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The Unnatural State

The Economist reports that in five nations net transfers (private plus public) go from the young to the old rather than the other way around. Some of these nations are deeply social democratic (Germany, Austria, Slovenia). Some are thought to be conservative (Hungary, Japan). But all have in common large social entitlements.

This trend shows show how welfare states can reverse the natural order of things, where the old give more to the young than the young can ever repay. Families exemplify this principle. Socially too, the intergenerational flow of resources is what creates civilization as each generation receives benefits from the previous one.

Now to be sure, not everything that is natural is good. But few people criticize the special solicitude parents feel for their children or the old feel for the young generally. And entitlements to the elderly cannot easily be justified by abstract appeal to the justice of redistribution. It is simply not the case that the elderly as class are poorer than the young.

The social consequences of this unnatural flow are deeply unfortunate. The weight of the welfare state on the young gives them fewer resources to have families themselves.  As a result, low birth rates are something that nations that transfer from the young to the old have in common as do other nations approaching a similar tipping point. Such societies also become less innovative as the young lack funds to be entrepreneurial and face unfavorable incentives because of the taxation needed to support the welfare state.  Given their level of development, all of the nations listed by The Economist punch below their weight in creating the next new thing.

The United States is not yet a nation which moves net resources from the young to the old. But as U.S. baby boomers retire, the flow of resources to the old threatens to become a torrent. Our Democratic presidential candidates want to increase old age entitlements. And Republican presidential candidates, as Veronique de Rugy notes, have generally been conspicuous by their silence on entitlement reform.

This perverse movement of resources is a necessary rather than a contingent fact of the welfare state. The elderly vote more than the young, who have more distractions, and politicians are thus all too eager to give them goodies. And while individually the elderly would like to direct more resources to their young relatives, when they act in politics they face a kind of tragedy of the commons. They cannot prevent others from living off the state, so they might as well do themselves.

Politicians also design entitlements to mislead voters into thinking the old age entitlements simply return to the elderly what they paid in as youngsters. That is one of the false implications of terming social security a trust fund.   The collapse of restraints on government has led to a system at war with one of the deepest and most celebrated human impulses.

Reader Discussion

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on January 31, 2016 at 21:56:13 pm

[E]ntitlements to the elderly cannot easily be justified by abstract appeal to the justice of redistribution. It is simply not the case that the elderly as class are poorer than the young.

True, in the US, it is not the case that the elderly as a class are poorer than the young since the advent of Social Security. Prior to that – yes, it very much was the case.

More generally: Each generation tends to be wealthier than the prior one. No, perhaps the young are not as wealth as the old at any given point in time. But on average, each generation is wealthier than the prior generation at any given age. For example, today’s 30-yr-olds tend to be richer on average than 30-yr-old from prior eras. If you value egalitarian distribution of wealth levelized over a lifetime, I don’t see how you can avoid the conclusion that, on balance, wealth should be transferred from the young to the old.

True, historically society may not have allocated more wealth to maintaining seniors than to investing in other age cohorts. But this dynamic may have resulted from a variety of related favors. Most obviously, historically people died earlier. In a society where nobody lived to be 80 yrs old, clearly society allocated very little money for the maintenance of 80-yr-olds. Moreover, in a society that lacks the technology to enhance life expectancy or life quality, there may be little incentive to allocate wealth for these purposes. But in societies where money can extend life and life quality, and where people do live longer, it is not difficult to imagine that societies would see reason to transfer money in that direction.

Finally, I’m curious about this discussion about allocation of wealth among generations. Historically the world was a more violent place than it is today; social groups were more likely to wage war on each other than they now are. I suspect that a huge percentage of the people who engage in this violence for the benefit of the social group were relatively young. In other words, war taxes the young for the benefit of the rest of society, e.g., the old. So if we include these transfers in the calculations, perhaps we’d find that 1) it’s common for seniors to be net beneficiaries of social wealth allocations, and 2) as wars have grown less smaller and less common, there has been less wealth reallocation than in the past.

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nobody.really
on February 01, 2016 at 00:06:36 am

Each generation tends to be wealthier than the prior one. No, perhaps the young are not as wealth as the old at any given point in time. But on average, each generation is wealthier than the prior generation at any given age. For example, today’s 30-yr-olds tend to be richer on average than 30-yr-old from prior eras.

Are you sure about that?

In 2009, households headed by adults ages 65 and older possessed 42% more median1 net worth (assets minus debt) than households headed by their same-aged counterparts had in 1984. During this same period, the wealth of households headed by younger adults moved in the opposite direction. In 2009, households headed by adults younger than 35 had 68% less wealth than households of their same-aged counterparts had in 1984.

