Samuelson on the Coming Age Wars

Probably no political platitude is more invoked or more ignored than this: let's do it for the kids. Everyone recognizes the moral power of making sacrifices today for our children's well-being tomorrow. That's why most politicians embrace this promise, as Barack Obama has. "We know we have to get spending under control in Washington so that we're not mortgaging our children's future" was a favorite campaign line. Just last week, in an interview with The Washington Post, Obama again promised to overhaul "entitlements." But alas, politicians don't always practice what they preach.

Generational tension, and maybe generational war, is an inevitable part of the Age of Obama. It's known that America is graying. In 1960, only one in 11 Americans was 65 or older. Now it's one in seven, and by 2030, it's expected to be one in five. What's less understood is that the political system favors the old over the young in this fateful transformation. We risk becoming a society that invests in its past.

The plight of the U.S. auto industry provides an ominous warning. For years, the Big Three and the United Auto Workers constructed an ever-more-generous system of early retirement and retiree health benefits for their employees. But ultimately, the costs became oppressive. The main victims were younger workers, whose jobs, wages and benefits were squeezed to protect retirees.

Similarly, the promises made to retiring baby boomers may impose crushing costs on society. Taxes may rise, other government programs—from national parks to college grants—may suffer and long-term economic growth may slow. Again, the main victims would be today's young, who would pay higher taxes and receive fewer public services.

Already, the three major programs serving the elderly population—Social Security, Medicare and Medicaid—account for two fifths of federal spending. In fiscal 2008, that was $1.3 trillion out of total spending of $2.98 trillion. By contrast, all defense spending totaled $613 billion.

The impending bulge of baby-boom retirees presents no good choices. Taxes? Higher spending on Social Security, Medicare and Medicaid could require massive increases in federal taxes—about 50 percent from present levels by 2030. This estimate assumes that other programs remain constant as a share of national income. Well, what about cutting some programs? Paying for baby boomers' added retirement costs this way would require the elimination of most defense spending or most other domestic programs.

State and local governments face parallel, though lesser, pressures. As their workers retire, spending on pensions and health benefits will swell, intensifying the need either to raise taxes or trim local services—schools, police, mass transit. There's a way to cushion the shock: make annual contributions sufficient to pay future benefits. But that's only partially occurred.

Studies suggest that state and local government pensions were about 85 percent funded in 2006, with wide variations. Wisconsin was 100 percent funded, Illinois only 60 percent, reports the Pew Center on the States. But the stock-market decline has been devastating. Through October, it reduced state and local government pensions by $1 trillion, or about a third, estimates the Center for Retirement Research at Boston College. Another problem: promised health-care benefits are largely unfunded. In 2006, these long-term costs totaled $370 billion.

What looms is a huge transfer of income from younger workers to older retirees. Ideally, we would consciously decide how large the transfer should be. But in practice, the choice occurs semiautomatically. Social Security, Medicare and pension benefits are set by law. Unless the laws are changed, the payments go out, and the pressures on taxes and other government programs are inescapable.

Beyond reassuring speeches, Obama hasn't confronted the conflicts. He's been all things to all people. Rhetorically, he's for the children. But he's also for the elderly. In the campaign, he opposed proposals for reducing the future costs of Social Security and Medicare through higher eligibility ages and lower benefits. Obama is in a box of his own making; he cannot fulfill his promises to children without repudiating some promises to the elderly.

As a society, America is in the same box. The conflicts between generations may or may not incite open political warfare, but either by design or default, we will be making decisions about America's future. The old are well organized and highly protective of promised benefits, while the young are politically passionate and unfocused. For the young, the odds look lousy.