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 welfare programs.
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 Security System:
"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 or dire.
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 payroll.
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 pensions.
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 and leisure."
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 generations."
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 benefits.
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 older Americans."
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 U.S. today."
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 it.
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 extreme.
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 one.
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 college.
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 children.
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 and takeovers.
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.
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