Book review: The Coming Generational Storm
Dan Piergallini
For the past few years I’ve repeatedly heard political catchphrases along the lines of ‘we need to fix Social Security’ or ‘we need affordable healthcare.’ While I understand the concepts of SS and healthcare, I never knew exactly what the details were until I read the book The Coming Generational Storm: What You Need To Know About America’s Economic Future by Laurence J. Kotlifkoff and Scott Burns (MIT Press, Cambridge, Massachusetts. 2004). Apparently, the devil is in the details, and he a mean and nasty sonuvabitch.
We know we’re in debt, and yet we continue to run a deficit. In 2004 the operating deficit was $413 billion – or $105,000 per newborn. However, the implicit deficit is roughly one trillion dollars (or $250,000 per newborn). If you’re unsure about the definition of implicit debt, it is the promise to pay (in this case, mostly SS and healthcare) in the future. The authors point out this is a problem because not only are the promises are going to exceed (and continue to do so) the tax revenue paying for said programs, but future generations of Americans are either going to have to pay for promises or watch as the United States pulls an Enron.
The authors spend a great deal of the book explaining how this will occur. If you haven’t had a course in population geography, you might be unaware of the demographic shift occurring in the developed world. Basically, Americans (and Europeans, Japanese, and Chinese as well) are getting older. For example, the ratio of workers to retirees in 1950 was 16.5:1. In 2000 that ratio had dropped to 3.4:1. In 2030 it is predicted to hit 2:1. This wouldn’t be as big of a problem if the government didn’t keep increasing Social Security and Medicare benefits.
Not only are we getting older, we’re also living longer. By 2050 the number of people age 100 or over is expected to increase tenfold. Social Security doesn’t count on people living that long, which leads to more problems figuring out exactly how much we’re going to have to pay in the future. If that wasn’t a big enough problem, it seems most politicians don’t (or can’t) care because nobody wants to be the person to raise taxes and cut benefits because that’s not how you get re-elected. Yet no one has a problem passing the problem on to the next generation of Americans, a practice that the authors’ aptly describe as fiscal child abuse.
Exactly how much abuse? With 77 million baby boomers set to start collecting benefits over the next 20 years, a lot. Depending on the figures you use, our implicit debt will run upwards of $45 trillion dollars. It should be noted that this government figure is deemed rather optimistic by the authors of the book. It is also worth noting that if we delay starting to solve this problem by only five years, that $45 trillion dollar problem becomes a $76 trillion dollar one. Interest is a bitch.
Social Security attaches a memo to its annual benefits letter it sends workers over 25 specifically telling people, we might run out of money and/or cut benefits. The problem is real.
Is there a happy ending? Not in the conventional political sense. The book is quick to point out that popular remedies such as technological progress, foreign investment, immigration, older retirement age, reducing government waste, and so forth are drops in the bucket at best – additional debt at worst. In fact, the generational gap problem is worse and more pronounced in many foreign countries – meaning we will have to solve this problem ourselves.
Adding to the dilemma is the AARP, which effectively lobbies Congress on behalf of this debt (and the inherent implicit promises).
The authors outline very sound plans for how to fix the Social Security and Medicare problems – completely overhaul them. They seem reasonable enough, but getting a politician or Congress to bring it up could prove difficult. After all, more than half the people who voted in the last election were either retired or rapidly approaching it. No Congressmen wants to try to dodge that electoral bullet.
One of the authors, Kotlikoff, is an economist who has served in an advisory capacity to the government on multiple occassions. When he had a chance encounter with a Congressman on a flight, he talked to him about the problems of Social Security and healthcare. The Congressman was quick to point out the same conventional solutions, claiming they would solve the problems, even though apparently, they won’t.
What can you do to fix it? Check out part 2, where I go into greater detail on the authors’ strategies. Also, be on the lookout for a SmartBeam podcast interview with both of the authors – detailing the issues on this book as well as other economical problems facing young Americans.
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