Facing Facts Alert 17

Volume II ( Number 5 May 2, 1996

Facing Facts Alert 17

The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
Volume II ( Number 5  May 2, 1996)


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

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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