Wednesday, May 15, 2013

The Brewing Generational Conflict

Financial promises made under different conditions and assumptions are null and void, period.

Essayist Eric A. touched on a key theme of the next decade in his two-part series A Brief History of Cycles and Time, Part 1 and Part 2: the political, social and financial dominance of the Baby Boom generation, and the eventual erosion of that dominance.

The promises made to the 76 million baby Boomers cannot be met. It's really very simple: promises made when the economy was growing by 4% a year and the next generation was roughly double the size of the generation entering retirement cannot be fulfilled in an economy growing 1.5% a year (and only growing at all as the result of massive expansions of public and private debt) in which the generation after the cohort entering retirement is significantly smaller.

Just look at this chart: demographics is destiny, and the so-called Silent Generation (roughly those born 1925 - 1942) currently drawing Social Security and Medicare benefits is somewhere between half and 2/3 the size of the Baby Boom.

Meanwhile, Generation X that follows the Baby Boom is almost half the size of the enormous cohort currently entering retirement. Sorry folks, the numbers don't add up, no matter how you finesse them: a smaller working population in a low-to-zero growth economy burdened with fast-rising debt cannot fund the pay-as-you-go retirement of 76 million citizens, fully 25% of the entire U.S. population.

(Recall that Social Security, Medicare and all other entitlements are pay-as-you-go. There is no trust fund; the current benefits are paid in full by taxes paid by current workers/taxpayers or by Federal borrowing via the sale of Treasury bonds.)

(The numbers and dates of generations are inexact; the Silent Generation, for example, is assumed to have missed serving in World War II but my father was born in 1926, joined the U.S. Navy in 1944 and was on a LST preparing for the invasion of Japan in early 1945, so this is not true of all Silents. The Baby Boom is typically defined as those born between 1946 and 1964, but many of those born in 1959-64 do not feel they belong to the "earlier" Baby Boom, and so some people divide the Baby Boom into two cohorts, or start Generation X in 1961. The lack of precision does not change the basic demographics.)

Everyone takes the present trend, takes out a ruler and pencil and projects it into the future, as if current trends will continue in a straight line. But they never do; the world is dynamic and trends change and reverse.

I have been surprised by the deep emotions that arise out of our cultural Id when generational characterizations and conflicts are openly discussed. Perhaps this is why these issues and feelings are rarely aired in the mainstream media.

In the free-form blogosphere, these officially inconvenient (i.e. suppressed) emotions are expressed, and these few honest expressions garner large audiences and a great many highly charged comments.

My position on the entitlements promised to the Baby Boomers has been clear since 2005 (Boomers, Prepare to Fall on Your Swords June 2005): demographics, the changing job market and the destructive consequence of financializing the U.S. economy render the entitlements promised (Social Security and Medicare) unpayable.

The current 115 million full-time workers cannot sustainably support the 110 million people currently drawing Social Security and Medicare/Medicaid--and the number of retirees entering these entitlement program will rise by millions in the decade ahead.

This worker-beneficiary ratio (already 1-to-1) will only become more unsustainable as Baby Boomers retire and the forces of The End of Work erode full-time jobs The End of (Paying) Work (January 21, 2009).

The generation in power has the biggest stake in retaining the status quo. Anything that threatens the status quo threatens their power and all that has been promised to them by the status quo.

As a result, any real reform that reduces entitlements to a sustainable level is politically dead on arrival (DOA). Reform is thus as impossible as paying the promised entitlements.

Though he is often presented as belonging to a new generation, President Obama (born 1961) is a Baby Boomer in age, outlook and politics, accepting the fantasy that 25% of the nation can draw hefty, open-ended benefits from Medicare indefinitely.

The solution is to work backwards from what the current generation of workers can afford to pay, not to work forwards from promises made when things were different. The pool of money that can be skimmed from the productive economy via taxes to pay for national defense, the care of veterans, education, welfare in all its forms, corporate and individual, all the myriad departments of government and Social Security pensions and Medicare is not unlimited. Difficult choices will have to be made, and what was promised decades ago is not the key consideration: what is foremost is the sustainability of the nation as an ongoing concern, which means focusing on the generations coming of age and those shouldering the tax burden going forward.

It is a truism of the entitlement mindset that the greater the entitlements promised and offered, the greater the resentments and self-absorption of the beneficiaries. I have often written about the state of permanent adolescence the Savior State/entitlement mindset engenders:

Our Many Layers of Entitlement (September 29, 2011)

We desperately need an adult discussion focused on reality rather than resentment. The solution will require dismantling open-ended, everyone-deserves-everything Medicare, which will bankrupt the nation itself. The solution is currently "impossible": The "Impossible" Healthcare Solution: Go Back to Cash (July 29, 2009)

As for pay-as-you-go Social Security, it will have to be means-tested: those drawing thousands of dollars a month in other pensions will have to let go of "what wuz promised" so other Boomers who have only Social Security can receive their full benefit. What exactly is so difficult about that?

I am a Baby Boomer, born 1953, and I hope our generation musters the courage to face reality and the need for re-assessment and adjustment and yes, the word that is tossed around in endless lip-service but avoided in the real world, sacrifice. Anything less will be a generational failure of monumental proportions.

I refuse to burden our children and grandchildren with mountains of debt so I can get the full measure of "what I wuz promised." Financial promises made under different conditions and assumptions are null and void, period. Reality trumps "what wuz promised" every time.

What nobody dares say is that if the 76 million Boomers press their claims to the point the nation is bankrupted, then the next generations (X and Y) will have to wrest political power from the retirees, not for their own sake but for the sake of the nation and for the generations behind them. 

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

Thank you, Eugenio M. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Brian S. ($100), for your mind-bogglingly generous contribution to this site -- I am greatly honored by your steadfast support and readership.

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