The Clash of Generations

By Laurence Kotlikoff and Scott Burns

Prologue: The Last Straw

The day was coming—for years, decades, really.

Warnings had been sounded, loud, clear, and often.

Most heard, few listened. The problem was distant, its size unclear.

“No worries. We’ll fix it. The next election, the next party, the next leader.”

There was time.

There wasn’t.

The contract was simple: 100,000 barrels of oil, delivered to this country, at this port, on this day. Payment in Chinese yuan.

The seller was big and always insisted on dollars.

Not that day.

Thanks to U.S. pressure, the yuan was floating free. You could buy and sell it anywhere.

The yuan was strong and rising. The dollar was weak and falling.

No wonder: America’s economy was awful; over 30 million, mostly young, looking for work; and Uncle Sam was broke. But Sam’s ace in the hole was the dollar—the world’s reserve currency. If Sam needed money, he’d print it, and everyone would take it.

No longer.

“Our shareholders come first. The dollar’s too risky. Let’s settle in yuan.”

And so the contract said yuan.

The medium of exchange was the message, and the message was broadcast, posted, e-mailed, tweeted, Facebook’d, and texted around the globe, in seconds.

“They switched. We should too.”

Denominating contracts in anything but dollars became routine.

If only. If only that company had waited or kept it quiet. If only that company was smaller or foreign.

But there it was. A major U.S. oil company had publicly called it quits on the greenback.

America’s economic death was quick and painful.

In short order, the dollar plunged. Interest rates soared. Bond and stock markets vaporized. Towns, cities, states, and businesses—large and small—started declaring bankruptcy.

And massive layoffs began. The young got the first pink slips.

The Fed rode to the rescue.

“Not to worry. We’ll print more dollars, buy bonds, and lower rates.”

“Worked before.”

“You need a loan. Step right up. We’ve got money.”

This time was not different.

This time, ancient economic law prevailed: more money begets higher prices.

With prices rising, the dollar became a hot potato. No wonder. The longer you held it, the less it would buy.

And faster money pushed prices even higher.

Next came the bank runs.

Deposit insurance didn’t matter. Everyone wanted to get and spend their money before it became worthless.

Uncle Sam printed trillions of dollars to honor insurance and other guarantees to depositors, money market funds, bondholders—you name it.

Inflation reached double digits.

Per month, per week, per day, per hour.

The economy was unraveling.

And then the next generation took to the streets.

From Chapter 2: Catastrophic Success

Centenarians, Left, Right, and Center

As one example of the lurking danger of the-really-long-retirement problem, consider America’s fastest-growing population. We’re not talking illegal immigrants. We’re talking centenarians—those aged one hundred and over. Today there are 79,000 members of the old old-old. By 2050 (when today’s newborns are middle aged), this figure will reach 601,000. That’s enough centenarians to fill up Washington, D.C. We can imagine movies being remade to suit an older demography, such as Butch Cassidy and the Sunda nce Centenarian. Coming soon.

Next, contemplate a much scarier vision: the annual health care costs, circa 2050, of these projected 601,000 residents of the new Century City.

Later in Chapter 2

Your Money or Your Life

We could solve the financial problem Social Security and Medicare represent simply by reducing life expectancy, but there is a remarkable lack of public enthusiasm for the idea. No politician has suggested a new program with special tickets to shorter lives. Unlike the 1973 science-fiction movie Soylent Green, there are no arrangements for a few glorious final moments before being turned into food for the young. And when palliative care was part of the 2010 health care reform bill, it was quickly labeled “death squads” and removed from the bill.

We like being alive, thank you, and aim to stay that way for as long as possible.

What we have never faced up to, however, is that we literally have a your-money-or-your-life decision. The operative word here is or—but we want both. We won’t give up our growing years of life, but we don’t want to pay for them. Politicians of both parties know this and act accordingly. They promise more public benefits because that’s what we want. Then they hide the bill in the diaper of a newborn. This would be a minor issue if the advances in life expectancy were not so great and supporting the elderly at the style to which they’ve become accustomed so expensive.

Further in Chapter 2

Modern Aging and the Arrival of the Lupies

Science-fiction writer Richard Matheson offered a brand-new perspective on our terminal state. His 1956 novella, “I Am Legend,” introduced us to the “living un-dead,” otherwise known as “lupies,” and death in life hasn’t been the same since. As many sad newspaper stories tell it, the real death in life can be found in the Alzheimer’s unit of any nursing home. This is simply too painful to bear, so our culture offers us the darkly comic movies that tell us about what might be called the Modern Zombie.

