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Home Publications Blogs Beat the Press Inter-generational Equity and the Lies They Tell in Washington

Inter-generational Equity and the Lies They Tell in Washington

Friday, 06 August 2010 05:27

Much of the whining over current and projected future deficits is couched in terms of inter-generational equity. The story goes that we are doing bad things to our children and grandchildren by running up a huge debt that will threaten their living standards. In this story, the bottom line is supposed to be the living standards of future generations.

This should leave the public wondering why it seems that absolutely no one among the deficit whiners (including the reporters and editorial writers) commented on the fact that the Social Security trustees report released yesterday showed much higher wage growth than the previous year's report. According to the new report, average annual wages (adjusted for inflation) will be 47.8 percent higher in 2040 than in 2010. Last year's report showed wages would be 39.1 percent higher in 2040 than in 2010.

This higher wage growth projection dwarfs the impact of any potential tax increases that could be necessary to deal with budget deficits. For example, the change from last year's projections to this year's projections, if it proves accurate, would have more than twice as much impact in raising living standards as a 3 percentage point increase in the payroll tax would have in reducing living standards.

If the deficit hawk gang was actually concerned about the living standards of future generations, it is inconceivable that they would not be discussing these new projections. The fact that they have completely ignored them suggests that their concern with deficit projections have nothing to do with the living standards of our children and grandchildren.

Comments (12)Add Comment
written by zinc, August 06, 2010 6:27
The unrelenting march to armegeddon by the Republican party is de je vu all over again. Fresh off of "fwee markets and fwee twade", the shifting of medical, pension and financial risk to the unorganized citizenry, they are busy polishing off the last leg of FDR America. Back to the days of the plantation society.

Who could possibly have seen it coming ?
written by wkj, August 06, 2010 6:53
Dean--I believe that the CPI-adjusted cumulative increase in the Social Security average wage for the 30 years from 1978 to 2008 (the last year for which I could find figures) was 13.8%. This skimpy increase was also slightly exaggerated by the change in the definition of "wages" 1990 to include certain deferred compensation contributions that had not previously be counted.

The SS Trustees assumption of a 47.8% increase in real wages over the next 30 years is thus almost 3.5 times the 13.8% increase over the last reported 30 year period. What are they smoking?

Also, you are usually pretty skeptical about "expert" projections, why are you buying their assumption?

written by skeptonomist, August 06, 2010 9:09
Running up the debt does put a burden on our descendents, but the clash is really inter-class, not intergenerational. The reason that we have been running large deficits since 1981 is that taxes have been reduced on the rich, while SS has been accumulating a surplus. Now the rich and those they control want the Trust Fund debt to be dishonored in order to keep taxes on upper brackets from rising.

wkj: Projections are not really the issue. The trust fund will run out eventually and then what retirees get will depend on the wage level at that time, and what fraction of it goes to retirees. The demographics are fixed for a considerable time into the future. If income inequality continues to increase, both workers and retirees dependent on SS will be in trouble. The real issues are the income inequality and skewing of the economy toward finance and other things which do not really increase the general standard of living. Fiddling with retirement ages or adjusting payout rates is not the solution to these problems. SS bashers like to get people arguing about projections because it diverts attention from the real issues.
real wages
written by Mike B., August 06, 2010 10:58
wkj -
47.8% over 30 years is about 1.3%/yr, which doesn't seem that high (they assume a long-term 1.2%, with higher than that in the next few years due to assumed recovery from the recession). For 1960-2005, the average was about 1%. For 1978-2008, the first 2 years saw a total drop of about 7.2%, and the last year of 2.1%, which pulls the average down a lot.
written by wkj, August 06, 2010 11:08
skeptonomist: Largely for the reasons you have stated, I am in favor of maintaining the current Social Security benefit structure, even at the cost of tax increases. I just think it is a tactical mistake to overstate the case for the result one favors.

Also, I think SS cost projections cannot be ignored. If the % increase in the average wage over the next 30 years is no higher than it was in the past 30 years, then the cost of maintaining the current SS benefit structure will be higher (as a % of covered payroll and of GDP), than it would if the more optimistic wage projections in the Trustees Report proved out.

