Generational Equity and the Legacy of Today’s Politicians

There is a moral issue behind most of the public policy issues at the federal, state and local levels, and even in the private sector: generational equity. Almost every decision, non-decision, deal and trend of the past 25 years has provided no reductions in benefits, or even more benefits, for older generations, while imposing additional burdens and sacrifices on younger generations, those who will be working and paying taxes, and in need of public services and benefits in the future. One finds generational inequities in the Social Security system, in government financed and subsidized health care, in public employee union pensions and other retiree benefits, in the wages and benefits of older and younger generations in the private sector, in the financing of maintenance of the public infrastructure, in energy and the status of the natural environment, and in the tax code. These are in addition to soaring on-the-books federal, state and local debts. In some cases a diminished future for younger generations has already arrived, and in some cases it is coming. And no one, not the Democrats, not the Republicans, not “liberals,” not “conservatives,” seems willing to point this out.

Let’s start with Social Security. As I wrote in more detail here, twenty-five years ago those running the federal government made my generation and those after a promise: pay a vastly higher regressive payroll tax throughout your lives and accept a later retirement age, and Social Security will be there to keep you out of poverty in your later years. With all the extra payroll taxes since collected over and above those required to pay benefits (plus interest), the rest of the federal government owed Social Security nearly $1.9 trillion dollars as of FY 2006. But in reality, however, all the additional money collected in the past was spent in the past, and substituted for personal income taxes that were cut in the past. To pay Social Security that $1.9 trillion back, the rest of the federal government will have to force younger generations to pay a second time — in higher taxes and/or lower spending on other things, or it will have to cut Social Security benefits. Not only that, but during the past 25 years the federal government borrowed even more money on top the funds that should have been set aside for retirement benefits but wasn’t, and we will have to pay that back too.

How about health care? As I showed here, although the majority of Americans finance their health care through private insurance plans, the federal state and local governments are in reality paying for three-quarters of all third party health care expenditures in the United States, either directly (Medicare, Medicaid, the VA system) or indirectly (private insurance paid for by taxpayers on behalf of public employees, and tax breaks such as the exclusion of employer-paid health insurance from taxable income). Total direct and indirect government spending on health care soars ever year, but benefits fewer and fewer people. In fact, the government cost of health care in the United States, as a share of GDP, is higher than the total cost of health care in other developed countries, countries where they government covers the basics for all, leaving people to pay for luxury-class and high-tech care on their own. Here the government provides or subsidizes luxury and high tech care for some, and provides nothing for others, others who nonetheless pay taxes that fund health care.

Each year additional spending and benefits, including the recently enacted prescription drug benefit, buys more health care at and higher and higher prices for beneficiaries inside the charmed circle, particularly public employees and today’s senior citizens. Those in younger generations, meanwhile, are increasingly uninsured, or forced to pay for health insurance on their own. And this isn’t just a choice to remain uninsured while they are young and healthy, as some claim, it is a generational shift in what people will receive throughout their lives. Just as earlier generations granted generous defined-benefit pensions for themselves, and offset the cost by giving my generation less-generous 401K plans (increasingly with no employer contribution at all), so younger generations are increasingly less likely to receive employer-financed health insurance, even when they get older and really need it. Many large businesses, for example, get around the requirement that in order to receive the income tax exemption all employees must receive employer-financed health insurance by taking on younger workers as “freelancers” and “independent contractors” rather than employees. That is one reason self-employment is surging as a share of total employment in this country.

Based on the current trend, there is no reason for me to believe my teen-aged children will receive employer-financed health insurance once they complete their education. Soaring federal, state and local debts mean that today’s twenty-somethings are not only less likely to be insured today, but they will also be less likely to receive government support for their health care needs later, when they get older and health problems begin to accumulate. My own generation may not even benefit from government-funded or subsidized health care when we need it most. As the United States heads toward bankruptcy, I tell my generational peers all we’ll get is medical marijuana followed by legal assisted suicide. And that’s if the Democrats are in power. If the Republicans are in, we won’t even get that.

And those debts are soaring. When George W. Bush proposed his tax cuts in 2001, he promised surpluses as far as the eye could see. Now, with those tax cuts enacted, his administration admits there will be deficits as far as the eye can see, even when the economy has recovered. In fact, the federal deficit has been reported to be at record levels in dollars this year, and that’s with all those additional payroll taxes workers are forced to pay being spent today, rather than set aside for their Social Security. And government bailouts of the financial industry, to offset the debt-driven consumer spending boom of the past eight years, will add billions — perhaps trillions — more to that debt. If those who save, who are mostly outside the United States, become unwilling — for whatever reason — to keep lending more and more money, interest rates will soar and the economy will collapse.

