Is War Between Generations Inevitable?

Studies | Social Security

No. 246
Friday, November 30, 2001
by Jagadeesh Gokhale and Laurence J. Kotlikoff


Conclusion

Our government, through its various fiscal agencies, is assuming away our fiscal problems rather than confronting and correcting them. In so doing, it disserves both us and our children. Notwithstanding the rosy fiscal projections, our country has a huge imbalance in its generational policy. Without dramatic and immediate changes in policy, our grandchildren and their grandchildren are likely to face lifetime net tax rates that are twice those we face.

"Without dramatic change in policy, our grandchildren and their grandchildren are likely to face net tax rates twice those we face."

Replacing Social Security with a compulsory private saving system represents a way to keep the next generation from facing much higher payroll tax rates. But this "cure" is not painless, since paying off the unfunded liabilities of the existing system entails a real sacrifice. Still, careful simulation studies by academic economists demonstrate that the economic losses to current generations would be modest compared to the gains that would accrue to future generations. Privatizing Social Security and paying off all its unfunded liabilities may be the most responsible course of action, but it's also the least likely to be chosen through our political process. Hence, baby boomers and other Americans can look forward to various tax hikes and benefit cuts, many of which are likely to arise within the Social Security program. Social Security is already a bad deal for most American workers, and alternative ways of "reforming" the system through tax hikes and benefit cuts will make a bad deal worse. Precisely who gets hurt and by how much will depend on the particular policies chosen.

Can Americans protect themselves from what's coming? Yes, but it will require saving at rates that far exceed what most American households typically achieve. And how one saves may be as important as how much one saves. In particular, the notion that saving in tax-deferred form lowers everyone's lifetime taxes and permits higher lifetime spending is belied by Gokhale and Kotlikoff's forthcoming NCPA study.11

To conclude, a major generational storm is on the horizon. It's a big one. And, at long last, we had better get ready.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.


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