Justice Between Generations
Unless a number of trends are soon
reversed, the Baby Boomers are headed for a disastrous retirement
by Phillip Longman
Every generation requires a strategy for its old age. An odd and chilling
folktale that has been recited throughout Europe since the thirteenth century
shows how far-reaching the repercussions of such strategies can be. "The Tale
of the Ungrateful Son" begins with a description of an old merchant who day by
day grows more infirm. The old man's wife has long since passed away, and he is
miserably lonely. Fearing that he will soon lose his powers of mind, the old
man finally decides to ask his middle-aged son and daughter-in-law if he might
move in with their family in the country.
At first the couple is overjoyed, for by way of compensation the merchant
promises to bequeath his small fortune to them before he dies. But the old man
in his dotage becomes increasingly troublesome to clean and feed. Eventually
his daughter-in-law grows resentful of his constant needs and senile chatter.
Indeed, she harangues her husband night and day, until he reluctantly agrees
that the time has come to take the old man to the barn.
The ungrateful son is too embarrassed, however, to confront his father directly
with his shameful decision. He gives that chore to his own youngest child.
"Take your grandfather to the barn and wrap him in the best horse blanket we
have on the farm," he tells the boy. "That way the old man will be as
comfortable as possible until he dies."
With tears in his eyes the child does as he is told, except that, having
selected the farm's best horse blanket, he tears it in half. He uses one part
to swaddle his beloved grandfather but sets the other part aside. The
merchant's son is furious when he learns what his child has done. "What sort of
boy are you who would put his own grandfather out in the barn to freeze with
only half a horse blanket?" he shouts.
"But father," the child replies, "I am saving the other half for you."
THE amount of help that each generation requires from its children may vary,
but the demand for assistance in old age never vanishes. Today Social Security
and Medicare are all but universal programs, with the typical recipient
collecting benefits costing at least three times as much as the taxes he or she
contributed. This year nearly 28 percent of all federal spending is going to
the 11 percent of the population that is sixty-five and older. The budgets for
all of the federal government's various retirement programs, including
Medicare, are four and a half times bigger than the budgets for means-tested
Despite the huge cost of old-age subsidies, one hears only a modicum of
complaint from taxpayers. It is easy to understand why. Not only would people
in the work force, regardless of class, prefer to be relieved of direct
financial responsibility for their parents, but also they themselves expect
someday to take advantage of Social Security, Medicare, special tax breaks,
reduced bus fares, and the like. For these reasons the majority of voters are
inclined to favor generous benefits to the old. But there may be a point at
which the young say "enough" and rise up in revolt against their elders.
Today's older generation need not worry; though the cost of their entitlements
is extraordinarily high, it is bearable, because it's spread across an
unusually large working-age population. The 75 million members of the Baby Boom
generation--all those Americans born between 1946 and 1964 have good reason to
fear desertion by their successors, however. Unless many fundamental trends are
soon reversed, the Baby Boomers are headed for a disastrous retirement.
The long-term solvency of the Social Security system has come to depend on
several broad contingencies, none of which seems very likely in the lifetime of
the Baby Boom generation. Consider first how the system's pension, disability,
Medicare, and other trust accounts are financed. Since the late 1950s the
system as a whole has collected just about the same amount every year as it has
paid out. Because levels of revenue and expenditures vary from month to month
and are difficult to predict, each trust account maintains what might be called
a contingency reserve. Today these reserves are generally sufficient to cover
only a few months' worth of benefits.
It has been widely predicted that over the next few decades the pension fund
will grow substantially. The convergence of two demographic trends helps to
explain why. First, the youngest members of the Baby Boom generation are just
now entering the work force and starting to pay taxes. Second, in the early
1990s the rate of increase in the system's annual pension costs will taper off,
owing to the relatively small size of the Depression-born cohort that will then
be reaching retirement age. Barring another recession, these trends, in
combination with a series of modest payroll-tax increases scheduled to go into
effect between now and 1990, mean that by the early l990s the pension-fund
account is likely to begin to take in much more than it pays out. And it should
continue to do so until the very large Baby Boom cohorts enter retirement.
Some observers have suggested that a large reserve within the pension fund will
help the system meet the tremendous cost of the Baby Boom generation's
retirement. Unfortunately, for the same period in which the pension fund is
projected to be in surplus the Medicare trust fund is expected to incur a huge
deficit. If past experience is any guide, it is quite likely that Congress will
adopt the quick fix of inter-fund borrowing. Thus the reserves expected in the
pension-fund account will probably be used to replenish the Medicare fund, with
no means of repayment in sight.