Speaking of taxes, as a result of a long series of senior citizen tax breaks, many enacted in the past when senior citizens were worse off (on average) than working people and younger generations rather than better off, those over 65 pay vastly lower taxes than younger people even when they have exactly the same income. As shown in this analysis, where I live a hypothetical young couple with a child, earning $100,000, with no savings or health insurance or pension, and living in a rented one-bedroom apartment, would have paid $22,214, or 22.2% of their income, in federal taxes in 2007, while a retired, senior-citizen couple who owned their home, had a pension, and benefited from Medicare, would have paid $11,791 on the same $100,000 income, or 11.8% of it. The young couple would have paid $10,926 in state and local income taxes and (indirectly as part of their rent) property taxes, or 10.9% of their income. The senior citizen couple would have paid just $2,378, or 2.4% of their identical income, in state and local income and property taxes, one quarter of what the younger couple would have paid. That is $33,140 in taxes for the young couple and $14,169 in taxes for the senior citizen couple on the very same cash income, even though the senior citizen couple in this example has far more wealth and non-cash benefits. Will today’s young people be similarly advantaged when they become senior citizens themselves? Almost certainly not.

In addition to the on-the-books federal, state and local debts, and the fact that the extra Social Security taxes have already been spent, there is another enormous debt that has been hidden — the rich pensions (after early retirement) and extensive retiree health benefits that today’s politicians have promised public employees — including themselves — but have not paid for. All of the cost of the retiree health care, and much of the cost of the pensions, has been deferred, allowing older generations to enjoy more spending (on themselves) and lower taxes (on themselves), with younger generations facing the reverse when the bill comes due.

As I explained here, in older places (such as New York City) where the retirement crisis hit long ago, the result has been a cycle of richer pension and retiree benefits for public employees with seniority every time the financial markets boomed, described as “free” since investment returns would purportedly pay for it all. This has been followed, multiple times, by higher taxes, reduced public services, and lower pay and benefits for newly hired public employees every time the financial markets bust, due to “circumstances beyond our control.” The result has been a series of union contracts providing enriched pay and benefits for those cashing in and moving out, and lower and lower pay and benefits for the increasingly less motivated and qualified people providing degrading public services in the future. And those disadvantaged new hires are nonetheless forced to pay dues to the unions who sold them out, dues that in part help fund the political activities of the incumbent politicians.

Suburban and Sunbelt communities haven’t yet faced the public employee retirement crisis New York and other older cities have, and thus have lower taxes and in some cases better public services. The reason is that newly-developing places have relatively few public employee retirees (reflecting their past as rural areas with few people) and lots of new taxpayers, keeping the cost of retirement benefits low relative to the growing tax base. Once a community is fully developed, however, the tax base and population stop rising rapidly and the number of retired government workers soars. That’s when newer and younger residents of those communities find out that the pensions and health care benefits of the newly retired weren’t paid for in the past, when they were working. The cost was deferred, and will require huge tax increases and public service reductions to pay. Much of suburban and Sunbelt America faces the kind of fiscal crisis New York and other older cities faced in the 1970s, unless a new national health care system picks up the cost of the retirees. Whether the cost is federal or state and local, however, tomorrow’s taxpayers will be forced to pay for public services provided by public employees yesterday, a hidden debt over and above the financial ones.

The decline of our infrastructure is another hidden debt. The suburban and Sunbelt infrastructure that was put in place in the 1950s and 1960s has suffered from inadequate maintenance, and now requires rehabilitation or replacement — just as the urban infrastructure did when it fell apart in the 1970s. One might argue that our oil dependent transportation system is functionally obsolete and requires at least partial replacement with something else. With federal, state, and local governments already deep in debt, however, there is no money for this.

