Stamatakis: Retiring Boomers to receive undeserved fruits

By Nick Stamatakis

Everybody loves to believe that a secret person or group is running the country. The Left likes… Everybody loves to believe that a secret person or group is running the country. The Left likes to believe it is wealthy industrialists — shady figures who dole out campaign cash to buy judges and legislators. The Right would have us believe that it is unions and the media who are cohorts in a scheme to direct policy.

But as intriguing as these theories are, neither side wishes to reveal the true puppet masters — the elderly and soon-to-be elderly. It is Mabel from Mobile, Ala., and Ezra from Bethesda, Md., who actually direct policy in this country, both through organized lobbying groups like AARP and by sheer voting power. And while it isn’t like the elderly don’t deserve to be cared for, their power and well-being comes at the cost of our future prosperity.

A quick overview of the numbers shows how this power has been transformed into state and federal budgets: About 9 percent of our gross domestic product consists of entitlement payments to the elderly, according to the Congressional Budget Office, while roughly 5 percent of GDP goes to children.

Now it isn’t that spending more on the elderly is necessarily a bad thing: Health care is expensive, after all. Plus, the whole concept of spending extra actually works very nicely in the halls of policy schools, where politics don’t intervene. Working adults just sacrifice some of their present earnings to provide support for people in these groups — young and old — who either can’t or don’t earn income themselves. For Americans, these payment vehicles are property taxes to go toward schools and payroll taxes to go toward senior care.

When everybody pays as they should, everybody ends up breaking even. Nobody unfairly benefits, and nobody unfairly pays.

An example of fair payers, our grandparents — whose lavish retirement programs are the envy of many — paid substantial property taxes to fund the education of the people who would eventually be providing for their own retirement (in terms of Social Security), according to a Brookings Institution study. They paid fairly, and thus, paying for their retirement hasn’t been so difficult.

The Baby Boomers, however, enjoyed lower property taxes without such a large school-age population, and they didn’t invest in their own retirement by paying income taxes.

How does higher income-tax revenue bolster a generation’s ability to retire? By lowering budget deficits.

To see how this works, it’s important to first understand that the Social Security Administration operates as an institution completely separated from Congress. During a given year, the SSA raises its own taxes (called FICA) and redirects that money to provide benefits to the retirees currently tapping into the program. This is called a “pay-as-you-go” system. Given its separation from Congress, the SSA can run a surplus — more FICA revenue than outlays — at the same time the rest of the government is riding a budget deficit, and this scenario roughly describes the period from 1984 until 2010.

So what has the SSA done with this 30-year accumulation of surpluses? The short answer is that the money was invested, and the trust fund that resulted is now a collection of $2.6 trillion worth of U.S. Treasury bonds — basically U.S. government IOUs.

You might ask yourself, “The government owing money to itself — isn’t that crazy?” Well, while it should be noted that U.S. government debt is the safest asset known to modern man, the paradoxical debt relationship that is the Social Security Trust Fund indeed poses a problem. Specifically, what the fund represents is $2.6 trillion of liabilities, which only exist because past Congresses ran deficits of its own. Once retirees start substantially tapping into the trust fund — which they are starting to do — the only way a U.S. Congress that passes yearly budget deficits can pay off these IOUs is to borrow even more money. Thus, if Congress runs a high budget deficit, paying off its debt to the SSA would require Congress to raise the deficit and, in the long run, the national debt. So if presidents pass tax cuts and correspondingly reduce government revenues, to fulfill Social Security promises to retirees, the tax cuts will push substantial debt burden onto future generations.

Unfortunately for our generation, this is exactly what past administrations have done. Kennedy, Reagan and Bush all did what good presidents of democracies do — please the majority — and decreased the share they would need to contribute toward their own retirements. To pay for their own eventual retirements, these administrations should have been building up huge funds or at least have been heavily advocating private accounts for individuals.

It is an ironic situation, almost: Instead of our country being run by secret minions out to suck money out of the economy, it was run just as it was intended. The majority was placated, and now we have a generation without the funds needed to ensure a comfortable retirement.

The result is that soon-to-be retirees are expecting their parents’retirement benefits without paying as much. But because this population will likely not be willfully forgoing payments, the burden will fall on two groups: children and young adults.

Children will be hurt because, as a nonvoting population that doesn’t exactly care about school funding, young people provide a demographic whose education spending can be sacrificed. Despite the fact that another Brookings Institution study shows that education spending produces anywhere from a 2-to-1 to a 17-to-1 return on investment — margins unheard of in the stock market or real estate — the benefits are so long term, the trade off doesn’t seem that bad. This trend is already revealing itself in state capitals across the country.

Finally, young adults will hurt because, without a change in benefits, we will not only be paying for our own retirements, but for the interest of our parents’. Unlike the nice model where there are no winners and no losers, where everybody ultimately ends up right where they started, we will all be losers.

So I suppose there is something to be optimistic about in this country: Democracy is pleasing the majority, just like it is supposed to. Secret groups in high offices aren’t running the government. The Baby Boomer generation is, and its members will enjoythe fruits of past generations’ thrift and our generation’s labor.

Oddly enough, this fact about our democracy isn’t comforting to me.

Write Nick at [email protected]