There is another, more fundamental reason why Baby Boomers should not look to a
surplus as a panacea. By law, a surplus accruing within any of Social
Security's various trust accounts must be used either to offset the deficits of
other trust accounts or to buy debt instruments issued or guaranteed by the
United States Treasury. Almost all such transactions amount to one part of the
government writing an IOU to another. Taxpayers are ultimately liable for both
the principal and the interest on these IOUs--that is, for replenishing Social
Security's accounts. Their ability to pay inevitably depends on the condition
of the economy when the IOUs come due. Thus, in order to be of any benefit to
future taxpayers, a surplus would have to be deployed in a way that made
taxpayers richer in the future than they would have been otherwise.
Unfortunately, although some portion of federal spending, such as that which
goes to education and scientific research and development, does serve to
improve future productivity, most goes solely to meet the wants of the here and
now, and will in no sense benefit generations to come.
The outlook for Social Security cannot be determined by looking at the
operations of its various trust accounts in isolation. The architects of the
Social Security system realized as much. For example, in 1949 the economist
Eveline M. Burns, one of the prime theoreticians of the social-insurance
movement, addressed the matter of surpluses in her book The American Social
"The economic burden on any society of maintaining a large number of
non-producers at some future date can be reduced in only one way: the present
generation must take action to increase the productivity of future generations
over what it would otherwise be....The income the retired aged will enjoy in
1980 or 2000 will reduce correspondingly the current income available to the
rest of the population living at that time. If the present generation wishes
those living in 2000 to be no worse off than themselves, in spite of having to
support a much larger proportion of non-producers, they must so add to or
improve the material and human capital of that society that productivity will
increase by the extent of the additional burden."
Social Security's future depends ultimately on the broad course of American
society, and many variables come into play. These include the rates of
mortality, disability, immigration, and emigration; the birth rate; the rates
of inflation in prices and wages; the unemployment rate; trends in work-force
participation, child-rearing practices, and retirement decisions. The numbers
one assigns to these variables can make the system's prospects look either rosy
Recognizing how indeterminate any projection of the system's long-term
financing must be, the Social Security Administration (SSA) issues four
projections, which range from "optimistic" to "pessimistic." Under the most
recent "II-B" intermediate forecast--the category that President Reagan's
National Commission on Social Security Reform adopted for planning
purposes--Medicare will slip into deficit in 1993 and its reserves will be
completely depleted by 1998; the disability fund will be "exhausted" by 2034
and the pension fund by 2050. (The pension fund, of course, could go broke
earlier if its reserves are used to cover deficits in the other two funds.)
To reach these less-than-reassuring conclusions the SSA had to assume that
there will be no more recessions during the next seventy-five years, that the
economy will grow by two to three percent a year, and that after 1990
unemployment will not exceed six percent a year. The SSA also assumed that the
birthrate will rise by at least 11 percent by the year 2010 (a reversal of the
downward trend of the past two centuries) and that life expectancy at
sixty-five will increase by no more than three years and nine months.
Even the SSA's most "pessimistic" model calls for the economy to perform better
in the future than it actually has during the recent past. This model is based
on the assumptions that inflation will not rise above 5.9 percent and that
after 1990 real wages will increase by an average of 1.3 percent a year. Yet
from 1973 to 1983 inflation averaged 8.2 percent and real wages actually
declined by an average of 0.9 percent a year. The worst-case model also assumes
that the unemployment rate will not exceed 8.6 percent and that after 1989
there will be no recessions.
If the economy behaves according to this scenario, the SSA predicts, the
disability trust fund will be exhausted in three years, Medicare in seven, and
the pension fund by 2024. The SSA estimates that by 2055 the cost of these
three programs will be equivalent to 42 percent of all taxable payroll. The
present cost of the three programs is about 14 percent of all taxable
All SSA forecasts for the next century assume--with good reason--that future
pension benefits will be much less generous than today's. In amendments to the
Social Security Act passed in 1983 Congress enacted cutbacks that will lead to
sharp reductions in pensions during the period in which the Baby Boomers will
be retiring. As a result many (if not most) members of that generation will
probably pay more into the system than they collect.
