We just celebrated the 68th anniversary of D-Day, and well we should. That day in western France was the pivotal day and the pivotal event of the 20th Century. As Omar Bradley pointed out, every man who set foot on the beaches of Normandy on June 6, 1944 was a hero – the men who took the cliffs to fight tyranny and took back a continent for freedom. I dare you to try to watch footage of and about that horrible, dreadful, wonderful day with dry eyes or a cold heart.
Here’s to the boys of Pointe du Hoc. In the words of Stephen Spender, these are men who in their “lives fought for life and left the vivid air signed with [their] honor.”
For what they did at D-Day and beyond, we describe that group as the “greatest generation” – who had, in FDR’s phrase, a “rendezvous with destiny.” They were largely born in a time of promise and prosperity shortly after what was supposed to be “the war to end all wars.” But instead they saw many of their dreams dashed by depression and yet another world war. Still, they persevered. They left us their legacy of liberty and so very much more. When they “left the field” to us, America had become the world’s sole superpower, with an economy that was the greatest the world had ever known and filled with opportunity for those with the industry and ingenuity to make the most of it, a tremendous educational system, a vibrant middle class, state-of-the-art infrastructure and a functional and representative government.
Not anymore.
America has been left largely in the hands of us Baby Boomers, more than 75 million strong. And even though we’ll deny it vociferously, the evidence is pretty clear that we’ve made a mess of things pretty much across the board, in large measure due to our unwillingness to put the interests of our children first. In sum, we are selfish, entitled toads who hate our kids.
But at least we come by our selfishness and sense of entitlement naturally. Consider the “cookie experiment” led by Berkeley psychologist Dacher Keltner. In this study, teams of three students were instructed to produce a short policy paper. Two members of each team were randomly assigned to write the paper while the third member was handed a leadership position by being tasked to evaluate the paper and to determine how much the other two would be paid. After 30 minutes of work, a plate of five cookies was brought in to each team. No one was expected to reach for the last cookie on the plate, and no one did, consistent with good manners.
But what about the fourth cookie? It was still an extra and also one that might be taken without any awkwardness. It turns out that even just a little bit of power went to the heads of the leaders – none of whom even earned their status. These leaders not only tended to take the fourth cookie. They also displayed signs of “disinhibited” eating, chewing with their mouths open and scattering crumbs widely. They ruled the roost and acted like it (after just 30 minutes!). This study confirms what we already recognize from experience: power tends to corrupt.
As leaders of this country, Boomers have not handled power very well. In stark contrast to our forebears, we look out for #1 at the expense of our kids.
Dead-Ends
Our biggest failing (among several big ones) with respect to our children is the lack of substantive opportunities we are providing them today. As noted, we Boomers are more than 75 million strong and the first of us turned the traditional retirement age of 65 just last year. However, we are increasingly postponing retirement and thus crowding out opportunities for the younger generation. Our reasons include our poor savings records, a lousy economy, an ugly stock market, home values still in the tank and even self-actualization. And to be fair, net household wealth in the U.S. is still down more than 10% from its pre-recession peak.
Whatever the reason, however, it is an unfortunate reality for our kids. Employment for those 55 and up has risen to all-time highs while everyone else is languishing well below the 2007 employment peak (see below).
Source: St. Louis Fed
Perhaps even worse, as we Boomers retire, they will be net sellers of equities, putting downward pressure on stock prices (more here), hurting us as well as our kids – who may just be beginning to save and invest. Indeed, our children are already terrified of the stock market and are afraid to invest generally.
Moreover, our K-12 educational system is in shambles for reasons ranging from severe and ongoing funding cuts to the lack of support, commitment and involvement of parents (us again). Meanwhile, the cost of higher education continues to grow at a pace nearly double to that of inflation (as it has for decades), leaving recent graduates with an enormous debt burden. Total student loan debt has reached more than $1 trillion and now even exceeds credit card debt. Today, 94% of those graduating with a bachelor’s degree are in debt compared with 45% two decades ago. And since they have such lousy job and career prospects, they despair about their ability to pay it. Even worse, by an overwhelming margin, kids no longer think they will do better than their parents did (see below).
Meanwhile, because there are so many of us, the ranks of the retired will continue to grow while the ranks of those supporting us (our kids) – via paying for entitlements such as Social Security and Medicare – will continue to shrink. And we’re living longer too. In 1950, the average American lived for 68 years and more than 16 workers supported each retiree. Today, the average life expectancy is 78 and fewer than three workers support each retiree. Health care costs continue to explode higher too.
