Is War Between Generations Inevitable?

Studies | Social Security

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


The Perfect Fiscal Storm

1Close your eyes and imagine it's 2030. What do you see? A country that's older than present-day Florida, a country where the number of walkers equals the number of strollers, a country with only 15 percent more workers to pay benefits to 100 percent more retirees - and a country with high and rising poverty rates among the elderly.

You also see a government in desperate trouble - raising taxes to unprecedented levels, cutting benefits drastically, cutting domestic government spending to the bone, borrowing beyond its capacity to repay and printing lots of money to "meet" its bills. And you see major tax evasion, high and rising rates of inflation, a growing informal sector, a rapidly depreciating currency, large capital outflows and more people leaving than entering the country. In short, you see an America in 2030 that looks a lot like Russia circa today.

"Whether by design or through neglect, our public officals have misled the nation about our fiscal condition."

But "gee," you say, "things can't get that bad. After all, the country's running a huge surplus. Social Security is in close to 75-year actuarial balance. Medicare and Medicaid spending is slowing down. The government can cut spending. Technical change will bail us out. We can let in more immigrants. Moreover, aging has its economic benefits. Old people own wealth. Wealth represents claims on capital. So more oldsters relative to youngsters means more capital per worker and, therefore, higher labor productivity. Finally, even if the government is undersaving for the future, the public will save on its own to make up the difference."

Is our ship of state heading into the perfect fiscal storm? Or will it reach a safe harbor well before America's 77 million baby boomers switch from changing diapers to wearing them? You can ask a lot of economists and get a lot of opinions. But there aren't two right answers to this question. And getting to the truth is well worth the investment - for our nation, for ourselves and for our children.


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