In a study published two years ago in the Cato Journal, Anthony Pellechio and
Gordon Goodfellow, of the Department of Health and Human Services, calculated
the financial consequences of the 1983 amendments, given the SSA's II-B
assumptions and constant 1983 dollars. Here are some of their specific findings
for Americans now under twenty-five: All members of this generation who remain
single over their lifetimes, except for women who earn no more than $10,000 a
year, will be net losers. A single man who earns $35,700 or more will lose some
$80,000 on his "investment" in Social Security. Two-paycheck families with
incomes higher than $20,000 will likewise pay more taxes than they receive in
benefits. (Such projected losses contrast sharply with the returns enjoyed by
current beneficiaries. In 1982 the Congressional Research Service estimated
that a sixty-five-year-old worker who filed for pension benefits that year and
who had contributed the maximum taxes since 1937 would get his contribution
back in only seventeen months.)
The main reason why members of the Baby Boom generation should not expect much
from Social Security, even if the system does survive, has to do with the rules
for taxation of pensions. Since 1984 individuals whose income exceeds
$25,000--including all interest income and half the value of their
pensions--have had to pay federal income tax on the whole of their pensions.
Congress did not provide for the $25,000 threshold to rise with inflation, nor
is it likely to do so in the next century, when the financial pressures on the
system will be extreme. Given just the modest inflation rates assumed by the
SSA's II-B model, $25,000 will buy less in 2030 than $4,000 buys today. Thus
all but the poorest Baby Boomers will probably have to pay income tax on their
THE idea that Americans are bound by destiny to experience ever-greater
affluence has been an article of faith since the Second World War. That idea
helps to explain why until recently almost nobody considered that public
borrowing might encumber future generations. It seemed to follow that as long
as the economy continued to grow at a robust rate, the transfer of debt from
one generation to another would be painless. Borrowing against the future would
be like taxing the rich to help the poor.
Paul A. Samuelson, arguably the most influential economist of the postwar era,
helped to popularize the notion of borrowing against the future in a defense of
Social Security that appeared in Newsweek in 1967. "The beauty about social
insurance is that it is ACTUARIALLY unsound," he wrote.
"Everyone who reaches retirement age is given benefit privileges that far
exceed anything he has paid....How is this possible? It stems from the fact
that the national product is growing at compound interest and can be expected
to do so for as far ahead as the eye cannot see. Always there are more youths
than old folk in a growing population. More important, with real incomes
growing at some 3 percent per year, the taxable base upon which benefits rest
in any period [is] much greater than the taxes paid historically by the
generation now retired....Social Security is squarely based on what has been
called the eighth wonder of the world--compound interest. A growing nation is
the greatest Ponzi game ever contrived. And that is a fact, not a paradox."
For any historian of the postwar era, one of the great riddles to be solved is
why a generation of economists and intellectuals who had experienced the trauma
of the Great Depression became convinced during the 1950s that the country had
entered an age of unbounded growth and affluence. David Riesman, a sociologist
at Harvard University, whose commentaries on the Zeitgeist of the 1950s
were--and still are--widely appreciated, was among the first to proclaim that
the near prospect of an end to scarcity had transformed American society. In an
essay published in 1952 Riesman wrote, "Whereas the explorers of the last
century moved to the frontiers of production and opened fisheries, mines and
mills, the explorers of this century seem to me increasingly to be moving into
the frontiers of consumption."
In 1956 the historian Arthur Schlesinger, Jr., called on liberals to put aside
their concern for economic growth and to address instead what he called
"miseries of an age of abundance." Schlesinger wrote in a much-remarked essay
for The Reporter, a leading liberal journal of the day, "Instead of talking as
if the necessities of living--a job, a square meal, a suit of clothes, and a
roof--were still at stake, we should be able to count that fight won and move
on to the more subtle and complicated problem of fighting for individual
dignity, identity, and fulfillment in a mass society." Schlesinger urged
liberals to occupy themselves with such goals as "the bettering of our mass
media and the elevation of our popular culture, in short, with the QUALITY of
civilization to which our nation aspires in an age of ever-increasing abundance
The conviction that the economy would always grow and that the next generation
would have to be concerned only with matters of the spirit owes much to the
influence of the economist John Maynard Keynes. Even with the world economy
collapsing around him, in 1930 Keynes confidently predicted that through the
miracles of science and compound interest the standard of living in developed
countries would rise so high that the common man would be free to cultivate
"the art of life itself." In an essay titled "Economic Possibilities for Our
Grandchildren" he wrote that the new age would bring a reaffirmation of "the
most sure and certain principles of religion and traditional virtue--that
avarice is a vice, that the exaction of usury is a misdemeanor, and the love of
money is detestable, that those walk most truly in the paths of virtue and sane
wisdom who take least thought for the morrow."