The Social Security Administration claims that “Social Security is a compact between generations.” But that claim is false. Our kids never consented to those obligations. Both Social Security and Medicare are promises we Boomers made to ourselves that we expect our children to fund. Even worse, we haven’t managed them very well to date. Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This year’s annual report (summary here) again says that the finances of Social Security and Medicare are in trouble.
The proposals on Social Security reform contained in the December 2010 report of the co-chairs (there was no official report, contrary to consensus opinion) of President Obama’s deficit reduction panel (the Bowles-Simpson commission) include closing about half the funding gap by gradually increasing the amount of wages subject to tax. Medicare is worse off. The $38.6 trillion in unfunded benefits Medicare is expected to pay over the next 75 years equals $328,404.43 for each of the 117,538,000 households the Census Bureau said there were in the United States in 2010. Meanwhile, the economic disparity between America’s rich and poor continues to grow and the middle class continues to shrink.
Predictably, representatives of the primary political factions – our representatives (the average age of Congress is 58; they’re Boomers) – continue to blame each other and do nothing. It’s easy to blame Congress (with good reason), but we do not demand more and better from them either.
Expect things to get worse, too. Right now, the ratio of those 65 and older versus those 15-64 is right around 20%. By 2035, it’ll be closer to 35%. If nothing changes, 100% of U.S. tax revenues will go to entitlement spending and interest payments on the federal debt by 2024 – only 12 years from now.
Why Nations Fail is a terrific new book. It argues – very persuasively – that the key distinction between countries that fail and those that succeed lies in their institutions. Nations thrive when they develop “inclusive” political and economic institutions and they fail when those institutions are or become “extractive” and concentrate power and opportunity in the hands of only a few.
“Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few.” Inclusive economic institutions “are in turn supported by, and support, inclusive political institutions,” which “distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy.” That reality is the how and why behind America’s becoming the most powerful economic engine the world has ever known.
On the other hand, extractive political institutions that concentrate power in the hands of a few reinforce extractive economic institutions to hold power. Unfortunately, neither major American political party is fully on-board with inclusive institutions today. Republicans are generally willing (and often eager) to provide benefits to the wealthy to the exclusion of the poor and (the vanishing) middle class. Meanwhile, Democrats are far too willing to stifle creativity via regulation and a corporate tax structure that leaves us at a competitive disadvantage. Neither party (although perhaps for different reasons) seems interested in dealing with an educational system that’s failing as well as a higher education system whose cost structure makes no sense and the insane levels of debt students take on to try to pay those costs. Nor are they willing (again, typically for different reasons) to foster an economic climate that provides our youth with opportunities for meaningful careers with decent pay.
The future isn’t very promising for our kids and it is largely our fault.
Debt and Deficits
Beneath all this is a simmering government debt crisis, as long-postponed hard choices on debt and deficits come home to roost. We aren’t Greece (yet), but the news isn’t promising. Simply put, we have too much debt (see below).
And we haven’t raised nearly enough tax revenue to pay for what we have ordered.
Contrary to the claims of both sides, both political parties are to blame for this mass of government debt and the deficits we face. Federal tax revenue was equal to 14.9% of the economy in 2009 and 2010, the least since 1950, according to the Office of Management and Budget. At the same time, total U.S. debt generally and as a percentage of GDP has grown substantially (despite a slight decrease recently).
The debt ceiling deal reached last year provided for almost no immediate debt relief and surprisingly little relief longer term (more here).
The debt problems described by Standard & Poor’s when it downgraded the credit rating of the United States last August are real, substantial and growing. Indeed, the amount of federal debt held by the public is projected later this year to surpass 70 percent of the nation’s annual economic output (as compared with 40 percent in 2008), as the CBO said this week in a report that spotlighted the stark choices policymakers face on taxation and government spending.
But the news is actually even worse than that. Debt held by the public, which currently stands at $10.9 trillion, excludes money borrowed from Social Security and other government accounts. When this $4.7 trillion in so-called “intra-governmental holdings” is added into the mix, the total debt is in the ballpark of $15.7 trillion, roughly equal to annual GDP.
Research suggests that nations with debt levels of 90 percent or more of their GDP grow more slowly – at rates similar to the sluggish U.S. recovery – and take longer to recover from financial crises. Thus current debt levels are a major concern. Why we have gotten to this point is simple. Tax rates are at their lowest levels in decades and expenditures are at an all-time high. In other words, we want a lot of stuff but aren’t willing to pay for it.
