June 23, 2017

Facing Facts Alert 17

Volume II ( Number 5 May 2, 1996

Facing Facts Alert 17

FACING FACTS The Truth about Entitlements and the Budget A Fax Alert from The Concord Coalition Volume II ( Number 5 May 2, 1996) LISTEN UP, GENERATION X According to Richard Leone's "Don't Worry, Generation X" in Tuesday's Washington Post, the aging of America is a nonproblem. Leone, president of the Twentieth Century Fund, repeats two old canards that have recently cropped up in a number of op-eds. The first is that future workers will face little extra "dependency" burden because the growth in the number of seniors will be mostly offset by a relative decline in the number of children. The second is that rising incomes will in any case make the extra dollar burden easily affordable. Leone concludes by declaring that an older America will be "grayer, but not poorer" and by tut tutting the young for whining about nothing. There's a problem with this argument: It's wrong. The Dependency Fallacy Let's start with the first point. A stable ratio of dependents to workers does not mean that America's aging will impose only a minor extra burden on tomorrow's workers. Leone's demographic numbers alone say nothing about the vastly greater cost of supporting each senior. At the federal level, the ratio of per capita spending on the elderly to spending on children is eleven-to-one. Even including state and local spending, and hence the nation's entire education budget, the ratio is at least three-to-one and maybe as high as five-to-one in favor of the elderly. (There are no up-to-date numbers on state and local spending by age group.) Yes, families spend a lot of their own money on their kids, and if we took this into account it would narrow (but not eliminate) the gap in dependency costs. But why should we? In our economy, there's an obvious difference between personal spending and public spending (for one thing, only the latter runs up the national debt). And in our political system, there's an obvious difference between compulsory transfers and voluntary giving. Some might argue that personal spending on a dependent is not really voluntary. But this doesn't wash. Perhaps some people may regard helping out grandma as an other-than-voluntary burden. But this is not ordinarily the case with children, since the decision to raise a family is usually a matter of choice. A premise that seems to underlie Leone's argument is that family transfers adjust dollar for dollar in response to public transfers. Thus, increasing a public benefit leaves no one better or worse off. But this flies in the face of the presumed purpose of public benefits, which is to take from workers and give to dependents in precisely those cases where workers don't give the money themselves. Otherwise, why have the programs? Then there is the most profound issue of all. To the dependency theorists, any worker income spent on someone other than oneself is a worker burden regardless of whether the transfer (or gift) represents saving for the future or paying off the past. Leone is perplexed that Americans look forward to the senior boom with anxiety but didn't consider the 1960s an era of "deprivation," even though the total demographic dependency ratio was higher in 1960 than it will be in 2030. The difference is that thirty-five years ago adults were sacrificing to build the future while thirty-five years hence they will be sacrificing to reward the past. The Income Fallacy As for the other point, it's simply not true that a growing economic pie will allow future workers to enjoy a rising living standard while honoring today's entitlement promises. As we pointed out in a recent alert, the rising cost of just three programs social Security, Medicare, and Medicaid for seniors will, under the Social Security Administration's official intermediate scenario, erase all growth in real after-tax worker incomes between now and 2040. And this is an optimistic scenario that assumes a one-third improvement in productivity over the record of the past twenty-five years. Under SSA's high-cost scenario, real after-tax incomes would suffer a catastrophic decline of 59 percent. Listen up, Generation X: You've got good reason to worry about your economic future, and you'd better start doing something about it. Perhaps the place to start is to set up a Twenty-First Century Fund.


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