The first of those movies was the classic 1968 B flick directed by George Romero, Night of the Living Dead. Scott’s favorite line from it is, “We may not enjoy living together, but dying isn’t going to solve anything either.”

So even as the baby boomers were coming of age and learning about birth control pills, some other part of the public imagination was worrying about what was going to happen when this crowd got to be really old. Imagination answered: it will be hell. The truly living young will be outnumbered, isolated, and besieged by the living undead. The actual situation of our young will be physically far less frightening and contain less visual drama, but in reality, young people will be defending themselves from the ever increasing demands of the elderly.

From Chapter 3: Living beyond Our Children’s Means

Doing Ponzi Proud

The $30,000 combined Social Security, Medicare, and Medicaid payment that is being handed, on average, to each of today’s elderly equals almost two-thirds of per capita GDP. By the time the boomers are fully retired, the figure could exceed 100 percent of per capita GDP. Whoever said America isn’t a welfare state? It is a welfare state, but the welfare is for the elderly, not the poor. While our two parties argue over the haves and have-nots, we are blind to what the nows are doing to the laters.

And later in the chapter

Uncle Sam’s Fiscal Gap

When you add up all our unofficial future bills and net out all the future taxes that will be available to pay them, the difference, that is, the fiscal gap, is staggering. Since a dollar in the future is not the same as a dollar today, we have to make sure this adding up makes less of (discounts the value of) dollars paid or received down the road. Once you do so, using the government’s preferred 3 percent real (inflation-adjusted) discount rate, you learn that the value in the present (the present value) of all the future bills, less all the future taxes, is $201 trillion. The icing on this enormous debt cake is the $10 trillion of official U.S. debt in the hands of the public. Add that with a deft hand, and you’ve got a fiscal gap of $211 trillion! Public discussion is all about the icing. It’s never about the whole cake.

Further in Chapter 3

Voodoo Economics

Maybe we’ve missed something, but we’ve yet to hear any politician advocate raising all taxes by 64 percent for, well, forever. Nor have we heard any politicians advocate a 40 percent immediate and permanent cut in federal outlays.

On the contrary, Republicans want to cut taxes and Democrats want to increase spending. Both groups are engaged in what President George H. W. Bush called voodoo economics. Republican supply siders are sure that every federal tax would produce more revenue if only it were cut. We think setting all tax rates to zero and forcing Republicans to announce each day’s tax collections would change their tune, but maybe not.

Democrat demand siders are equally subject to magical thinking. They believe that raising federal spending, even if it entails paying people to dig ditches and fill them back up, will stimulate the economy so much it will pay for itself through extra taxes. We think providing all Americans a year’s free vacation and forcing Democrats to provide daily revenue reports would alter their thinking, but who knows.

In the dream world of our political parties, their favorite action always “pays for itself.” Republicans buy votes by reducing taxes and claiming they pay for themselves. Democrats buy votes by spending money and calling it an “investment.” Setting just one set of these loonies loose on the economy would be damaging enough, but in recent years we’ve opened the asylum. We’ve watched them combine forces to both raise spending and cut tax rates. The bill goes to the kids who, conveniently, are never in the room.

Also from Chapter 3

Is the United States in the Worst Fiscal Shape?

Based on official debt figures, the United States appears to be in relatively good fiscal shape compared to other developed countries. Its 69 percent debt-to-GDP ratio is, for example, roughly half of the comparable ratio for Greece. But on a fiscal gap basis, the United States appears to be in either worse or much worse fiscal shape than its co-members in the the Organization for Economic Cooperation and Development (OECD), the club for developed economies.

The U.S. fiscal gap now stands at fourteen times U.S. GDP. For Greece, this figure is roughly twelve times GDP. Compare the two numbers and you see the naked emperor: on a fiscal gap basis, the United States is in worse fiscal shape than Greece even though its ratio of official debt to GDP is roughly half that of Greece.

And ending Chapter 3

Darkness at the End of the Tunnel

If you’re not thoroughly bummed out at this point, we haven’t done our job. You’ve learned that our country is in much far worse fiscal shape than any politician has let on and that our official debt bears no intrinsic relationship to our nation’s true indebtedness. But don’t stop reading. The story gets worse. Our reckless, generationally immoral fiscal policy has done terrible damage to the underlying economy. Yet few economists, let alone politicians, have connected the dots.

