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Three Reasons to Reform Old Age Entitlements Now

In my last post, I showed that the younger generation is likely to live longer in a wealthier nation. If the younger generation is likely to be better off, why shouldn’t we transfer resources to the old and forget about reform to Social Security and Medicare? There are three reasons.

First, because of human nature each generation wants the next generation to be better off. It is distinctly odd to redistribute against the preferences of the beneficiaries. Most people have children and others have nieces and nephews. They are committed to these youngsters’ welfare even at the expense of their own. This is clear not only from polling, but from actions. People of any means almost invariably try to leave their children an inheritance rather than party down into old age.

One might ask why nevertheless old people often vote against reform of entitlements. First, most people are rationally ignorant of politics. Polls regularly show that many people do not recognize the amount of money spent on entitlements, thinking instead that foreign aid makes up a greater portion of the budget. Second, Social Security and Medicare are deceptively denominated as trust funds so that many, if not most, think they are only getting back what they paid in. Finally, the old have no confidence, given the weak restraints on government spending, that the money saved on entitlements will not be squandered elsewhere. At least living off Social Security may allow them to pass on more of their own savings to their children.

The second reason to worry is that large old age transfer programs put the government on autopilot, as entitlements become a greater and greater percentage of spending. The Steurle-Roeper Index of fiscal democracy shows that the percentage of the federal budget not already allocated to programs, including entitlements, continues to decline. Entitlements thus represent the real dead hand of the past constraining government choices for the future.

That kind of budgetary mix handcuffs society’s ability to deal with new collective risks. It is hard for democracy to ramp up new spending to address a risk when a large amount is already handed out in transfers. The higher the rate of taxation to pay for preexisting entitlements, the harder it will be to raise taxes to handle a crisis.

And the very technological acceleration that I have described previously is going to lead to more risks as well as more wealth. Abroad the risks include new kinds of weapons of mass destruction created by nanotechnology and biotechnology. And the risks of their use may also become greater because accelerating technology may destabilize traditional societies, giving rise to the kind of terrorism that is hard to deter.

There are also risks at home. Three million people drive for a living. Self-driving cars will be a great boon but a threat to jobs. Machine intelligence will also encroach on a variety of middle class white collar jobs as software does routine accounting, diagnostics, and yes lawyering. Such displacement may well require innovative government programs in education and training to help people transition to new work.

And these are just a few of the possible risks of technological acceleration: others are as varied as climate change and takeovers by machine intelligence. These are known unknowns, but with technological acceleration we face unknown unknowns as well.

My third concern about entitlements is the political climate they create. A government that transfers large resources from one group to another encourages a fiscal and regulatory war of all against all. The rhetoric war, whether the war on the old, the war on the young, the war on women, — fill in the groups of your choice — obscures what we have in common — the need for a government to protect us against invasion and catastrophe and to establish rules that facilitate invention and exchange.

We already have in Europe a warning of the consequences of an entitlement society where all sorts of groups have claim rights on revenues and even on employment by private companies.  This culture of social stagnation deprives nations of the resources to defend themselves without the aid of America, let alone meet new challenges.

As Edmund Burke understood, society is indeed an intergenerational compact, but it does not follow that we should think about creating a society in which each generation has an equal share of wealth. It is in the nature of things that old will want the young to do better than themselves. Today, an unreformed entitlement state is a risk to the young and to us all because it disables the government from addressing serious new challenges. By reforming entitlements and returning to constitutional limits on government we can better empower our nation  to address the unpredictable, collective risks of technological acceleration.  We can also create a better political culture — one where people  jockey less for a bigger share of transfers but focus more on common goods that transcend generations.

Reader Discussion

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on November 18, 2014 at 14:44:50 pm

It won’t surprise anyone that I found McGinnis’s earlier post more persuasive than the latter one. In general this analysis fails to distinguish between individual and collective interests, and between rich and poor members within each generation.

[E]ach generation wants the next generation to be better off…. People of any means almost invariably try to leave their children an inheritance rather than party down into old age.

Ah – there’s the qualifying term: “their children” – not “all children,” which is what the phrase “the next generation” entails.

I am prepared to believe that in general, members of each generation want member of their own family in the next generation to be better off. But I would be hard pressed to find evidence that this impulse generalizes. Consider: The oldest generation of Americans is more predominantly white, religious, conservative, and rural; the youngest generation is more ethnically diverse, less religious, more liberal, and more urban. Does McGinnis really have evidence that this younger generation is the natural object of affection of the older one?

Even assuming everything McGinnis says is generally accurate, it does not do much to undermine the rationale for transfer programs. People who share McGinnis’s perspective are free to transfer the wealth they receive to (younger) others; people who don’t share this perspective would be free to keep their transfers. Thus, transfers don’t frustrate the preferences McGinnis claims to be defending.