Again, I believe that tax increases to maintain the current SS benefit structure will be a price worth paying. However, I also believe that is important to be realistic in thinking about what that price is likely to be.
Deficit peacocks...
written by dcdan, August 06, 2010 1:02
don't care about this generations living standards, why would they care about the next one's?

These folks are just looting the piggy bank, for them and their funders.
written by skeptonomist, August 06, 2010 2:41
Yes, if the official wage-growth projections are correct, let alone if they are too high, SS taxes will have to be increased or benefits reduced to meet the objective of current benefit levels when the Trust Fund expires. But this is a matter of adjusting tax or benefit levels so that there is no discontinuity at that time, not of survival of the program. When the Trust fund is gone, if the population growth has been relatively steady there will be no real need for long-term projections. And if wages do not increase - they are now around 1970 level - should workers be taxed at higher rates to maintain current benefits? These things will have to be decided, but there is plenty of time and there is no crisis now.

The idea that economists (or anyone) could predict something like wage growth 30 years in advance is absolutely ridiculous. This is one reason why SS is not dependent to the first order on investment funds etc. - it is basically an immediate transfer of income from wage earners to retirees. The SS bashers seize on any kind of projection, from a wide possible range, that seems to support their case, which is a phony one in the first place (based on the lie that the Trust Fund is the program itself).
written by PeonInChief, August 06, 2010 2:52
Well, having gone after home equity--the second-to-last bit of wealth most people had--they've now discovered there's something else to be had. So they're going after Social Security benefits. Then there really won't be anything.
written by Ralph Musgrave, August 06, 2010 3:31
There is a further weakness in the “whinger” argument. This is that in as far as national debt is held by natives of the country concerned, one set of natives pass on an asset to their heirs, namely national debt or “Treasuries”, while others (those who hold little or no national debt) pass on a liability: the obligation to pay interest and repay principal. These two, (assets and liabilities) are of exactly equal magnitude, thus these payments have NO EFFECT WHATEVER on average living standards of future generations.

In contrast, there is the portion of national debt held by foreigners. The effects here are more complicated and are way beyond the comprehension of the whingers (and beyond the comprehension of those “foundations” which regularly get articles in the WSJ – you know the ones). It would take me a thousand words or so to set out all the different possible effects here, and this isn’t the place for a full length article.

Our Grandparents
written by Paul, August 06, 2010 4:03
I wonder if our grandparents obsessed about the debt they were passing on to us when they recklessly decided to fight in WWII, or build the Interstate highway system or put Americans on the moon or . . . Fortunately, they didn't care about our debt burden at all.
"Back to the days of the plantation economy" says zinc
written by diesel, August 06, 2010 8:04
Ironic isn't it, how the tea party zealots wish to harken back to the wisdom of the "Fathers" (I suppose that makes them children), whose world was a preindustrial plantation system founded on princely crown land grants. They do indeed yearn for the days when their lowly place was clearly defined, as servility seems to come naturally to them. Too bad another revolution occurred in the interim--the industrial--of which they appear to be unaware, and which renders them hapless wage slaves rather than tenet farmers or sovereign small holders.
written by Pat, August 07, 2010 6:33
I already know my kids, who range in age from 22 to 30, are going to have to work harder and longer to earn a decent wage and that fact has absolutely nothing to do with the deficit. It has everything to do with "American" corporations shipping all their jobs overseas to places like Indonesia where labor is dirt cheap. No one is worrying about the deficit, but everyone is worrying about jobs. Everyone in Washington knows this and they are deliberately not doing anything about it. Hence, no Town Halls this summer because they do not want to face the reality that their voters need jobs and not a lecture on the deficit.
Fixing the deficit is actually easy if they want to do it but they don't. Start by slashing the Pentagon's many, many budgets, and then go one by cutting foreign aid to countries that are more trouble than they are worth, and whose citizens enjoy government paid for health care while Americans are going bankrupt because of their medical bills. Maybe then there will be some money left to do a jobs bill, but I'm not holding my breath with this wimpy administration, and especially this congress (the Senate specifically) to grab their sack and do the right thing.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.