(FORTUNE Magazine) – THINK OF the American Association of Retired Persons as grandfather, very big and very rich. AARP has an astounding 28 million members, almost 12% of the U.S. population, and annual revenues of about $200 million. When grandfather taps his knife on the water glass, as he is doing now, everyone at the table pays attention. It could be the start of an expensive new project, and everyone else might have to give up at least a second helping of dinner. AARP will spend up to $8 million in the 1988 election campaign on TV spots and direct mail. At the top of AARP's agenda: expanding Medicare, financed partly by the taxpayer, to pay for much of the more than $40 billion a year now spent to care for the disabled elderly in nursing homes or at home. As recently as a few weeks ago it looked as though AARP preferred private- enterprise solutions, including an enlightened scheme that would enable the elderly to convert equity in their homes into income without selling the house -- in effect, a reverse mortgage. But in late January the board fired the champion of that strategy, executive director Jack Carlson, 54. The board takes the view that most of the money for long-term care should come from a federal program. Business solutions, like the equity plan, should be used only to fill gaps. In firing Carlson, AARP has strayed from its traditions. The organization was born conservative, relying on private enterprise rather than government for help. In large part it is a business itself, a golden-years nonprofit conglomerate. AARP publishes a bimonthly magazine, Modern Maturity, with a circulation bigger than that of Reader's Digest and annual advertising revenues of about $27 million. It takes in more than $50 million a year as the middleman for the six million members who buy health insurance from Prudential Insurance Co. Although AARP won't reveal how much, it collects royalties from a mail-order pharmaceutical house it founded in 1959.

Ethel Percy Andrus, a retired high school principal, started the organization 30 years ago out of her house in Los Angeles. Her rather limited aim was to enable people over 65 like herself to buy health insurance. She died in 1967, and leadership passed to Cyril Brickfield, a former deputy administrator of the Veterans Administration. Brickfield, who retired last fall at 68, added tours and other popular services. AARP members can choose among 200 trips a year. The rolls grew to ten million by 1977. But in the late 1970s members began to complain that AARP was dominated by Colonial Penn. The insurance company was the sole underwriter of AARP's medi-gap policies, which pay for long hospital stays and other items Medicare does not cover. The critics claimed that without competition Colonial Penn had no incentive to keep rates down. Membership stalled and AARP began to run a deficit. In 1980 the organization put its insurance contract out for bids; Prudential offered more attractive coverage than 61 rivals. AARP also raised annual dues from $3 to $5 and in 1983 dropped eligibility from age 55 to 50. It vigorously seeks new members through the mail as soon as prospects turn 50. Applications now flood in at the phenomenal rate of 8,000 a day, most no doubt from those interested in the enticing discounts members get from hotels and car rental agencies. Under Hertz's corporate rate, employees of Time Inc. (publisher of FORTUNE) can rent a midsize car for $48 a day with 100 free miles. An AARP member pays $41 a day and gets unlimited miles. One-quarter of AARP's members are not retired. Local chapters can muster 400,000 volunteers to help members fill out income tax returns or testify before state legislatures. The most dedicated leaders work their way up to positions on the national board of directors. The 22- member board oversees 1,000 employees (average age: 41), most of them in the eight-story building AARP owns on Washington's K Street, the epicenter of lobby power. AARP entered big-time politics late and hesitantly, recognizing that partisanship can rip its loosely knit fabric apart. A survey four years ago revealed that 40% of the members are Democrats, 40% Republicans, and the rest independents. By expressing a presidential preference AARP would presumably make half its members unhappy. Playing it safe, AARP declines to finance or endorse any candidate. It wasn't until the early 1980s that AARP started to speak out strongly on public policy issues, partly because of needling by such old-age activists as the feisty Margaret Kuhn, 82, founder of the Gray Panthers. ''AARP made a hell of a lot of money selling insurance and conveying the idea that old age is a time for having fun and taking trips,'' says Kuhn. ''It's good to see they now have a social conscience.'' Still, AARP has been cautious about tossing its huge weight around, size compelling it to be a plant-eating brontosaurus rather than a flesh-tearing tyranosaurus. Economist Milton Friedman makes the point that a lobby that becomes too big loses its effectiveness. The maximum size is 6% of the population, he says, big enough to make politicians take notice, but small enough so the cost of the goodies the group seeks can be spread painlessly across the populace as a whole. AARP is already twice that size and plodding forward warily. As board chairman C. Kermit Phelps, 79, a retired psychologist from Kansas City, puts it, ''We don't want to strike fear into anyone.'' ON MANY OLD-AGE issues, AARP has been the voice of moderation and compromise. Take the case of the self-styled Notch Babies, the 6.5 million persons born between 1917 and 1921. The Notchies argue that persons born just ahead of them, between 1910 and 1916, get greater Social Security benefits and that their age group represents a gap, or a notch, in the system. They are right, but only because of a mistake. When Congress corrected the inflation allowances for Social Security recipients in 1977, it accidentally gave more money to the older group. Though the Notchies do as well as those born after 1921, they argue that in fairness Congress should make a mistake for them. The cost could run to about $80 billion over five years, according