The Demographic Wave

The following animation (from Calculated Risk, using Census Bureau data), which updates every second, shows the wave of demographic changes from 1900-2060.

PopDist

The additional numbers of older Americans (and thus retirees and, by implication, the need for better retirement saving and planning) going forward — as the Baby Boomer generation retires — should be obvious.

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Why Do We Hate Our Kids?

D-DayIn honor of the 69th anniversary of D-Day, I am repeating this post from a year ago.

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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.” Continue reading

Why Do We Hate Our Kids (Redux)?

Back in June, in honor of D-Day, I wrote a long post entitled Why Do We Hate Our Kids? in which I argued that we Boomers have 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 (effectively) hate our kids.  My conclusion follows.   

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.

Third Way, the self-styled moderate Democratic think tank, has now published a study that supports my argument by asserting that what they (and the federal government) call “public investments” (such as defense, infrastructure, long-term research and education) are on a collision course with entitlements (Social Security, Medicare, Medicaid, etc.). In essence, the research claims that the only way to save  things like NASA, highway funding, and clean energy research is to reform entitlements.  Third Way sees that approach as a “progressive” imperative.

But, like Bill Keller of The New York Times (whose excellent recent piece alerted me to the study), I was particularly struck by the visual (irrespective of whether or not you agree with the priorities Third Way sees as “investments”), shown to the left. In 1962, about 32 cents of every federal dollar, excluding interest payments, was spent on investments and only 14 percent on entitlements. In the mid-70s the lines crossed. Today we spend less than 15 cents on investment and 46 cents on entitlements. By 2030, when all the Baby Boomers have started collecting Social Security, entitlements will consume 61 cents of every federal dollar, leaving us, in the words of the study, with “a less-skilled work force, lower rates of job creation, and an infrastructure unfit for a 21st-century economy.”  Whatever political priorities one might choose as appropriate investments in our children’s futures, without entitlement reforms we can’t afford them.

I am not the first nor the last to make a basic Boomer-bashing argument. As Keller pointed out (follow-up here), just in July The New York Times editorial page published such pieces from Ross ThouhatDavid Brooks and Kurt Andersen. Sadly, they are largely correct.  We are essentially unwilling to make the tough choices and the difficult sacrifices that are necessary for our children to flourish.

The American Left panders to Boomers by opposing anything like a cut to entitlements (for example) and panders to everyone by suggesting that our problems can be fixed simply by taxing “the rich.”  But the math of such alleged “solutions” simply doesn’t work (in fact, it’s so far off as to be ridiculous).  The American Right panders to everyone by claiming that taxes needn’t be raised and can even be cut (for example) while only eliminating government “waste.”  That’s nuts too (although perhaps cynically intended to “starve the beast“).  To the extent that either position prevails without serious and careful compromise, investments in our kids’ futures are doomed.

Ever since I turned 50, I have received regular solicitations from the AARP to join up. But since the organization’s stated and public approach (see here) seems to be that entitlements are “sacred” and that any approach — no matter how sensible and fiscally responsible — that even considers what they see as a reduction in benefits is evil (not to mention the “third rail” of American politics), I have no wish to provide them with my money.  I love my kids too much.

Why Do We Hate Our Kids?

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.

Goodbye, Golden Years

There is a significant article in today’s edition of The New York Times by Harvard economist Edward L. Glaeser in which the problems faced by Boomers looking towards retirement are highlighted:  “Retirement seems out of the question for increasing numbers of Americans who are saddled with debt and whose savings evaporated during the recent bust.”

Many more seniors are working than in the past — both fulltime and part-time.  That’s partly because Social Security no longer punishes those who receive benefits and continue to work, partly because work is much less arduous than it once was for many (fewer workers over age 55 are steelworkers, for example), and partly because seniors today are much healthier than in the past.

But not every senior who wants to work is working — not by a long shot.  Today nearly 450,000 Americans 65 and older are unemployed and the number of unemployed elderly job seekers has more than doubled in the last four years. Many work or want to work because they need to:  “American households saved less than 4 percent of their incomes for every year between 1999 and 2008; during this time, thrifty Germans were saving about one-tenth of their earnings. A nation that prefers spending to saving is going to find it difficult to enjoy a comfortable retirement.”

Look at this statement again for emphasis:  “A nation that prefers spending to saving is going to find it difficult to enjoy a comfortable retirement.”

There is a bit of good news here though.  The usual idea that older workers working longer is bad for younger workers is turning out not necessarily to be true. That’s some small comfort amidst a very discomforting picture.