Moreover, the U.S. economy will likely fall into recession in the first half of 2013 if large tax increases and scheduled government spending cuts are allowed to go into effect in January, the CBO said recently. This is the “fiscal cliff” many have warned against.
Sometime before the beginning of 2013, Washington will have to contend not only with a new debt ceiling increase (the last one having gone so well), but with the expiration of a long list of revenue measures (Bush tax cuts, payroll tax holiday and more) and automatic spending cuts that add up to a drag on growth of around 4% of the gross domestic product. And unless something is done, it would all happen at once – risking a new recession outright, since the International Monetary Fund is looking for the U.S. economy to expand by only 2.1% this year and 2.4% in 2013.
The longer-term picture, if anything, is even scarier. As noted above, by 2024, if nothing is done, 100% of U.S. tax revenues will go to entitlement spending and interest payments on the federal debt.
Traditionally, Republicans have been the leading critics of deficits. But now it seems they only care when a Democrat is president. As then Vice President Dick Cheney claimed while in office, “Reagan proved deficits don’t matter.” In any event, deficits do matter.
Unless and until we fix the current debt and deficit problem, our kids are in for a very rocky future. To this point, nobody in power seems willing to pitch in to fix things.
Disasters
Here in California, where I live, the infrastructure is a mess. Roads and bridges need repair. Schools and other public buildings need work. Maintenance levels are down. Sadly, the rest of the country has similar problems. Fully one-third of the nation’s roads are in poor or mediocre condition, and the Federal Highway Administration recently estimated that one out of every four bridges is either structurally deficient or functionally obsolete. Every infrastructure sector, from rail, air and seaways, to water supply, sewage and irrigation, to energy pipelines and the electric grid are in need of significant capital. The American Society of Civil Engineers says it will take an investment of $1.6 trillion over the next five years – double the current outlay – just to bring the nation’s infrastructure to acceptable levels.
Instead of dealing with these issues, we have ignored them and spent enormous amounts of money on other things. Our kids will have to bear the burden of repairing things (literally and figuratively) and run the risk of disaster in the meantime.
For example, the I-35 West bridge over the Mississippi River was an eight-lane, steel truss arch bridge in Minneapolis, Minnesota. During the evening rush hour on August 1, 2007, it suddenly collapsed, killing 13 people and injuring 145 on account of a design defect.
In 2005, the bridge was rated (again) as “structurally deficient” and in possible need of replacement, according to the U.S. Department of Transportation’s National Bridge Inventory database. Problems were noted in two subsequent inspection reports. A 2006 inspection found problems of cracking and fatigue. The bridge had been scheduled to be replaced, but not until 2020.
Due to general disrepair, more such catastrophes are possible, perhaps likely. Unfortunately, we have even bigger (if more controversial) disasters to worry about.
Like nearly all expert scientists in the field, I am convinced that global climate change is a dangerous reality. So is pollution generally. However, even if these risks are much lower than scientists think they are, the consequences of these problems are so dire that we must act on them for the sake of our children and their safety. But we do not.
I agree with Nassim Taleb:
“Correspondents keep asking me if the climate worriers are basing their claims on shoddy science and whether, owing to nonlinearities, their forecasts are marred with such a possible error that we should ignore them. Now, even if I agreed that it was shoddy science; even if I agreed with the statement that the climate folks were most probably wrong, I would still opt for the most ecologically conservative stance. Leave Planet Earth the way we found it. Consider the consequences of the very remote possibility that they may be right—or, worse, the even more remote possibility that they may be extremely right.”
Still, we do nothing, at tremendous cost.
Dysfunction
Despite these big and difficult problems, there seems to be little chance of any political solution. What I wrote when S&P down-graded U.S. government debt last summer still applies.
“Simply put, a majority in Congress (consisting of members of both parties) has been and remains unwilling to require the federal government to live within its means over the long-term while the President cannot or will not do anything about it. At the same time, a (different but still) majority in Congress (consisting of members of both parties) has been and remains unwilling to enact tax legislation sufficient to pay for the spending it has authorized while the President cannot or will not do anything about it. …Finally, and perhaps most tellingly, there is little reason in the current political climate to expect one side to compromise if there is a significant chance that credit for any subsequent benefit will be attributed to the other side. Today, political positioning seems to take precedence over the national interest far too often.”
To get a broader perspective, I recommend It’s Even Worse Than It Looks by Thomas Mann and Norman Ornstein, on the roots and current status of our dysfunction in Washington (see their April Washington Post op-ed piece here). To be clear, I am more cynical than they are. They place the bulk of the current blame on Republicans. I’m more comprehensive and even-handed in my criticism. To the extent that the Democrats have been less “effective” than their opposition in terms of making things difficult for the other side, I think it’s only because they are less disciplined and focused.