In the 1960s the discussion of the relationship between the economy and the
good of society narrowed. For years economists had been debating what the
"optimal" rates of savings and investment ought to be. In the 1960s a more
specific question arose: By how much should social planners discount the
interests of future generations in their cost-benefit analyses of such
long-term public investments as dams and highways?
Economists argued endlessly over what they referred to as the "social discount
rate," wielding against one another such arcana as alternative utility
functions, mathematical axioms of cardinal welfare, and game-theory matrices.
The real subject of the debate, however, was not at all obscure. According to
the Yale University economist James Tobin, in a 1964 essay summarizing the
already voluminous literature, the real subject was one that "has always
intrigued and preoccupied economists: the present versus the future." Tobin put
the question this way: "How should society divide its resources between current
needs and pleasures and those of next year, next decade, next generation?"
In the beginning the idea that it is reasonable for one generation to make
sacrifices for the welfare of the next went unchallenged. But as the economy's
robust growth continued, some doubt on that point was introduced. In 1964
Gordon Tullock, an economist now at George Mason University, asserted that "the
next generation...is going to be wealthier than we are," and that to save in
its behalf would "clearly tax the poor to help the rich." In 1968 William
Baumol, an economist at Princeton University, paraphrased Tullock's description
of public investments, calling them a "Robin Hood activity stood on its head."
Apparently convinced that future generations would enjoy ever greater
affluence, Baumol wrote, "In our economy, by and large, the future can be left
to take care of itself. There is no need to lower artificially the social rate
of discount in order to increase further the prospective wealth of future
In examining the course of the debate over the social discount rate one is
struck by several ironies. The first is that precisely during the period in
which mainstream economists were moving to the view that their cohort was under
little or no obligation to undertake new capital projects in behalf of future
generations, much of the nation's existing infrastructure was being allowed to
fall into disrepair. Beginning in the late 1960s the cost of the Vietnam War
and the expanding agenda for social spending necessitated severe cutbacks in
spending for public works. From 1965 to 1980 total public capital investment
declined by 30 percent, from $33.7 billion to less than $24 billion. Measured
as a share of gross national product, the nation's capital budget fell by more
than half, according to estimates by the Council of State Planning Agencies.
These statistics betray not only a reluctance at all levels of government to
undertake new projects but also a lack of commitment to the maintenance of
existing public works. According to separate studies by the Congressional
Budget Office and Congress's Joint Economic Committee, from 1983 to 2000 the
country will need to spend more than a trillion dollars to repair and replace
existing public infrastructure. This sum is equal to more than half of the
national debt and much of it must be counted as part of the encumbrance being
imposed on the young by the old. What economists should have been asking
themselves twenty years ago, it now seems clear, was not how much people should
sacrifice to build new dams, highways, bridges, and the like but whether they
were under any obligation to maintain the improvements that had been conveyed
to them by preceding generations.
The second irony of the debate is that although subsidies to the elderly were
increasing dramatically throughout the 1960s and 1970s, that trend made no
evident impression on anyone's thinking about the reciprocal obligations
between generations. Even the philosopher John Rawls, of Harvard University,
who joined the discussion in 1971 with his monumental book A Theory of Justice,
made the implicit assumption that only one generation occupies the earth at any
given time, and that therefore the old are never repaid for the sacrifices they
have made for the young.
F. Scott Fitzgerald, famously, defined a generation as that reaction against
fathers which occurs about three times a century. In discussions of political
economy, however, the more useful distinction is between dependent youths,
working-age adults, and the also dependent retired population. In the United
States today these three generations share the stage, and each, according to
law, has its own set of rights and privileges. Members of each generation begin
life entitled to public subsidy from their elders for the cost of education if
nothing else. They end life entitled to subsidy from their
juniors--specifically, for the full public cost of health-care and retirement
The long-term interdependence of the three generations makes questions of
reciprocity, and therefore of justice, inevitable. The middle generation in any
given era either must strike a prudent balance between the demands of its
parents and the demands of its children or prepare itself for an unhappy
retirement. If, for example, the government spends so much on the elderly that
it must skimp on the education of the young or on investment in economic
growth, then when it is time for the young to govern, they may be unable to
provide their elders with enough support. Alternatively, if the government is
stingy with the elderly, the young may come to feel like the child in "The Tale
of the Ungrateful Son"--free to shirk their responsibilities to the old.
