A version of this piece first appeared in the Washington Times.
According to a study recently released by the Pew Research Center, a mere six percent of the so-called Millennial generation believe they will receive the same level of Social Security benefits as current retirees. It is hard to decide the appropriate reaction to this finding. On one hand, I am relieved that the vast majority of this generation understands that there is little hope Social Security will be around for their retirement—regardless of how much they pay in taxes. On the other hand, I am incredulous that six percent of this group still clings to the delusion that the Social Security gravy train will continue on its current path.
This generation, which entered the job market just as the economy spun into the Great Recession, could well be the unluckiest of many. The already-degraded outlook for Millennials is made even worse by laws that shift wealth from younger to older generations, as well as the continued failure by Washington to enact the reforms necessary to keep the largest retirement safety net programs, such as Social Security, solvent for the long term.
The Millennial generation is currently between the ages of 18 and 33. According to the Pew study, they are heavily burdened by student debt and have higher levels of unemployment and poverty than the generations that preceded them. Their income and wealth levels are also lower than was the case for the earlier generations at comparable times. This lack of economic stability drives the lower marriage rates for Millennials—26 percent, compared to 36 percent for Gen X and 48 percent for the Baby Boomers—at the same point in their lives.
Their coming of age at the start of the Great Recession might haunt many Millennials for decades. Failure to secure a job, or ending up with underemployment can have long lasting impact on both income and wealth. It can take decades to make up for lost earnings. As it is, dealing with the double whammy of shaky employment prospects and heavy student debt, an unprecedented number of Millennials are returning to their parents’ homes instead of striking out on their own.
This visible burden is not the worst that Millennials bear. Social Security, and the obligations that the system has imposed on the unsuspecting young, is by far the more onerous burden. That obligation does not figure in the official debt count. This is what Boston University economist Laurence Kotlikoff calls the “fiscal gap.” The Millennials have been drafted to cover some of this gap—which makes any thought of their receiving current levels of benefits hopelessly naive.
In a December 2013 study for the Mercatus Center, Mr. Kotlikoff calculates that the official estimate of public debt of $12 trillion is a severe underestimate. Simply adding Social Security’s unfunded liabilities, accounting for the trust fund’s assets would increase public debt to $37 trillion—twice that of GDP, and higher than that of the crisis wracking Greece. According to Mr. Kotlikoff’s calculations, the fiscal gap over the next 75 years is $205 trillion. When this bill comes due, it’s not spread evenly. Today’s 65 year old expects to receive more than $280,000 net and is adding to the fiscal gap. The unfortunate Millennials, and generations yet unborn are the ones who will have to redeem these obligations. Today’s 30 year old will pay net $12,000, while the average 25 year old will pay almost $26,000. The net tax bill for future generations is an eye popping $420,000.
This kind of transfer, from a generation that is expected to have both lower income and wealth to a generation that is richer and better is morally indefensible. Persisting in this policy means that some future generation will be taxed at the rate of 60 percent, net of any transfers they receive. The current policy is unsustainable in the long run, as Mr. Kotlikoff points out.
In the recently proposed budget, Mr. Obama declared the age of austerity over, on the basis on a brief reduction in the budget deficit, even though the non-partisan Congressional Budget Office is predicting large budget deficits, and consequently, increasing debt, over the next decade. Far more troubling, Mr. Obama abandoned the very modest proposal to change the method of calculating the way increases in Social Security payments are determined. A switch to a chained Consumer Price Index would have resulted in a very small decrease in the rate of growth of Social Security. It was certainly not fundamental reform, and would not have corrected the underlying unsustainability in the program. The failure, however, is a signal, of the difficulty of the task of reform.
Nonetheless, if Social Security is not reformed, this inequitable and unsustainable intergenerational transfer will continue to take place. The fiscal gap will continue to grow, and the United States will continue its slide toward bankruptcy.