Posted by: dstieglitz | June 29, 2012

Who Will Pay?

My birthday was last week so I’m conscious of another year going by. When people ask how I feel about getting older, I respond: “It’s better than the alternative.” But my hands don’t flex as easily, I don’t hit a golf ball as far, and even when I hit it well I can’t see it. I also look at younger generations differently. The divergence between their interests and mine is an undercurrent in the battle over the Federal deficit and national debt. Can the country afford to maintain Social Security benefits and lower student loan interest rates? Can it spend trillions on the last year of old people’s lives (30% of Medicare budget) and increase support for K-12 education? The U.S. is spending far more than it collects in taxes, but will the gap be closed on the backs of the young or the old?

Smoke & Mirrors Strategy. As government control over the economy expands and the federal debt soars, there should be heated debate over priorities – but there hasn’t been. Many want the federal government to spend whatever it takes to create new jobs, resuscitate the housing market, and curtail the financial industry – but not raise taxes or cut benefits. It is a smoke-and-mirrors strategy that tries to create something from nothing – like taking out a second mortgage on your house because you can’t pay the first one. By promising pain-free solutions to desperate voters, Congress and the President are selling the economic equivalent of a miracle weight-loss program that requires no exercise or dieting.

Illusion of Creating Something. The truth is the government doesn’t create anything, it merely reallocates resources. When the government spends, the money must come from somewhere either today or in the future. If government has no reserves, it must come from higher taxes. If taxes don’t go up, the money must be borrowed. If no one is willing to lend, the government must print new money which diminishes the value of people’s savings and assets. Similarly, when the government protects inefficient jobs in one industry, more efficient jobs are not produced in others. As the government controls more and more economic factors, the economy becomes more inefficient. And inefficiency lowers productivity, reduces living standards, and reduces the country’s international competitiveness.

Are Our Best Days Behind Us? Many gen-Xs and gen-Ys are afraid that peak U.S. prosperity is in the past. Opportunities that were taken for granted for decades have vanished – like the guarantee of high-paying jobs after college graduation. Even Americans who still have jobs feel like they have lost a decade of progress because wages have fallen in real terms. Consequently, the younger generations have a different attitude toward money than my generation – they are consumers. Most would rather spend money today than plan a retirement that seems so far in the future. If they save at all, it’s because they want to buy something big next year. They have high expectations – they feel the American Dream is being taken from them.

Concerns of the Old.  The older generation is complaining too – they have security concerns of their own. Economists say Social Security will run out of cash in roughly 20 years. But that shortfall is just one of the economic issues the older generation faces. The value of their homes, which many had treated like a savings account, has fallen; their IRAs have lost value since 2008; and their expected life span extends into the 80s. As recent retirees ourselves, our financial planner says there is a 50% chance that my wife or I will live into our 90s. Will our savings last that long?

Who Will Pay for Future Benefits? Workers pay a 6.2% Social Security tax on earnings up to a $110,000 income cap, as do their employers. Congress temporarily cut the employee tax to 4.2%, but that cut will expire at the end of 2012. According to AARP, eliminating the cap could end the Social Security shortfall in one stroke. Similarly, raising the tax rate above 7% for employees and employers would do the same. But those solutions would force the younger generation to pay for today’s Social Security benefits. Cutting benefits could close the gap too, but that would mean the older generation would not receive benefits they counted on in their retirement planning. Increasing the minimum retirement age (now 67 for those born after 1960) is a sensible long-term solution, it doesn’t solve the short-term cash shortfall in Social Security.

Medicare is Worse. Similar considerations apply to Medicare – except the problem is worse. Workers are covered earlier (at age 65), a growing number of disabled workers are included, and health care costs are rising rapidly. Any proposal to change Medicare alarms older Americans, who see Medicare as an essential part of retirement security. As with Social Security, ideas to save Medicare for future generations are plentiful. Some proposals, like raising the eligibility age and raising payroll taxes, primarily affect the young. While proposals like cutting payments to doctors and requiring some Medicare beneficiaries to pay high premiums primarily affect the old. Again, cuts in Medicare mean the old suffer, while higher payroll taxes mean the young are paying for the old. In either case, the something-for-nothing government has promised benefits it couldn’t afford.

The Painful Answer.  Logically, government priorities should be to invest in the future through infrastructure and education – give the youth the same opportunities the older generation has already enjoyed. However, the older generation is a powerful, well-funded special interest group. They vote in large numbers, which is why Medicare and Social Security are considered the “third-rail” of politics. At a minimum, we need an active and frank debate about priorities and balance. In keeping with our American heritage, the conclusion would be that everyone sacrifices a little for the common good of all. Do you think the President and Congress we will elect in November will see it that way? Whether you are old or young, are you willing to sacrifice?

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