Source.

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z9z99
on February 01, 2016 at 10:49:09 am

Hm! I wouldn’t have guessed. Nice find, z9z99!

I was thinking in terms of, say, changes since 1935 rather than changes since 1985. And I had discussed changes on average, while the Pew study discusses changes in medians – but I’ll concede that median measures are the more appropriate bogey.

My chief quibble is that the Pew study compares bookkeeping entries rather than economy data. For example, it counts student loans as a debt, but doesn’t estimate a future value of the education derived thereby. Pew also has a study on the rising cost of NOT going to college -- but that kind of opportunity cost finds no place in the economic wellbeing study cited by z9z99. To make a fairer assessment, we’d need to amortize the cost of the capital investment over its productive lifetime, or impute the value of the resulting asset. And each of these calculations would require making estimates.

I also note that the Pew study analyzes wealth per household, without regard to the size of the household. Because family sizes have been shrinking (especially among young households, due to delayed childbearing), analyzing data on a per capita basis might not reveal such large disparities.

Finally, by focusing on bookkeeping data, we overlook the hard-to-measure societal phenomena that always get discussed when evaluating inflation measures. For example, today's generation is enriched by the internet in ways that will not be reflected in bookkeeping measures.

But the larger point remains: I’ll have to reevaluate whether the median economic well-being of each generation is better than the prior generation’s. The Pew study -- putting aside its methodological shortcomings – identifies a counter-trend that has endured since at least 1985. That’s suggests something structural, not just a quirk of business cycles.

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nobody.really
on February 01, 2016 at 11:00:44 am

Nobody:

Pretty sensible, I'd say.
However, how do you account for Z9's statement that in the most recent 25 year comparison, those under 35 have experienced a net decline in wealth? Most of us have seen this data, or something similar - is this simply an outlier as a result of the housing fiasco - or is it something more.
Clearly, some segment(s) of the under 35 group are doing quite well - but overall, maybe not so much?

In these pages (and at other sites) we have talked about the economic impact of 'globalization, technology, regulation, etc upon the lower and middle classes and some have gone on to argue (Tyler Cowen) that there will be even more separation / inequality in the future.
Do you see this as well? Or is this a blip on the radar that will soon self-correct and allow us to continue to *transfer* wealth to the elderly? (Of course, one must ask, how much of we old folks wealth is derived from transfers rather than hard work and savings and the income deriving therefrom).

Anyway, your thoughts on this!

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gabe
on February 01, 2016 at 11:35:43 am

I think that Professor McGinnis's post suggests a relevant query: How do particular policies affect the mechanisms of wealth accumulation in different age groups? For example, do capital gains tax rates skew income distribution in favor of the elderly, and is this to the net advantage or disadvantage of younger people? Is there a larger allocation-of-resources strategy whereby wealth is directed toward those most likely to produce greater economic growth for society as a whole, even if this is almost certain to result in greater wealth disparities? Is the diversion of wealth toward younger generations an "investment?" and diversions the other way divestments? How would you model this?

I dunno.

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z9z99
on February 01, 2016 at 12:24:45 pm

Is the diversion of wealth toward younger generations an “investment?” and diversions the other way divestments?

This is how I understand McGinnis's remarks.

I merely wanted to note that --

1) If such transfers are systemic, it does not follow that any generation is made worse off; they just must wait for their opportunity to be on the receiving end (and, presumably, each generation would adjust its savings levels in anticipation of such transfers; this would free up resources for things such as rearing children....)

2) The post puts into relief the distinction between consumption and investment. The subtext of McGinnis's post is that investing in youth is productive, whereas investing in old people is a waste of money. He lavishes attention on the harms that arise from giving money to old people, while making no mention of the harms what would arise from redirecting these resources.

A perennial question: To what extent should we structure society to promote the strong, and to what extent should we structure society to defend the weak even at the expense of promoting the strong? Societies generally do some of each -- "defending the weak" understood as an investment in promoting social cohesion -- but how to make the trade-off?

I'd agree that age is a poor proxy for "strong" and "weak," but I sense that's the concern that has animated these policies. If McGinnis is advocating for means-testing Social Security payments, I'm on board.

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nobody.really
on February 01, 2016 at 12:33:48 pm

Z:

" Is there a larger allocation-of-resources strategy whereby wealth is directed toward those most likely to produce greater economic growth for society as a whole, even if this is almost certain to result in greater wealth disparities?"

