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30 July 2012

Generational Warfare

Nick Gillespie and Veronique de Rugy recently wrote a fantastic article on one of the largest transfers of wealth in world history.  It is being taken from the young and given to the baby boomers in the form of Social Security and Medicare and it is getting larger and larger every year.  I would encourage you to read the whole thing, but here are some highlights:

Flash forward half a century, and the boomers who once sang along with Dylan have become the reactionary elders, clinging to their power and perks at the literal expense of everyone younger. There’s a new generation gap opening up, one that threatens to tear apart the country every bit as much as past confrontations over war, free love, drugs, and sitar music. This fight is about old-age entitlements and whether the Me Generation will do what’s right for the country and stop sucking up more and more money from their children and grandchildren. 

In a 1999 address to the National Education Association’s Women’s Equality Summit, then-First Lady Hillary Clinton was even more explicit in celebrating her own generation’s freedom from the burdens of traditional caretaking responsibilities. “Were it not for Social Security, many of us would be supporting our parents,” intoned the author of It Takes a Village. “We would take them in; we would do what we needed to do to try to provide the resources they required to stay above poverty, to live as comfortably as we could afford. And that would cause a lot of difficult decisions in our lives, wouldn’t it?”
This rhetoric about entitlements freeing the young ignores the fact that they are hit with the cost of supporting their elders in every paycheck. Furthermore, when repurposing lines first uttered a half-century ago, today’s politicians are also ignoring some very good news: The oldest among us are in remarkably good shape compared to graybeards of previous generations. 

Seniors have more stuff and more wealth. According to 2010 combined data from 15 federal agencies on population trends, economics, and health issues, seniors’ average net worth as of 2007 had increased almost 80 percent during the previous 20 years. The same sort of improvement has not spread to all age groups. In fact, the data show that younger Americans are losing ground. 
In 1984, reports the Pew Research Center, households headed by people 65 or older had 10 times the wealth of households headed by people under 35. By 2005—before the Great Recession hit—the gap had increased to 22 times, and by 2009 it was 47 times. In 2010, 11 percent of households headed by people 65 or older were officially under the poverty line. For households headed by someone under 35 years of age, the figure was 22 percent....That older households are wealthier than younger ones is not surprising, and it is no cause for concern in itself. Elderly Americans have had a lifetime to amass savings and assets and to earn money from interest and investments. By the time they reach 65, most Americans also have lower living expenses. The kids are out of the house, and the house is more likely to be paid off (or to cost less due to inflation). In their new book The Clash of Generations, economists Lawrence Kotlikoff and Scott Burns show the cost of living for households of different sizes and ages varies dramatically. The cost of living for a married couple with children ages 6 to 17 is at least twice the cost for a retired couple. And these numbers underestimate the gap between retirees and married parents since they don’t include expenses such as saving for college, orthodontic treatment, and vacation time.
This is not to say that some seniors aren’t seriously struggling. But to assert that younger Americans benefit from having the government take money from their current wages and give it to their parents obfuscates obvious points about where that largess comes from—and whether it will exist when today’s 50-, 40-, or 30-year-olds retire.

Social Security’s various trust funds, according to its own trustees, will be depleted of all reserves by 2033 and won’t be able to take in anywhere near enough cash to pay its obligations. Medicare’s major trust fund, which covers hospital benefits, is scheduled to run dry in 2024. In addition, both programs already contribute to the deficit due to massive borrowing that will only get bigger and more expensive. Contrary to common belief, the various trust funds for Social Security and Medicare aren’t filled with gold coins or even the money collected from taxpayers over the years. Instead, they are filled with IOUs or promises by the government to pay back whatever has been taken. 

During his famous 1964 nominating speech for Goldwater, Reagan asked, “Can’t we introduce voluntary features that would permit a citizen to do better on his own?…We are against forcing all citizens, regardless of need, into a compulsory government program.” 
Yet by the 1980s, President Reagan called preserving “the integrity of the Social Security system” the “highest priority of my administration.” In an era of bitter partisanship and division, “one point that has won universal agreement,” Reagan declared, was that the entitlement “must be preserved.”