I favor progressive transfers. Thus, I don’t favor taxing the poor young to subsidize the wealthy old, or taxing the poor old to subsidize the wealthy young. I (generally) favor taxing the wealthy to subsidize the poor. And I think our transfer programs generally achieve this outcome, although perhaps not in the most efficient manner possible. In particular, it’s my understanding that Social Security is generally progressive once you account for disability payments.

The second reason to worry is that large old age transfer programs put the government on autopilot, as entitlements become a greater and greater percentage of spending.

Here again I part company with McGinnis: Why regard transfers as spending at all?

The Steurle-Roeper Index of fiscal democracy shows that the percentage of the federal budget not already allocated to programs, including entitlements, continues to decline.

Yeah – and I expect that the share of resources you spend on household items is declining relative to the size of your 401(k) as you age. In short, as a society we’re spending more on old people as society gets older. This is bad because….?

Entitlements thus represent the real dead hand of the past constraining government choices for the future.

McGinnis seems to argue that government is freer to tax wealth in the pockets of the rich than to tax Social Security benefits. Is that true? Perhaps so, but it’s a curious argument to hear from a libertarian: “Leave more money in the pockets of a wealthy minority, because society will be more willing to oppress them to deal with an emergency than society will be to share the burden more broadly.” Given the nature of tax havens, I have to suspect that mechanisms to redistribute wealth will also render wealth more readily taxable than leaving the wealth in more concentrated form. But I’m willing to consider counter-arguments.

Machine intelligence[, etc.,] will also encroach on a variety of middle class white collar jobs as software does routine accounting, diagnostics, and yes lawyering. Such displacement may well require innovative government programs in education and training to help people transition to new work.

Ah – education, the magic wand! Because we all know that today’s great concentration of wealth accrues to people with the most education. All those billionaire PhDs working on their post-docs....

Yes, displaced workers will need new training – to become home health aides for the elderly. There will be no shortage of work – but lowly-paid work. While society becomes ever richer. In short, we need government intervention not just for retraining, but for redistributing the benefits of this new world order.

My third concern about entitlements is the political climate they create. A government that transfers large resources from one group to another encourages a fiscal and regulatory war of all against all.

And a government that refrains doesn’t evade this war; rather, it enlists wholly on the side of the rich against everyone else.

We already have in Europe a warning of the consequences of an entitlement society where all sorts of groups have claim rights on revenues and even on employment by private companies.

How does European life expectancy compare with US life expectancy? Who, exactly, has failed to meet the new challenges?

True, interest-group stagnation is stultifying. So let’s keep telling the 99%, “Hey, we’re going to continue globalization policies that will undermine your place in the workforce. This will make society richer, but leave you in the toilet.” Guess how much protectionist policies you’re gonna get now? If you don’t want protectionism, you need to cut the 99% in on the benefits of free trade and deregulation.

The US has been experiencing pretty substantial economic growth – yet the party in power took a shellacking. Why? You think voters were actually motivated to join the Republican agenda? Then explain why voters also voted for increasing the minimum wage. No – voters voted for change because a large share of the electorate isn’t feeling the benefits of that growth. Another two years of this kind of stagnation for the 99%, and Hillary will ride a wave of populism while proclaiming, “Hello, Smoot-Hawley!”

It’s not too late. We can still avert a populist disaster. But the 1% is gonna have to cut a deal. And if we want to be at all efficient – minimizing the amount of wealth that is actually consumed by government -- that deal is going to have to involve transfer payments. It's the least bad outcome.

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nobody.really
on November 19, 2014 at 11:26:20 am

It is not the proper role and function of the American Constitutional Republican Federal Government to solve social/economic problems. Old age pensions,medical care,disability and unemployment insurance,welfare,food stamps,education,housing and the whole litany of the Federal Welfare State should not exist. These matters belong in the realm of private charities,religious organizations,private insurance,local and county government,if necessary,and especially to the family. The end results of the Federal Welfare State has been to create a nation of illegitimacy,dependency,destroyed economic capital that could be used to build the economy,helped to destroyed the nuclear family unit,destroyed self reliance and especially self responsibility plus contributed,along with the warfare state,to fiscally bankrupting the nation with unsustainable debt,taxation and inflation. Something has to change or else America will not only be bankrupt but turned into a fascist police state. To blame "the rich" for "not paying their fair share" is not only blatant Leftist class warfare but unrealistic. In the end there is not enough wealth either owned or being created to sustain the modern American Welfare State. The truth is America is bankrupt. The only logical answer is to recognize this fact and to dismantle and redirect the national welfare state to the realm of charity and private initiative where it belongs.

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libertarian jerry

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