Disinherited. Diana Furchtgott-Roth
PROMISES
Jared’s grandfather, August Meyer, an octogenarian living in Minnesota, does not see his Social Security checks as entitlements because he paid Social Security taxes during his entire career as an airline-engine shop foreman. He was told that the Social Security system would invest his hard-earned money and use the returns to ensure that he had a comfortable retirement. But owing to a series of botched and unfunded promises, Social Security has turned into a pay-as-you-go system in which the money he paid in, as payroll taxes taken out of each paycheck, was spent long ago and the money young people are now paying goes directly to retirees in his position.
In terms of government spending, August is a winner. He is an unintended winner, because he never wanted to take advantage of his grandchildren, but he is a winner nevertheless. The government increases the federal debt, and, if August’s grandchildren get jobs and pay taxes, they are the ones who will be stuck paying it back. Our government requires young people to pay an outsize share of taxes, loans, and health-insurance premiums—all to benefit older Americans. This system is neither sustainable nor fair.
Jean Thompson (not her real name), a young professional, agrees. “I think my generation is paying for the boomers’ credit cards with the entitlement programs [Social Security, Medicare, and now Obamacare] as they are structured now,” she told us. “I remember reading in U.S. News and World Report that the interest from these programs and the national debt will absorb 92 cents of every dollar in the next 10 years. Boomers have less in personal savings as compared with other generational cohorts, and I suspect that this is in part because they are relying on these programs they believe they have paid in to, even if Social Security and other programs aren’t exactly paid for in this manner.”
Jean studied demography, so she approaches these problems in demographic terms. She is mildly forgiving of the boomers, because she does not think they understood that fertility rates were declining. In the 1970s, as these entitlement programs were gathering steam, people were concerned about a population bomb, not a birth dearth. But with declining fertility rates, sustaining entitlement programs is difficult unless the American economy is exceptionally strong. There are fewer young people, so they will have to contribute more to the system, as a group through a high labor-force participation rate and individually through ever-higher payroll taxes. Economic growth has been tepid since the recession, though, so young people lack financial resources.
Jean sees that Washington has been reluctant to fix this system, all while the federal deficit grows. Politicians have not acknowledged how much this system hurts young people. It is tough for older Americans to understand why young people might live at home with their parents, carry large debt loads, or have trouble finding work. And because older Americans are a large voting bloc, politicians have resisted increasing the amount of money that older people pay to the entitlement programs they benefit from.
Few young people know that America is $18 trillion in debt, and fewer know that this is only the federal debt. Of this amount, $5 trillion is held by the government and $13 trillion is privately held.1 Social Security contributed $69 billion toward the debt, but that is just the tip of the iceberg.2 When future spending obligations on entitlements are compared with future tax obligations, the so-called fiscal gap is $205 trillion.3 This is 12 times GDP and 16 times official debt held by the public. In simpler terms, we are broke.
In addition, states have their own deficits, which will have to be funded by young Americans. States are $5 trillion in debt from unfunded pension liabilities.4
“I think that our political institutions and political leaders have accommodated themselves to deficit spending and growing debt and acquired a stake in their continuance,” Hudson Institute senior fellow Christopher DeMuth wrote in National Review. “Disagreements over the consequences and immediacy of the problem are always resolved in favor of borrowing more to address the problems of the moment and deferring ‘debt consolidation’ (through some combination of higher taxes, lower spending, and higher economic growth) to a later time. The American body politic has acquired deficit-attention disorder.”5
Paying off the amount of the federal fiscal gap—irrespective of state deficits—would require an immediate and permanent 57 percent increase in all federal taxes. In 20 years, this amount becomes 69 percent and in 30 years, 76 percent. Another way to close the fiscal gap would be to institute immediate and permanent cuts of 37 percent in all federal spending except that which services the debt; in 20 years, this number becomes 43 percent, and in 30 years, it balloons to 46 percent.6 Neither of these options is politically feasible, but the consequences of delayed action only worsen as time passes.
This leaves young Americans with two options. They can either pay substantially higher taxes than their parents do, while not receiving any more benefits, or they can pay the same rate as their elders and receive far fewer benefits. Both outcomes are grossly unfair. “You have been conscripted to finance other people’s retirement and health-care needs, regardless of what impact this will have on your life. Your duty is to set aside your own happiness in order to serve the needs of the old,” Don Watkins explains to millennials in his book Rooseveltcare.7
The Congressional Budget Office estimates that if the country continues on its current path, the federal deficit will be $7.2 trillion aggregated over the next 10 years. CBO’s job is to analyze the effect that current laws on spending and taxes will have over the next decade. Based on their assessment, they construct projections of deficits or surpluses. These days, deficits are all they see, and these are getting larger. CBO has projected that government revenues, nearly all of which come from taxes, will stay around 18 percent of GDP until 2024, while spending would rise from slightly more than 20 percent of GDP to 22 percent of GDP over the same 10-year period.8
Real Federal Debt per Capita
Sources: U.S. Department of the Treasury, Treasury Direct; U.S. Census Bureau, Population Estimates; and Bureau of Labor Statistics, Consumer Price Index
Federal Debt to GDP
Sources: U.S. Department of the Treasury, Treasury Direct; Bureau of Economic Analysis, National Income and Product Accounts
It is not just that young people are paying for their elders’ entitlement programs, but that those currently in Washington are handicapped by decisions made by previous administrations. Federal spending in 2014 on mandatory programs such as entitlements equaled 12 percent of GDP, whereas discretionary spending was 7 percent of GDP.9 This leaves less money for more-essential functions of government such as building and maintaining America’s transportation infrastructure.
This is not to say that Washington is starved for funding. Federal debt from government activities outside these major entitlement programs is also projected to rise over the next decade.
In Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future, Urban Institute scholar Eugene Steuerle shows that the federal deficit is primarily driven by programs put in place long ago.10 These programs were created and essentially set on autopilot. Since then, they have grown in scope and scale. Washington has not mustered the political will to end the entitlement programs it has inherited. Now the government finds itself unable to adapt to 21st-century challenges, as it is increasingly constrained by laws passed in the 20th century. Young Americans are funding Social Security and Medicare for the current population of elderly Americans, but the programs are scheduled to go bankrupt long before people who are young today reach retirement age.
If Washington does not change present law, the Social Security trust fund will be depleted by 2033.11 This means that for people retiring in 20 years, those Social Security