to AARP, which has concluded that the Notchies have no case. One powerful lobby for the old disagrees: the National Committee to Preserve & Social Security and Medicare, known as the Roosevelt group for short, after founder James Roosevelt, 80, FDR's oldest son. The Roosevelt group, quick to exploit anxieties and amplify demands, has urged its 4.8 million members to barrage candidates with postcards in support of the Notchies. Even opponents of AARP respect the quality of its research and the way it is presented without melodrama. ''Let the Gray Panthers make impassioned pleas before Congress,'' says Phelps. ''We want to go up to the Hill with data.'' Eighteen lobbyists buttonhole congressional and Administration aides on dozens of issues, including Medicare insurance against catastrophic illness and portable pensions that employees can take with them to new jobs. Although AARP is not shrill, it is stubborn, sometimes unreasonably, in resisting cuts in Social Security benefits. Democratic presidential candidate Bruce Babbitt may be on to a good idea: A retiree with a taxable income of more than $25,000 ought to be taxed on all his Social Security benefits, not just half as he is now. AARP rejects the proposal. When Administration and congressional leaders got together in November to try to cut the budget deficit, AARP was in there pitching to preserve Cost of Living Adjustments. ''If those COLAs had been delayed, 330,000 people would have been pushed below the poverty line,'' says legislative director John Rother, 40. At any rate, COLAs were not cut, and the whole issue has become yesterday's battle. Representative Claude Pepper ended it, at least for the time being, when he threatened to demand a roll call vote if the House decided to consider holding back COLAs. No House member wanted to be on record voting down the elderly's beloved COLAs. THE NEXT FIGHT is likely to be over government-financed long-term health care that would help the elderly avoid financial disaster brought on by maladies such as strokes and Alzheimer's disease that put people in nursing homes for years. The cost of care will rise at an accelerating rate as the number of people who live beyond 80 increases. So enormous is the expense that the government will certainly have to bear part of it, especially for those who have small incomes and few assets. But many older people have substantial incomes and are rich in assets. By some estimates Americans over 65 have $1 trillion of equity in their homes. Those assets ought to be tapped. Some elderly advocates, such as the Gray Panthers, are inclined to dismiss personal resources as inconsequential and want the federal government to assume the expense. Margaret Kuhn would find the money in the military budget, even though defense spending is already being squeezed. Despite its emphasis on government solutions, AARP to its credit still promotes private remedies. Last year AARP helped Prudential shape a long-term health care policy, which has attracted 33,000 members so far. A subscriber who enlists at age 50 pays $30.50 a month, and if he becomes disabled at any age, his policy will pay, after 90 days of care, $50 a day for up to three years in a nursing home and $25 a day for home care. Staying at home is usually difficult because most houses are not designed for disabled people to get around easily. So AARP is urging homebuilders to install grips and slip-proof surfaces in tubs and showers and to replace trendy globular sink fixtures with handles that people with arthritis can turn. When the genial Cyril Brickfield retired as executive director, AARP hired Carlson, former chief economist for the U.S. Chamber of Commerce. A talented organizer, Carlson in the early 1980s had turned the sprawling National Association of Realtors into a potent and focused lobby. Carlson is a soft- spoken but bear-sized man with an ego to match. Why the low-keyed AARP picked anyone so highly charged is a mystery. ''He put his best foot forward in the interview,'' says board chairman Phelps. FROM THE START Carlson asserted his Republicanism: Private solutions should come first and public programs second. He was particularly enthusiastic about the reverse-mortgage idea. American Homestead Mortgage Corp. of Mount Laurel, New Jersey, markets this arrangement in six states, offering, for example, a 75-year-old widow with a $100,000 house as much as $500 a month. If she dies at 80, say, her heirs sell the house and repay American Homestead five years of stipends, $30,000, plus interest compounded at a rate to insure the company a solid profit. Her heirs keep whatever is left. If she lives into her 90s, the amount paid out could exceed the value of the house. The company would lose money since the heirs do not have to make up the difference. Most financial institutions are chary of the plan because they could drop a bundle if they happened to sign deals with a lot of hardy souls. Carlson believed that by endorsing and marketing the plan, AARP could have provided lenders an ocean of clients, so the risk would be spread. $ After only three months AARP fired him. Carlson had tilted too far to the right for the cautious, centrist AARP, although he might have succeeded had he been more diplomatic. ''He didn't listen very well,'' says a senior staff member. ''The values here are education and caring, not cost benefit analysis.'' Without Carlson the reverse mortgage might not get the push it needs. The idea turns some at AARP timorous because old people, who are the members, resist plans that reduce their equity, even though their security is not threatened. Instead AARP stresses that the way to finance long-term care is to expand Medicare through an increase in inheritance and Social Security payroll taxes. The old would likely have to pay higher Medicare premiums. And as the righteous often do, AARP suggests that tobacco and alcohol be taxed some more as well. But making payroll taxes and sin taxes do the work that reverse mortgages might handle is not social justice. Why should employers, wage earners, and whiskey drinkers be nicked so that an 80-year-old widow can leave a house to her 50-year-old son?