Posts Tagged ‘Harberger’s triangle deadweight costs’

Generation Hexed: The Curse of Inter-Generational Taxation Without Representation

Tuesday, October 16th, 2012

In a political season of putative class warfare, with accusations of who didn’t build what and which percent isn’t paying its fair whatever, it’s worth considering that the true critical divide in early 21st century America, the one driving everything from entitlement spending to the tax debate, is that between generations as opposed to classes.

To understand this, one must first grasp the underlying demographic realities. The Baby Boom generation, comprised of the approximately 78 million people born between 1946 and 1964, are just now beginning to reach the age of retirement, with the eldest of this cohort now turning 66. They precede, and, as we shall see, intend to be supported by, Generation X, the approximately 46 million Americans born between 1965 and 1980. This “baby bust” is reflective of a parentage produced by low reproduction levels associated with the Great Depression and the Second World War, just as the 80-95 million members of Generation Y born between 1980 and the early 2000’s -the so-called “Millennials” – are an echo of the post-war Baby Boom.

Meanwhile, the life expectancy of Americans has increased sharply since the establishment of the entitlement programs the Boomers will avail themselves of in their golden years. For example, in 1935, the year Social Security was established, the average life expectancy was 61.7 years, significantly less than the full benefit eligibility age range of 65-67 years under current law. Even in 1970, five years after the establishment of Medicare with its eligibility age of 65, life expectancy had risen to only 70.8 years. By contrast, in 2008, U.S. life expectancy stood at 78 years, and, more to the point, the life expectancy of a 65 year old was a further 18.7 years, which is to say an average lifespan of 86.7 years.

One does not have to be an actuary to guess that if you have any kind of insurance and don’t increase eligibility age in line with an explosion in life expectancy, eventually the program is going to go broke. Over their working and voting lives the Baby Boomers neither meaningfully raised their own eligibility age nor sufficiently increased their contributions paid through taxes to fund future disbursements. As a result, under the current structure both Social Security and Medicare will be unable to pay out full benefits within coming decades. Specifically, Social Security would have to start reducing benefits between 2033 and 2036, while Medicare would need to do the same around 2024 (this despite the 2% reduction in Medicare spending promised under the recent reform). Past these dates it might still be possible to pay out reduced benefits for some added years (say at a 75% level) or alternatively to fund the shortfall from higher taxes paid now and in the future by the young, i.e. Gen X, and older members of Gen Y.

Of course, even a significantly higher tax burden may be merely sufficient to allow the younger generations to take care of the aging Boomers at the level that the latter, with their overwhelming numbers, have voted to become accustomed to. It would not fund the retirement and health care of the current young themselves. Gen X in particular will likely be faced with the choice of truly onerous, growth-killing taxes (these could include ruinous inflation to extinguish the national debt built up in funding the Boomers’ benefits) or a very sharp rise in their eligibility age, to a point much closer to their life expectancy. To borrow a term the current administration said was a criterion for some projects provided stimulus funding, Gen X may not get Federal retirement aid until it’s close to being “shovel-ready.”

In a very real sense, the nearly eight to five ratio of Boomers to Gen X has served to exaggerate a sort of inter-generational taxation without representation which may occur in a democracy, a form of moral hazard in which an older generation may vote obligations upon a succeeding one not yet fully enfranchised. In the present example, a ray of hope in the young’s otherwise dim prospects might be found in the economic opportunities afforded by serving a larger aging population. However the greater voting power of the Boomers could well limit this potential upside, through legislated effective price controls for critical goods and services Gens X and Y might sell to the Boomers, and indeed from health care to energy to finance, there are already a variety of proposals which could effectively constitute such controls.*

Patriotism and concern for the young could lead the Boomers to moderate their demands, perhaps through some combination of slowly raising their own eligibility age, means-testing entitlements, and limiting the growth of benefits. One could be forgiven for questioning the likelihood of such a shift in behavior on the part of what by the ’70’s came to be known as the “Me” generation, or was termed by Hunter S. Thompson a “Generation of Swine.” Perhaps more probable is the eventual emergence of some kind of voting block composed not only of Gen X but of older Gen Y and some younger Boomers (perhaps those under the 55 limit above which both parties hold no entitlements may be reduced) allied in realization that they are being assigned the very short end of the inter-generational stick.

To be fair, the young could have it worse. In his novel “Never Let Me Go,” Kazou Ishiguro imagined a dystopoia in which the young are produced via cloning for the sole purpose of providing successive and eventually fatal “donations” of their vital organs to the aging individuals in whose image they have been created. The Boomers are unlikely to impose a similar levy on Gens X and Y; after all, the technology just isn’t really there yet. Yet barring their elders acquiring some heretofore not evinced inter-generational empathy, X and Y will have to stand up for themselves politically lest they find Ishiguro’s lethal tax one of the few they have do not have to pay. As observed in another time in which one might be born into unbearable obligation, serfs own nothing save their own bellies. Let us hope the young are not on a road to a similar condition.

*N.B. For my mathematical economist friends, consider the future “Harberger’s triangle” dead weight costs to the economy Gens X and Y will experience as a result of effective rationing of these goods and services under those implicit or explicit price controls.