How Much More Should the Young Transfer to Richer Older Generations?
The Bigger Story
Older Americans “splurging on travel and dining,” younger consumers “spending more on basics,” and a “growing generational gap”—that’s how a recent Washington Post article by Asha Bhattarai began a summary of a recent Bank of America (BOA) study. The Post article gave some examples, such as a middle-aged worker whose immediate family cut back on travel while his parents went on two cruises a year.
BOA based its research mainly on credit card spending changes from May 2022 to May 2023. It concluded that cost of living (COLA) adjustments in Social Security for older households, along with higher housing costs and the pending end of a moratorium on student loan repayments, may have been responsible.
In general, one year of data may indicate only a temporary change. But there’s a much bigger story here – and a trend that goes back decades. Congressional Budget Office (CBO) data from 1979 to 2019 show that the elderly and nonelderly have switched statuses when it comes to who is richer and who is poorer.
In 1979, individuals living in households with at least one elderly person had total incomes, after both transfers and taxes, that made them more likely than their younger peers to be in the bottom or poorer 40 percent of the income distribution. By 2019, roles had reversed. Individuals living in non-elderly households, whether with and without children, now are more likely to be poorer, at least by this measure.
It's not hard to understand how this happened. Most growth in federal government spending over that 40-year period went for Social Security and health care (mainly Medicare). Ultimately, the money must come from somewhere. Households pay for benefit expansions in Social Security and Medicare not just with their current taxes. They pay through federal debt left to their children and cutbacks in other areas of spending.
The recent budget compromise from Congress and the President could very well exacerbate the income gap between young and old. That agreement substantially cuts discretionary spending, the source of much spending for the young and middle-aged, while keeping Social Security and healthcare – which predominantly benefit the elderly – on their very high-growth paths. The current House Republican effort to pare total federal outlays further does likewise.
The cuts threaten domestic discretionary spending in areas like educational supports for the poor and handicapped (or special education students), preventative health care, science and research, community development, environment and transportation—programs primarily oriented both to the young and to all age groups.
A look at growth rates in spending on programs for the elderly provides perhaps the easiest way to visualize what is happening. Outside of some wartime lags, that spending has absorbed an increasing share of national income ever since 1940. And it is scheduled to do so for as far as the eye can see.
This also occurs on a per capita basis; real benefits per elderly household grow continually faster than per capita income in the population. That means the share of national income for everything else goes down continually, and some combination of taxes, debt, and other program cutbacks – borne mainly by the young and non-elderly – go up continually.
Now, there’s a lot more going on that I don’t have space to cover here, including what has happened to wage growth, how the costs of healthcare can mess up how we measure the incomes of both elderly and nonelderly households (the CBO numbers I cite include the value of healthcare benefits in income), the increasing share of wealth held by older generations, and whether ability to pay taxes and poverty should be adjusted for those who can but do not work.
But the basic math is irrefutable. Set up a system where per capita transfers to each succeeding generation of retirees grow continually faster than per capita income in the population overall, and eventually retirees will be richer on average than the rest of the population.
While imminently reasonable when the elderly was poorer than the nonelderly, does it make sense to continue down that path when the roles are reversed? Or when the definition of who is “old” continually expands to include, at least in relative terms, many who are in late middle aged with life expectancies of two decades or more?
You shouldn’t be surprised, regardless, when you start to see more articles that suggest “retirees splurge on leisure, younger adults stick to basics.”
Agree with Kerry about Social Security (and Medicare) as a solid and necessary base of protection against all sorts of risks. But the marginal value of increased benefits is not the same as the average value of total benefits, especially in a system that has been and is designed to absorb an ever increasing share of national income. Ditto for years in retirement and very expensive health insurance. And if one cares about wealth inequality, then one has to worry about a society that increasingly relies upon the wealthy to hold onto most of those private and more risky assets that, along with greater short-term risk, provide a fairly high return to that risk..
I disagree on many points. A market-based solution would absolutely work for social security and would give dramatically improved returns. I fail to see how SS is more than a transfer program. What future benefits? Only those brought about by increased transfers. And as for "guaranteed" benefits, they are most definitely NOT guaranteed. As a matter of law (and confirmed by SCOTUS) SS benefits can be reduced or eliminated by Congress at any time (and will be for at least some, when the day of financial reckoning arrives). All the market risks you mention must be balanced against POLITICAL risk that promised benefits will not be paid. Your argument falls apart without the guarantee, and considering the fiscal condition of SS that guarantee will be proven to be false during my lifetime (I'm 63). You can't say that SS works when it is facing insolvency. Given the option to put 12.5% of their lifetime income into a 401(k) or into social security, most Americans would choose market risk to political risk. The fact that SS, like all government programs, is mandatory and that there is no private option tells you what people would choose. And so, to preserve the illusion that somewhere a socialist dream will actually work, we use force to deny people a tool that could not only prevent poverty but could create real wealth and would be an actual investment in our economy.