Even in places where the infrastructure fell apart sooner and has been repaired, the generations now in charge have been unwilling to pay to repair it, and have borrowed the money instead. New York City’s public transportation system, despite the highest ridership in 50 years, is facing a financial disaster, physical deterioration on a massive scale, and the postponement (actually cancellation) of long-promised improvements, as I showed in detail here. The reason is that within a few years half its revenues will be going to the past — to debt service, pension contributions, and retiree health care — not to transportation. The transit systems of Boston and Chicago are even more bankrupt, in the former case because of money borrowed to maintain the system as revenues were diverted to the “big dig,” in the latter case because of lucrative but un-funded pensions. The New Jersey transportation trust fund will use nearly all of its future revenues to pay past debts. The next President will inherit a bankrupt highway trust fund.

This, however, is not the greatest failure of the past 35 years. Following the 1973 Arab Oil boycott and subsequent energy crisis and economic meltdown, it was clear to the generations now in charge that energy was the greatest challenge they faced, as former President Carter explained in 1977 in the speech described in this essay. The environmental concerns related to global warming are merely an addition to the existing economic and national security imperatives. For 35 years, however, these generations have been unwilling to make any sacrifices for the sake of our economic, security and environmental future. Beginning in the mid-1980s, as the price of fossil fuels fell, they took the easy way out and stopped conserving and investing in alternatives. They had their cheap energy party, and left us with the situation we are in today. We an increasingly impoverished nation of global energy beggars, at risk of being cut off at any moment, either for political reasons or because the Chinese, Arabs and Russians realize we’ll never be able to pay off all the money we are borrowing to buy imported oil, and stop lending us more.

There are some who argue that government policies that enrich older generations are fair, because over time people become richer. By transferring wealth from younger generations to older, by running up debts, deferring costs, and not investing in the infrastructure, they argue, such policies are therefore “equitable,” transfers from rich to poor.

It is true that in their personal lives many of today’s young people expect to live a lifestyle immediately that it took older generations decades to achieve. But it is no longer true that younger generations are and will be better off that older generations were at the same age. The data shows that those in the second half of the baby boom, who came of age in the 1970s stagflation era rather than in the 1960s, were worse off in their 20s than earlier generations had been at that age, and worse off in their 30s than earlier generations had been at that age, etc. Those coming after have been worse off still. Much of the difference will not be apparent until the “stagflation” generation and those after reach old age — without pensions, retiree health care, or perhaps even Medicare. Rather that cut the cash pay young workers could see, businesses first cut the future pay they didn’t know enough to appreciate. As a result the poverty rate for senior citizens, which has been lower than for working people in recent decades following the expansion of senior benefits in the 1960s and 1970s, is set to soar.

People in their 20s today, moreover, are also paid less in cash (adjusted for inflation) than those who came before, as a demographic analyst showed in this analysis. In inflation adjusted dollars, average annual earnings for U.S. workers in their 20s fell from $32,192 in 1970 to $28,250 in 1990 (when I was 29) to $26,995 in 2005. Even for twenty-somethings who are college graduates, the averages were $42,834 in 1970, $39,040 in 1990, and $35,653 in 2005. So what can be expected for my own children, who are in their mid-teens?

In recent decades, in fact, only two kinds of people have been getting richer – top executives and today senior citizens, particularly retired public employees. Everyone else is getting poorer. And it isn’t because of international trade or technology or other factors economists talk about, it is because of power. The executives sit on each other’s boards and vote each other higher pay, even when the corporations they oversee lose money. State and local officials enrich pensions for public employee union members with seniority in exchange for political support, and then cut the pay and benefits of new hires when money is tight, and those new hires are forced to pay union dues even so. Social Security is adjusted upward for inflation, but the minimum wage is not.

Times sure have changed. In the 1950s and 1960s, everything was for the children and the young, as their parents left their grandparents behind in declining urban and rural communities and moved to the suburbs and the Sunbelt. The old, who had worked and sacrificed, were neglected and forgotten. Today things are just as inequitable, but in the opposite direction. And many of those who were on the lucky side as children and young parents are on the winning side yet again. Everything is still for themselves.

At every point in their lives the generations born between 1930 and 1955 – the so-called “Silent Generation” and the first half of the baby boom – have been better off economically than their predecessors, while those born later, who came of age in the mid-1970s and after, have been worse off. No wonder the estate tax has become such a hot issue. The “Greatest Generation,” those who are now dying off, worked, fought and sacrificed to build a better world for its children. Now, some members of the “Richest Generations” are desperate to provide a future for their children, and only their own children, in a diminished world. A world they are diminishing at this very moment through the actions of their elected representatives, almost all of who are of the same generation as themselves. 

This is the legacy of today's politicians.  And until they start admitting it, expect it to continue to get worse.