OLD age is no longer synonymous with need. According to the U.S. Bureau of the
Census, as recently as 1959 nearly a third of the population over sixty-five
was living below the poverty line. According to the latest Census figures, the
number is now 14.1 percent--a full percentage point less than for the
population as a whole. Moreover, when the market value of non-cash benefits
like food stamps, Medicare, and subsidized housing is counted, the poverty rate
among the old falls to 3.3 percent. There are nearly four times as many
children under eighteen below the federal poverty line as there are senior
citizens below it. Indeed, by some measures, the elderly as a group actually
have a higher standard of living than the working-age population does. For
example, in 1982 the average after-tax per capita income for households headed
by people sixty-five and older was estimated by the Census bureau to be $7,845.
The average for all households headed by people under sixty-five was $6,780.
Advertisers, predictably, have been quicker than social scientists to catch on
to the emergence of an increasingly large and prosperous class of older
Americans. Until recently it was a truism of the industry that companies with
"upscale" products to sell should generally avoid marketing to the elderly.
Indeed, consumers fifty and older, so the thinking went, were best ignored in
designing advertising strategies for most luxury items: people in that age
group were expected to be unhealthy, set in their ways, and reluctant to spend
what little discretionary income they might possess. Now that notion has
largely given way, in the face of the growing affluence and the new "active
life-style" enjoyed by many older Americans, including the retired.
According to Judith Langer, a marketing-research consultant who published a
report for advertisers seeking to reach the over-fifty consumer, "The glitter
is off the Baby Boom." Langer says, "The Baby Boom was once the darling of the
media, but these people, it turns out, just don't have the disposable income of
Rena Bartos, a senior vice-president of the advertising firm J. Walter
Thompson, has identified what she takes to be a new class within the population
of people fifty and older--one that she calls "active affluents." She says that
although most members of this class are still in their fifties and working, she
expects them to carry their "new values" and affluent life-styles with them
into retirement. "They're caught up in the same desire for self-realization
that affected the younger generation during the sixties and seventies," Bartos
says. "It's a desire not for total hedonism but for a full, rich life. They
don't want to just sit on the shelf. They want to travel, purchase luxury
items. Having fulfilled their obligation to educate their children, they don't
want to spend the rest of their days just building up an estate."
The same theme is echoed in the promotional material sent to potential
advertisers by Modern Maturity, the official publication of the American
Association of Retired Persons. AARP is by far the largest and most powerful
senior-citizens' lobby in the country, claiming more than 18 million
dues-paying retired and "pre-retired" supporters. While its legislative office
has consistently pressed the argument on Capitol Hill that older Americans as a
whole need and deserve more social benefits, the business staff of its magazine
has been asserting the opposite to potential advertisers.
One of the magazine's recent media kits proclaimed "50 & Over people . . .
They've got clout! Affluent * . . Aware . . . Active Buyers with over $500
Billion to spend." Inside, the copy reads, "50 & Over people are putting
into practice the credo of 'Living for Today'! They're spending on
self-fulfillment NOW (Hedonism vs. Puritanism), rather than leaving large sums
behind." AARP's advertising brochure boasts, "When viewed on a per capita
income basis . . . the 50 & Over group reveals a high income profile and
spending pattern that makes it one of the most affluent consumer markets in the
The pitch has worked spectacularly. In 1983 Adweek for the first time included
Modern Maturity on its annual list of the country's ten "hottest" magazines.
During the previous recession years Modern Maturity's advertising revenue had
surged ahead by 46 percent, with a 21 percent gain in ad pages.
Ironically, many firms have decided that the best way to reach this new
affluent class of older Americans is to offer senior-citizen discounts. Eastern
Airlines, for example, has a fare policy under which a customer sixty-five or
older can buy a year's worth of travel over all its routes for $1,299--hardly
the sort of discount likely to benefit old people who are truly in need, but a
good marketing strategy for winning over "super citizens," as some advertisers
now label the comfortably fixed elderly. Banks, having become aware of the
tremendous pool of savings controlled by older Americans, now routinely offer
such benefits as free checking and reduced fees for safe-deposit boxes to
customers sixty-five and older. Of course, such discounts must come at least
indirectly at the expense of younger customers.
