The Young Will Be Burdened

The generation that is now beginning to retire seems to have leverage its size into favorable policy that it will enjoy in later life. Governments slashed tax rates in the 1980s to revitalize their lagging economies just as boomers approached their prime earning years. The average federal tax rate for a median American household, including income and payroll taxes, dropped from more than 18% in 1981 to just over 11% in 2011. This means less revenue for the generous benefits boomers have continued to vote themselves, programs like a prescription-drug benefit paired with inadequate premiums have caused deficits to explode.

An American born in 1945 can expect nearly $2.2m in lifetime net transfers from the "state" far more than they pay in, and far more than any previous group. A study by the International Monetary Fund in 2011 compared the tax bills of what different age citizens pay over their lifetime with the value of the benefits that they are forecast to receive. The boomers are leaving a huge bill. Those aged 65 in 2010 may receive $333 billion more in benefits than they pay in taxes. This is  an obligation to the government, 17 times larger than that likely to be left by those aged 25, this is a huge burden that the young is about to inherit.

Sadly, arithmetic leaves few ways out of the mess, the numbers are ugly and much of it is only now becoming visible in our soaring National Debt. Faster growth would help, but the debt left by the boomers adds to the drag of slower labour-force growth. Carmen Reinhart and Kenneth Rogoff, two Harvard economists, estimate that public debt above 90% of GDP can reduce average growth rates by more than 1%. Meanwhile, the boomer era has seen falling levels of public investment in America. Annual spending on infrastructure as a share of GDP dropped from more than 3% in the early 1960s to roughly 1% in 2007.

Austerity is another option, but the consolidation needed would be large. The IMF estimates that fixing America’s fiscal imbalance would require a 35% cut in all transfer payments and a 35% rise in all taxes—too big a pill for a creaky political system to swallow. Fiscal imbalances rise with the share of population over 65 and with partisan gridlock, this is troubling news for America, where the over-65 share of the voting-age population will rise from 17% now to 26% in 2030. As this voting block grows and strengthens it is unlikely they will loosen the noose.

This leaves a third possibility: inflation. A few years of 5% price rises could help households reduce their debts faster. Other economists, including two members of the Federal Reserve’s policy making committee, now argue that with interest rates near zero, the Fed should tolerate a higher rate of inflation and try to speed up recovery. The generational divide makes this plan a hard sell. Younger workers are typically debtors, who benefit from inflation reducing real interest rates, older people with large savings dislike it for the same reason. A recent paper by the Federal Reserve Bank of St Louis suggests that as a country ages, its tolerance for inflation falls

Recently an article on BBC news  said the weakness in the labor market and in the UK economy is on the pay side and that people are having to price themselves into jobs. This means that there continues to be a cut in the real value of pay as inflation remains higher than pay increases. People have now taken an average cut in pay over recent years and today we see there's still more than five people chasing every job vacancy. Youth unemployment has risen, many jobs are only part time, and long-term unemployment is still far too high. I contend the same is happening in America.


Footnote; For more about what the youth of this Nation are facing read the post below. Other related articles may be found in my blog archive, thanks for reading and comments are encouraged,
                  http://brucewilds.blogspot.com/2013/01/ugly-math-made-simple.html