Doctors and hospitals get go-ahead to form their

own HMOs. Insurers can offer medical savings accounts to elderly.

Upper-income beneficiaries won't lose taxpayer subsidy of their

premiums. Low-income beneficiaries can get assistance to pay higher

premiums.

Losers: Providers - from hospitals, to HMOs, to home health agencies

- would see their payments scaled back. Health-care crooks will face

tougher penalties. Reformers were beaten in an effort to raise

eligibility age and increase premiums on upper-income beneficiaries.

IMMIGRANTS

Winners: Legal immigrants who are physically disabled but not yet

U.S. citizens would continue to get disability and other benefits; they

would have been cut off soon under last year's welfare bill.

DISABLED CHILDREN

Winners: They would be covered by the Medicaid program for

health-care expenses. Last year's welfare law would have cut them off.

ESTATES

Winners: Increases amount of estates exempt from federal tax, from

$600,000 to $1 million; to $1.3 million for family-owned businesses and

family farms.

AMERICAN INDIANS

Winners: An earlier proposal to subject casinos to federal taxation

was killed.

SMOKERS

Losers: The current 24-cent-per-pack cigarette tax would go up. In

2000 and 2001, the tax would increase to 34 cents per pack; after that

it would rise to 39 cents per pack.

UNINSURED CHILDREN

Winners: Lawmakers approve $24 billion to provide coverage for up to

half the 10 million children without health insurance, but it's not

clear whether the funds will achieve the desired result. Reasons: States

will have leeway on how to spend the money, and not all might go to

kids' health insurance; employers may find it easier to drop family

coverage.

TAX PREPARERS

Winners: New tax breaks will complicate existing law.

WELFARE RECIPIENTS

Winners: Democrats say welfare recipients are winners because they'll

receive at least the minimum wage when they enter the work force.

Republicans had proposed a sub-minimum wage for many jobs, arguing that

it would encourage more hiring of welfare recipients. ILLUSTRATION: [Color illustration]

JOHN CORBITT

The Virginian-Pilot KEYWORDS: BUDGET

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