The popular culture – across media and political outlooks, from the film Mr. Smith Goes to Washington to the television series The West Wing to the Jack Ryan novels by Tom Clancy – typically suggests that politicians would do better by being good and magnanimous, by putting the interests of the country first. Sadly, there are few recent examples of anyone being willing to test that idea. The political system is broken, nobody in power seems to want to fix it, and we voters are willing to settle for the same old thing.
Conclusion
A D-Day of sorts is approaching for those of us who are Boomers. We are headed toward a “point of no return” with respect to the giant problems we have created and nourished. Solving them will require creativity, strength, intelligence, courage and sacrifice. Those are characteristics Americans have often demonstrated in crisis and characteristics our brave men and women in uniform – our kids – demonstrate every single day. If it’s not just talk and we really do love our kids, it’s time to step-up, put them first, and get about fixing the messes we’ve made. But we’d better start soon because time is running out.
Above the Market 
Bob,
You used to be a pretty cheerful guy. What happened? You paint a picture of impending gloom and doom that will be a financial crisis the likes of which we have never known. Sadly, I doubt most of us have the ability to do much about it. Or perhaps it would be better to say most of us have no idea what we can do about it.
We’re worried about keeping our jobs so we can, hopefully, deal with a healthcare system with runaway costs that can, and in many cases will, financially break us. What can I do about this?
We’re worried about keeping our jobs that corporate leadership too often wants to “off shore”. Everyone gives lip service to jobs but management is never graded on how many jobs they create. Given the option business always opts for the least cost solution. What can I do about this?
We’re worried about falling home values. Homes that we were told would be good investments for the future. Homes th at were devalued by reckless lenders and even more reckless and shortsighted borrowers. Some of us bought modest homes, paid off our mortgages and still saw our home values decline because of the actions of the irresponsible. What can I do about this?
We’re worried about being able to survive let alone enjoy retirement. You’re a retirement specialist. If you are anything like my financial adviser you probably suggest that Social Security will play significant role of our post working life income. Neither this program (nor Medicare for that matter) seems to have great futures in its present state. And neither political party seems has any incentive to do anything about it. Say anything about limiting or restructuring these in any way. It’s political suicide. What can I do about this?
We’re worried about being able to save enough for retirement even though huge numbers of people have forgotten how to save if they ever knew how. And to be fair the level and style of saving needed by individuals has increased dramatically in the fairly recent past. Time was when many people had defined pensions. (And still they managed to save vastly more!) Those pensions are never coming back. Today we need to be what I would call aggressive in our saving strategies if we’re going to survive retirement. But when I talk to my younger coworkers they don’t want to even talk about a 401k. Without this saving they are going to further burden the entitlement system. What can I do about this?
We say we’re worried about being able to save enough for retirement even though for many people a dollar earned is a dollar to be spent (often on repaying credit). What ever happened to self-restraint? Our generation is the last one that knew, really knew, people who lived through the depression and learned fiscal responsibility. They passed that responsibility to some of us. We grew up in modest homes, took infrequent vacations, ate economical meals, mowed our own lawns and drove cars that, by today’s standards, would be considered small (this from the land of giant SUVs and pickups). We learned that if you want something you save for it and then buy it. A credit card was for convenience. Not for living expenses. What can I do about this?
The last paragraph of your article suggested we need to make changes. I could not agree more. But the article has the same problem as “The Omnivore’s Dilemma” by Michael Pollan. Everything you say sounds correct but it doesn’t take the next step and tell me: What can I do about this?
I’m still pretty cheerful, Kevin. But the gravity of the problems we face is very serious business.
I expect to follow this post up with a “What now?” discussion. In the meantime, I’ll simply note that it seems to me that there are two necessary categories of response. At the personal level, the best we can do is save more, live frugally, and borrow less. We can all do that, and doing so would help a lot.
The degree of difficulty rises a lot when we start looking at societal issues (even those we all contribute to those personally). I don’t see a ready fix there without a movement of some sort. We all want more government services and lower taxes. That math doesn’t work. It’s popular to agree that we need more tax revenue but that only “the rich” (usually defined as “people who make more than I do”) should pay more. That math doesn’t work either. We could tax “the one percent” at a 100% rate and not get the revenue we need. At current spending levels, everybody needs to pay more in taxes for the math to work.