I am not clear on this. Are you speaking in terms of transfer (via tax policy or *direct* transfer) to a *generation* more likely to produce economic growth or are you anticipating a more granular distribution / transfer, say to those actively engaged in economic growth - companies, entrepreneurs, etc?
The latter option, I suppose, would engender greater wealth disparity; not so clear regarding a generational transfer. - but i don't know.

Also, it seems (and I would request nobody's expertise on this) that one factor missing from this analysis is the effect of inheritances. Unless, we old buggers are hell-bent on spending every last dime we have accumulated in pursuit of a delayed but rather prolonged childhood, (talk to my brother-in-law about this), it is not unreasonable to assume that much of this accumulated wealth (via transfer indirectly and savings more directly) would at some point in the future make its way to the younger generation(s).
How do we weigh such things. If i recall correctly, nobody had some fine comments on this in the past - even if nobody did not, nobody's seeming command of this type of information may be instructive here.
In short, can we factor in a "time-delay" in wealth accumulation / transfer and does it have any meaningful impact?
Just curious!

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gabe
on February 01, 2016 at 14:29:41 pm

Gabe,

I think there is a distinction to be made here between wealth distribution and wealth allocation. I think of wealth distribution as the observed result of where wealth ends up whatever caused it to be so, Wealth allocation is that active process that affects, or attempts to affect, the wealth distribution. Different policy considerations apply to the two.

The questions we have about wealth distribution are what are the considerations by which we determine which distributions are desirable? Justice? Political contentment? Economic growth? Some sort of Buddhist notion of "nothingness?" Are we interested in maximizing the size of the middle class, or maximizing class mobility? Is greater employment with less class mobility preferred over the converse? Then we have to ask how we are to measure how well a particular distribution satisfies the underlying goals. Next we ask what are the principles (or if you are R Richard Schweitzer, the limiting principles) that apply to the relationship between wealth distributions and such things as justice, political contentment, economic growth, etc.?

With regard to wealth allocation, the first question is naturally, how likely are wealth allocation policies to produce the desired wealth distribution (assuming such a thing actually exists)? Next, we ask what are the costs of these policies in terms of economic opportunity, excessive authoritarianism and use of force, vulnerability to corruption and manipulation for the benefit of insular and perhaps nefarious interests? etc. Does a particular allocation strategy promote dependence or lessen it? How well does a particular strategy account for the foibles and quirks of human nature, and the law of unintended consequences? Cui bono?

I suspect it is easier to come to an agreement regarding wealth distribution, which is an abstract and noble thing, than it is to agree on a policy of wealth allocation, which is a practical, and thus potentially ugly and nasty thing.

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z9z99
on February 01, 2016 at 15:02:50 pm

Z:

Thanks, informative as always:

You went beyond my mere question (and I appreciate it) of what is the effect of (in your terms) of a private allocating of inheritances upon our assessment of, say, generational, wealth disparities.
That is to say, when formulating or considering whether we should implement Distribution Policy X, Y, or Z, ought we to factor in the potential voluntary (if death be voluntary, that is) transfer of wealth in our overall scheme?

Private action, say parental allocation of wealth, may have some impact on distribution data. Is it important?
And as nobody asks, should SS be means tested? If so, what is the impact upon private allocations of wealth and how will that redound to the benefit or detriment of the young? and to policy?

Just some thoughts from one who struggles with economics.

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gabe
on February 01, 2016 at 15:21:50 pm

Gabe,

To answer your question directly, I would start by saying private allocations of wealth will tend toward satisfaction of private interests. If you means test social security, people will game the system to both minimize "income" subject to payroll taxes, and to minimize whatever measure of means social security is tested on. I think it is always prudent to assume, as I have said here before, that the people who look for ways to exploit rules are smarter than the people who make rules.

As to your other question, I think that intergenerational transfers via inheritance are more efficient at achieving a transfer, (as opposed to say confiscatory death taxes) but less likely to satisfy most stated goals for encouraging such transfers; i.e. concentrations of wealth are likely to stay concentrated. I make no comment as to whether this is a good or bad thing. On the one hand it is quite natural for one's bounty to follow one's affections; on the other, when wealth is at least partly derived from transfers from young to old, harvesting wealth from the population generally so it can be concentrated specifically is likely to make some people grumpy. The malady in most wealth transfers schemes is the same: corruption, unscrupulous favoring of discrete interests, and reliance on the coercive power of the state.

In my opinion.

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z9z99
on February 02, 2016 at 00:06:27 am

[…] O. McGinnis, George C. Dix Professor in Constitutional Law at Northwestern University, explains how unnatural the direction of the transfer is. Normally, societies “give more to the young than […]

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