When Social Security first started cutting checks, America was still in the throes of the Great Depression. Retirement was a rare and wonderful thing, as most people worked pretty much until the day they died (the average life expectancy at birth was 47.3 years in 1900; 68.2 years in 1950s; and 78.5 years in 2009). When Medicare was created, seniors were more likely than the average American to be poor. Although neither of those things is true anymore, spending as a percentage of federal outlays on both programs continues to grow and shows no signs of slowing down.

In 1940 there were 159 workers for each beneficiary. Today there are fewer than three. Last fall Mitt Romney, whom the Obama administration accuses of wanting to “dismantle” old-age entitlements, attacked Texas Gov. Rick Perry during a Republican presidential debate for calling Social Security “a Ponzi scheme,” a scam in which current investors are paid profits from new investors, not out of actual returns. “The term Ponzi scheme is over the top, unnecessary, and frightening to many people,” Romney said. That may all be true, but it doesn’t change the reality that current workers are indeed paying for current retirees, not for their future selves, which means that as the number of contributors falls, payouts cannot continue at the same rate. The only options are to reduce benefits, increase contributions, or some combination of both.

Current law holds that when the trust funds are depleted, benefits must be cut to the level of payroll tax revenue. As it stands, that would amount to a 25 percent haircut or, in current dollars, $307 off the average retirement check of $1,229.

Last year C. Eugene Steuerle and Stephanie Rennae, researchers at the liberal Urban Institute, calculated what Americans at various levels of income (high, average, and low) and in various types of households (single or married) can expect to pay into and receive from Social Security and Medicare over the course of their lifetimes. For Social Security, the calculations assumed that individuals retire at the age when full benefits kick in (originally 65 but rising past 67 under current law) and that Medicare payments start at 65. The main findings are both highly informative and deeply dispiriting.
Consider the Social Security numbers first. A single man earning the average wage ($43,500 in 2011) who retired in 1980 would have paid a total of $96,000 in Social Security taxes and received lifetime benefits of $203,000, or about 211 percent of contributions. A single man earning the average wage but retiring in 2010 faces a vastly different situation: He would have paid $294,000 in taxes to receive benefits of just $265,000, or about 90 percent of contributions. For the same person retiring in 2030, taxes of $398,000 yield $336,000 in benefits, or just 84 percent of contributions. 

We must reform the current system, starting now. The most obvious, effective, and just approach is to end Social Security and Medicare and replace them with a true safety net that would help poor Americans regardless of age. To the extent that seniors qualify for income supplements, food stamps, and other transfer programs, they should be added to those rolls. They can also be added to Medicaid rolls (currently about 9 million seniors are so-called double-dippers, receiving benefits from both Medicaid and Medicare). There is no reason to have separate programs for the elderly and the poor when the real distinction should be not age but ability to pay. Payroll taxes, the most regressive taxes on income, should be scrapped, freeing up huge amounts of money for Americans of all ages to spend and save as they see fit. As Americans start to think seriously about saving for their retirements, long-term investment will boom, and so will insurance planning; generations will be forced to recognize that they are connected not via impersonal and punitive payroll taxes but through shared assets and household expenses. 
The popular counter-argument—that current and future beneficiaries have paid into these systems and are thus “entitled” to Social Security and Medicare— holds no legal or moral water. In the 1960 caseFlemming v. Nestor, the Supreme Court ruled that, contrary to the rhetoric surrounding Social Security, the program is not an actual retirement system in which participants maintain legal claims to the contributions they’ve made or the assets they’ve accrued. While it is terrifying for all of us to consider losing the money we’ve paid into Social Security, the fact is that we already have. 

It is hard to know which is more depressing: the punishing and sure-to-rise price that younger Americans are forced to pay for a system that steals from the relatively poor to give to the relatively rich, or the smugness with which champions of this patently unfair system insist on its righteousness. In his March speech in Florida, Vice President Biden told stories of building a new house that included living quarters for his parents, who refused to move in. Biden explained that his parents and other seniors value their “independence” and “dignity” more than anything. His mother, he said, was representative of seniors in that she wanted to be able to pay her own way at check ups with her doctor. “She didn’t want to ask her kids.” 
In Biden’s strange moral universe, his mom should be admired for wanting to get medical care on the dime of strangers rather than from her own family. The vice president was trying to defend old-age entitlements, but his example is the quintessence of what is wrong with the current system: It gives to those who already have much by taking from those who have little.

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