It’s also popular (albeit usually in other circles) to say that budget cuts should do the trick. But the lack of specificity in what that means is remarkable. Without true cuts to defense and entitlements (and very few seem willing to go there), it’s a pipedream to think we can get our spending and revenue in line. *That* math doesn’t work.
I’m sorry you were troubled by the gloom and doom. Past generations have been willing to make sacrifices during times of crisis. But if we don’t acknowledge that the current situation is a crisis there is little reason to expect people to sacrifice.
Well, if everyone cut back on consumption and saved, we’d be in a pickle in the short run.
I believe we are seeing it just beginning to see our predicament dawn on people. I heard a story on NPR where firefighters and police officers have gone from post-9/11 “hero” status to getting ostracized for foisting their outsize pay and pensions on taxpayers. As I noted before, the Wisconsin public employees had their union gutted, and Gov. Walker convincingly won his recall election.
As it becomes increasing a zero-sum game, people are going to switch from demanding lower taxes and greater services and benefit, to begrudgingly accepting higher taxes/lower services and demanding that someone else’s benefits get cut.
In the end, all of the above will happen (taxes and cuts), and whose ox gets gored will depend on their political power.
Directly applicable to retirement planning, it is not unreasonable to expect that tax promises will be broken or tax expectations thwarted. We may see a tax on Roth IRAs, increasing or new taxes on IRA or 401(k) withdrawals, or some sort of investment asset-based tax.
Individually, I advise consuming less and more wisely, saving more, and adding another element to your investment planning: finding buckets that are free from expropriation by Uncle Sam into which to put your investments (or at least diversifying from a “confiscation”/taxing perspective).
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Great piece. As a mid-30s Gen X’er (the smallest generation alive today) we saw the tail end of prosperity and excess just at the time we took on the burdens of mortgages and parenthood. I am a Democrat and have always been active in Democratic politics, but I’ve come to realize that our problems are not Red vs. Blue, but people over 50 vs. people under 50. The Tea Party tax cutters (mostly white, affluent, and over 60) and the Boomer liberals (Pelosi et. al) are cut from the same cloth, “I’m old, I’m greedy, screw those after me.”
The first candidate that says “I’m not running against Washington, I’m running against my parents.” will have my vote.
Bob —
Wow, long an thoughtful post. Some of my thoughts as someone on the older end of Generation X:
(1) I view the sale of equities by Baby Boomers as a potential opportunity. To the limited extent that Baby Boomers saved, they put off past consumption for future consumption. When they cash in their investments they will be consuming in the present, and more than likely consuming a lot more home-grown goods and services (health care, retirement homes, non-durable household goods) than foreign goods and services. Thus, companies have the opportunity to earn more as Baby Boomers shift from saving to spending, while their stock gets cheaper.
(2) The entitlements that Baby Boomers have voted for themselves are a selfish travesty. But we will never reach a point where 100% of tax revenues will fund only entitlements and interest in the debt because the rest of the budget is too large to fund solely with new debt (and who would lend to us anyway). If something can’t continue forever, it will stop, right? Expect to see entitlement promises “modified” (read: broken) at some point in the future. The events in Wisconsin, San Jose and your San Diego are harbingers of even greater cuts in the future.
(3) On deficits and debt, this is the greatest inter-generational transfer of wealth in human history. Every dollar of debt not well-invested in something that gives a greater return in the future (education, infrastructure) takes a dollar of future savings or consumption out of the hands or mouth of the Baby Boomer’s children and grandchildren.
Finally, there is so much fertile ground here, and I need to conclude with a thought about the future:
(4) As one columnist noted, any legislative cooperation we have seen in the past came in an era where the proverbial pie was increasing. Republicans could allow spending to get out of control while Democrats could agree to lower taxes because of the ever-increasing amount of money coming into DC and statehouses from taxes, bond sales and transfer payments. Now we are in a world where our debt payments and past promises have left hardly any pie for the legislatures to slice at the same time that we are losing our grip on global economic preeminence (without yet having shucked our costly global responsibilities). So neither party can afford to be so magnanimous without getting its goose cooked. And we should expect to see bitter partisan bickering over the remaining crumbs (or how we will break already-made promises or raise taxes) until we return to a time of low debt and surpluses.
But that is not necessarily a bad thing. In democracies, ideas are supposed to compete, sometimes bitterly. Parties in interest should fight to keep what they have. Yet it is a zero-sum (or negative-sum) game now, and there will be losers. The public employees of Wisconsin should expect to have a lot of company.
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