WITHIN a family transfers of wealth between the generations are usually based
on need. A rich father is not likely to receive payments from his children
merely because he has reached his sixty-fifth birthday. In contrast, almost all
federal benefits to the elderly are distributed with no consideration of need.
Yet as the senior-citizens' movement constantly stresses, many retirees
continue to be active, healthy, creative, and useful until very advanced ages.
Moreover, as we have seen, many are affluent, as well. Why, then, should we
persist in subsidizing them as generously as we do? More than a tenth of all
Social Security spending goes to households with independent incomes totaling
$30,000 or more a year. Much of this independent income is in the form of
interest payments and capital gains. To demand across-the-board benefits merely
on the basis of age is in effect to advocate welfare for the rich.
Americans have good reason to make such a demand, however. From the start
politicians have described Social Security programs as forms of insurance--a
conceit in no sense justified by the actual financial mechanisms underlying the
system. Naturally, the elderly have based their retirement strategies on the
assumption that the government would keep its promises to them, come what may.
It would not be right to change the rules of the game on those already
collecting or soon to collect benefits, however expensive it may be to keep
those rules in force.
Many younger readers are likely to ask, Why should the burden of reform fall
only on us and our children? Why should the old escape the consequences of
their own shortsightedness as a generation? Whether or not one can see a moral
justification for preserving the older generation's entitlements, one should
consider a purely political reason for doing so. The power of the Gray Lobby is
overwhelming. No reform is possible unless today's senior citizens are largely
exempted from sacrifice.
In any case, the challenge for members of the Baby Boom generation will be not
how to meet the demands of their parents but how to provide for their own
retirement without putting an impossible economic burden on their children. In
the 1960s economists called into question the need for one generation to
provide for the future well-being of its descendants. Today the more pertinent
question is how much one generation can rightfully borrow from its descendants
to subsidize its own consumption.
There are no purely technical solutions to the enormous deficits looming
everywhere in the social accounts of the government. According to Albert M.
Wojnilower, a prominent economist and the managing director of The First Boston
Corporation, in New York City, "Our problem is not an unbalanced federal but an
unbalanced national budget. As a nation and as individuals, we are probably
committed to expend more in real resources than we will be able to
produce....It is comforting to talk about a bloodless and abstract budget,
rather than to face the terrifying ethical and societal issues that have made
the budget what it is."
The deficits arise ultimately from demographic shifts that have thus far not
been accommodated by the major institutions of the welfare state. For example,
on the whole Baby Boomers started working and paying taxes much later in life
than did members of the previous generation. Eighty-five percent of those now
between the ages of thirty-four and thirty-eight graduated from high school, in
comparison with only 38 percent of their parents. The majority of Baby Boomers
have completed at least one year of college. Now, consider the economic
implications of this trend in conjunction with increasing life expectancy.
A thirty-five-year-old man can expect to live another thirty-nine years. If he
remained in school until he was nineteen and if he retires at what is now the
most common age--sixty-two--he will spend nearly half his life free from labor.
Can such a person, in any real sense, pay his own way through life? To do so,
he must produce as much during just half his lifetime as he consumes in all of
This example hints at the dimensions of our fiscal predicament. If the typical
middle-class citizen winds up consuming more over his lifetime than he
contributes to the growth of the economy, where will the resources come from to
settle his account? The shortfall will inevitably be charged to members of the
next generation, and will reduce their standard of living.
Some, no doubt, will advocate higher taxes for the rich as a solution. But such
taxes alone are unlikely to yield enough revenue to cover even the reduced
entitlements now promised to the Baby Boom generation for its old age. Neither
is it likely that the country will be able to cover the shortfall by further
borrowing. Already the size of the national debt is limiting our options as a
society. This year the interest alone is expected to consume 15 percent of the
federal budget. Given current interest rates, every dollar the government
borrows today will cost taxpayers approximately $24 in interest over the next
thirty years. Right now government borrowing is responsible in large measure
for the country's high interest rates and overpriced dollar; the strength of
the dollar, in turn, contributes to the huge deficit in our balance of trade.
