Fear the (Baby) Boom and Bust

The people running this site, "The Can Kicks Back," suggests that economic inequality, government and student debt, and median income stagnation all have the same root cause: essentially, it blames the baby boomers.

Normally, when confronting broad, sweeping arguments like this one, my instinct is to discredit the over-the-top claims with actual data. In this case, though, it's actually kind of hard to argue with.

First of all, we have the fact that Baby Boomers did not have the same mentality of thrift as their parents; it's not all that surprising, given that their parents lived through the Great Depression and Second World War, and they didn't. Nevertheless, you can see the generational shift in the data:

The graph measures savings as a proportion of current-dollar per-person income, from 1929 to 2012. Not surprisingly, there's a huge drop during the Great Depression, suggesting that people were using most of their income to feed themselves. Then there's a big, huge jump during the Second World War. Partially that was enforced by government rationing, partially it was social pressure to support the war effort, and (I suspect, although I'd need more data to back this up) partially it was rebuilding savings that had been depleted during the previous decade.

But what's important for this argument comes after that. There's a gradual rise in the share of income saved after the war, but that rise flattens out beginning in the late 1960s--when the first Baby Boomers are entering the workforce. The last of the Baby Boomers started entering the workforce in the early 1980s, and we see a drop in the savings rate at that time, followed by a downward trend (perhaps related to the retirement of the Boomers' parents). The discrete jump up in 2008 is most likely related to current-dollar incomes falling faster than savings can respond.

In short, it is at least a plausible theory that Baby Boomers significantly consumed out of their parents stored wealth without replenishing it.

One possible response to depleting stores of wealth, especially when planning for retirement, would be to consume less; another would be to simply borrow against future earnings. The latter category is a better description of the Baby Boomer strategy.

Forbes makes the case that the current system of government entitlement spending (which the Baby Boomers are starting to draw as benefits) pays out far more than the recipients ever payed in:

Senator Tom Coburn (a physician in private life) has estimated that the average American couple contributes approximately $110,000 to Medicare over their working careers and receives over $330,000 of Medicare benefits. On Feb. 20, USA Today cited Urban Institute data pegging those same figures at $88,000 and $387,000, respectively. There are differing estimates of the size of the gap, but clearly Medicare suffers from an unsustainable funding deficit.

The conservative estimate is that Boomers will be drawing $3 for every dollar payed in. If this were a long-term investment that might not be bad; but Medicare isn't an investment, it's a pay-as-you-go system ultimately funded by taxes. It's a system in which Boomers give up a dollar in taxes during their working years, and receive $3 in new taxes (or borrowing against future taxes) later.

According to Thomas Firey, a commentator at Cato, it doesn't get better when we look at Social Security:

In contrast, the Boomers will get a bargain. When they entered the workforce in the late 1960s, they paid only 6.5 percent of their earnings to Social Security and nothing to Medicare. For about half of their working years, the Boomers paid 10 percent or less to Social Security and less than 1.25 percent to Medicare. Only from 1990 on, when the Boomers had earned paychecks for a quarter-century, did they start paying 12.4 percent to Social Security and 2.9 percent to Medicare — the same percentage we Gen-X/Yers have paid our whole lives.

That’s the Boomers’ bargain: They’ve paid less of their earnings into Social Security than we Gen-X/Yers, yet they’ll receive more in benefits than we will and we’ll pick up the tab.

So when Baby Boomers complain to me about how they've paid a lot of taxes and have earned their government payouts, I have trouble keeping my cool. To be fair, Boomers have accomplished some major gains for America during their time in charge. Boomers presided over the rise of civil rights and feminism, essentially extending the benefits of their position to many who had previously been cut off from the wealth created by their parents.

But it doesn't help that the Boomers complaining about how high their taxes (and, tellingly, the extension of rights to those they consider undeserving or immoral) have been are consistently living in states that, on net, are heavily subsidized by others:

New York transferred over $950 billion to the rest of America's fiscal union from 1990 to 2009. But relative to the size of its economy, Delaware made the biggest contribution, equivalent to more than twice its 2009 GDP.

So if you are a Baby Boomer in Oklahoma or South Carolina complaining about your taxes, you could always do the ethical thing: First, refuse two-thirds of your medicare dollars and (a bit under) half of your Social Security dollars; then, call your representatives and tell them to give Texas, California, and Minnesota back their tax dollars. I won't be as upset as the "The Can Kicks Back" people if you don't, but until you're willing to do, don't expect any sympathy from me.

(The title of this post comes from the legendary Keynes/Hayek rap battle.)