NCPA - National Center for Policy Analysis

Generational Accounting Shows Entitlements Out of Balance

October 26, 2001

Baby boomers will begin to retire soon and start receiving Social Security and Medicare benefits. This will set the stage for an enormous conflict over resources that will amount to "generational warfare," according to economists Jagadeesh Gokhale and Laurence J. Kotlikoff.

In a new NCPA study, Gokhale and Kotlikoff estimate that by the year 2030 -- the midpoint of the baby boomer retirement years -- the cost of elderly entitlement programs will be about double what it is today, relative to the national income. That means we will either have to double the payroll tax rate (currently 15.3 percent) or cut every benefit in half.

According to their estimates, based on current policies and generational accounts:

  • An American born today can expect to pay 17.7 percent of his or her lifetime income over and above any transfer benefits he will receive.
  • Future generations -- all Americans not yet born -- can expect to pay 35.8 percent of their income over and above any transfer benefits -- more than twice the tax rate today's newborns will face.

Thus, despite the current focus on government surpluses, elderly entitlement programs are generating a huge implicit debt that future generations will have to pay off.

The answer, say Gokhale and Kotlikoff, is immediate action to correct the long-term funding crisis in Social Security and Medicare. This includes an immediate and permanent increase in workers' saving and investment equal to 10 percent of payroll. These funds need to be invested in interest-earning assets that can be sold in future years to pay benefits.

Source: Jagadeesh Gokhale and Laurence J. Kotlikoff, "Is War Between Generations Inevitable?" NCPA Policy Report No. 246, November 2001.

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