Leaving aside whether we can borrow against future resources without hurting
the next generation, we cannot do so without hurting ourselves.
The demographic shift most important to long-term deficits is the dramatic
decline in fertility rates for members of the Baby Boom generation. Much more
than any increase or decrease in longevity, fertility rates affect the eventual
age distribution of a population. In recent years the American fertility rate
has ticked up slightly, but it is still close to the record low, reached in
1976, of 65.8 live births per 1,000 women of childbearing age. The low
fertility rate guarantees that the median age of the American population will
rise dramatically in the years ahead--barring, of course, an enormous increase
in immigration. As the population ages, the demands on the budget will become
Today the number of people sixty-five and older is growing twice as fast as the
population as a whole; the number eighty-five and older is growing more than
five times faster. Still, the burden of supporting the old is manageable,
because there are now 3.4 workers to help support each retiree. By 2030,
however, that ratio is expected to fall to two to one.
Some people have optimistically observed that the cost of supporting the Baby
Boom generation through retirement may be offset, at least in part, by a
decrease in expenditures for the young as they decline in numbers. But if
current spending patterns persist, we will be left nevertheless with a huge
gap. The most recent study on the subject to date, by Robert Clark, an
economist at North Carolina State University, was published in 1977. In 1975,
according to Clark's estimates, total per capita expenditures for the elderly,
at all levels of government, exceeded the amount spent for children seventeen
and under--including the total spent on public education--by more than three to
The imbalance in social spending for the young and for the old has an
additional implication worth pursuing. It means that a couple can expect little
relief from the expense of raising children, and may therefore choose not to
have any. That expense is very high. Thomas Espenshade, in a 1983 study for The
Urban Institute, a nonprofit center for the study of social policy, in
Washington, D.C., calculated that the typical middle-income family of four, in
which the wife works part-time, spends $82,400 (in 1981 dollars) to care for
each child until the age of eighteen. The figure rises to around $100,000 per
child when such a family sends the chil`ren to a four-year public university or
These figures reveal only part of the problem. From 1960 to 1982 the
labor-force participation rate for married women in the prime childbearing
years of twenty-five to thirty-four more than doubled, from 29 percent to 62
percent. Yet despite all this additional work on the part of young wives the
real after-tax household income for the age group declined by 2.3 percent. No
wonder, then, that the birthrate is so low. Young couples have reason to feel
that they cannot afford to raise a family. Even though two paychecks have now
become the norm among today's young couples, their standard of living is
actually lower than that enjoyed by their counterparts in the early 1960s--when
typically only the husband worked, and the wife stayed home to raise
So it is that while the Baby Boom generation's prospects for retirement hinge
on population growth, too few young couples feel able to have families. Today
the obligation of the middle generation to the old is almost fully socialized,
while the cost of raising the next generation falls, for the most part, to
individuals. If that cost were offset by more generous subsidies, the birthrate
would almost certainly rise and the trend toward a disproportionate number of
old people in the population as a whole would be reversed.
The elderly, in laying plans for their retirement, bet that young Americans
today would be much richer than they have turned out to be, and also less
healthy and more inclined to raise large families. Those errors probably will
not--and should not--cost senior citizens their entitlements. But they do point
up the need for young Americans to be more prudent in devising their own
institutions for retirement. For Baby Boomers especially, the margin for error
is very small.
The augmentation of capital is central to the implicit contract between
generations, and members of the Baby Boom generation will neglect that at their
peril. Throughout history it has been the practice in most cultures for people
to strive during their middle years to build up or hold on to some store of
value, such as land or gold, for the eventual purpose of providing their
children with a legacy. Their chances of being supported and respected in old
age are thus much improved.
A British folktale, for example, tells of a poor old man who was mocked by his
sons, until a friend, hearing of his plight, lent him a bag of coins for a day.
The old man allowed his sons to discover him at the kitchen table counting what
they took to be his secret treasure, and thereafter they all treated him with
proper veneration until he died.
In an agrarian economy, such as that which prevailed in colonial New England,
the old could often retain enormous power over their middle-aged children by
refusing until the last possible moment to convey title to their farmland.
"Better it is thy children should seek to thee, than that thou shouldst stand
to their courtesy," went the common advice to the aged. As the social historian
David Hackett Fischer, of Brandeis University, has observed, in colonial New
England "land was an instrument of generational politics--a way of preserving
both the power and the authority of the elderly." According to Fischer, "Sons
were bound to their fathers by ties of economic dependency; youth was the
hostage of age."
With industrialization the balance of power between the generations shifted.
Factory workers could start young and achieve a tolerable standard of living
without first inheriting an estate. But by the same token, having gained this
freedom, most could not save enough out of their wages to provide for their own
turn at being old.
Under the rules of the welfare state the remedy for this problem has been to
allow each generation to tax its children, through such programs as Social
Security and Medicare. Because these programs are not capitalized, it might
seem that the social contract between the generations has been fundamentally
altered: each generation appears simply to appropriate by law some share of the
next generation's wealth, without providing any compensation.
Yet, as we have seen, the long-term solvency of these programs depends on
robust economic growth. Barring extraordinary good luck the only way any
generation can bring about such compounding prosperity for its children is to
build up capital and invest it wisely. In effect, then, the terms of the social
contract have remained the same. Each generation, in exchange for support in
old age, still must provide its children with a legacy. All that has changed is
that the necessary sacrifice falls not just to the individual but to the whole
of his generation.
The Baby Boom generation's long-term interests will be served best by policies
that promote capital formation and productive investment. In the short term,
the implementation of such policies would oblige Baby Boomers to rediscover the
ethos of thrift. For one thing, financial capital by definition is deferred
consumption. For another, as an increasingly large share of the pool of savings
was channeled to productive uses, there would be less credit available for
consumer borrowing. Yet the sacrifice would have its rewards. Baby Boomers
would have at least the moral satisfaction of attempting to pay their own way
as a generation. And they would stand a good chance of bringing about a truly
affluent society for themselves and for their children.
THERE are many ways to organize such an effort, and I do not mean to suggest
any one. Advocates of industrial policy, who seek greater government investment
in either high-tech or declining industries, may find attractive the idea of
purposefully building up large reserves within Social Security's pension fund
and investing the assets not in Treasury notes but productively, in publicly
selected industries. The fact that an entire generation's retirement benefits
would be linked to the success of the investments would serve as a powerful
political check against boondoggles or special-interest bailouts. But all of
the hazards of a large socialized economy would come into play.
Alternatively, Social Security and Medicare might be replaced gradually by
increasingly generous provisions for individual retirement accounts, and at the
same time taxes on savings and capital gains might be abolished or cut back.
This approach should appeal to more-conservative members of the Baby Boom
generation. If this strategy were undertaken, however, it would be important to
make sure, through the mechanism of tax incentives, that the resulting pool of
capital was used for productive purposes, rather than merely to finance mergers
Whatever strategy is adopted, there must still be generous public provision for
the elderly poor. It does not take much political savvy to realize that an
entitlement program based on need runs a much greater risk of being killed or
inadequately funded than does one that distributes benefits to all classes. But
as we have seen, providing benefits to the old regardless of need is bound to
impose an intolerable burden on the young--principally because there will be so
many old people to support in the next century.
Is there any way around this predicament? One means of compromise would be to
raise the retirement age higher than Congress has already done (it is scheduled
to be sixty-seven by 2027). At first glance this proposal seems fair. The Baby
Boom generation will probably be longer-lived than any that has gone
before--and thus will spend a longer period in retirement. But whereas means
testing presents a potential threat only to the poor, setting the age
requirement higher is all but certain to have unhappy consequences. The poor do
not live as long as middle- and upper-class people do. Black males born in
1982, for example, had a life expectancy that year of 64.9 years. In contrast,
white males born the same year could be expected to live past seventy-one.
Distributing benefits on the basis of age alone tends to work to the advantage
of those least in need. Raising the retirement age under such a system only
compounds the inequity.
Giving to each according to his circumstances rather than his age seems the
fairest principle. Such a policy may encourage some people to be spendthrifts,
but if we provide a strong incentive to save for retirement, the problem should
be manageable. As currently written, the tax code rewards large borrowers, by
allowing full deductions of interest payments, and discourages most forms of
saving. Given the Baby Boom generation's long-term need for capital formation,
this is a perverse arrangement.
What becomes of Social Security, Medicare, and other retirement programs in the
future is not an issue for senior citizens. It is an issue for their children
and grandchildren to decide, before time runs out.
Copyright © 1985 by Phillip Longman. All rights
The Atlantic Monthly; June 1985; "Justice Between Generations"; Volume 255,