From Chapter 4: Economic Fallout

America’s scariest economic chart is a snapshot of postwar American economic decline. Figure 4.1 shows that our country is now saving nothing and investing next to nothing. This isn’t anything new. Hop onto either the saving curve or the investment curve in 1950 and you’ll take a ride downhill, with some uphill stretches, over the next sixty years.

Countries that don’t save don’t have the wherewithal to invest, so it’s not surprising that our nation’s net domestic investment rate has followed our national saving rate down the tubes. But there is one way for a spendthrift country to experience investment: let other countries invest in our stead. That’s what the green bars show—the U.S. current account deficit (measured as a share of national income). They measure the difference between our rate of saving and our rate of investment. When our national saving is less than our domestic investment, as has been the case for decades, our current account is negative (a deficit). This means foreigners are investing more in the United States than we Americans are investing abroad.

Later in Chapter 4

Like AARP’s most ardent supporters, we’re old. Some of our best friends are old. One of us, Larry, has a ninety-two-year-old mother whom he loves dearly and who is getting younger by the year, thanks to Medicare’s assistance and her own spirit and exercise routine. And yes, the poverty rate among the elderly in 1960 was 35 percent. By 1995, it was down to 10 percent. That’s a fabulous achievement, and we give Social Security, Medicare, and Medicaid full credit for achieving this success.

But the achievement was not a free lunch. At the same time poverty rates were dramatically lowered for the elderly, they were little changed for the young. Today over one in five children live in poverty. Among minorities, the child poverty rate is about one-third and 35 percent live in “food insecure households.” Back in 1960, one in four children lived in poverty. So we’ve made some progress, again thanks in large part to Social Security, Medicaid, and Medicare (which covers disabled children), yet we’re sitting here today with 13 million impoverished children. Another 16 million children live in households with very low levels of income, albeit that exceed the poverty threshold. To be clear, we consider the current distribution of wealth, income, and consumption to be outrageous. When some children go hungry while others are whisked to summer camp on the family private jet, you know the maldistribution of income has gone too far. Yet how to reduce inequality is open to debate.

But our main point here is that most of the massive postwar redistribution from the young to the old has not been from rich young people to poor old people. It has mostly been from middle-class young people, who pay high employment taxes, to middle-class old people who receive them. And that redistribution has left the young with a fiscal sword of Damocles suspended over their heads. Furthermore, that redistribution has cut our national saving rate from 15 percent to 0 percent. It has cut our domestic investment rate from 15 percent to 4 percent, and it has contributed to the lack of real wage growth, which marks the death knell of the American dream. Reducing poverty among the elderly (or any other group) is a wonderful goal, one that we should pursue. But we seriously doubt that anyone, of any political or chronological persuasion, would want to do it at the cost of literally wrecking the country.

From Chapter 5: Beatings without Bruises

A Rare and Modern Wedding

To say the wedding was long awaited is an understatement. Beyond the area where the bride and groom would exchange vows, a gentle creek is backed by a dramatic escarpment. The location is Driftwood, Texas, about twenty miles outside Austin. Behind the bucolic scene, a rustic building is ready with a waiting band, servers, food, and champagne. The slightly balding groom walks carefully with his arms held slightly ahead of his body. He is cradling his six-month-old daughter. He is in his early forties, an executive with a rapidly growing Internet-based firm. The bride follows with her father. The bride, dark haired, lovely, and in her mid-thirties, is a court judge.

The ceremony is short, sweet, and serious. The groom promises to cherish his bride forever, but hopes she will forgive his occasional lapse from vegetarian meals. If there is a leitmotif here, it is intentionality and consciousness. These two know exactly what they are doing. They have waited a long time. They are sure. And they are telling the world they are sure.

In an odd way, this wedding opens a window on how we have changed over the past half-century and how much different our world looks to the young than it did a few decades ago. For starters, weddings are getting to be rare events. And this couple, unlike the many who don’t dare these days, can marry with confidence. Both have good jobs, both have good educations, and they own a home. They are ready. No one can say they were impulsive.

They are fortunate. And their child is particularly fortunate, or so it would seem. Unlike more and more children, this child will grow up with a decent living standard, excellent education, and, most important, two parents to help her reach adulthood. But there’s the rub. Once she’s released into the world of grownups, things are likely to be very difficult as they are for so many young adults today.

From Chapter 8: Unsafe at Any Speed

The financial meltdown that’s surely coming and will do more lasting damage to our kids won’t be triggered, like the last one was, by the production and sale of trillions of dollars in fraudulent securities. It will be a run on the Treasury and the Fed triggered by the global realization that Uncle Sam is in far worse fiscal shape than ever imagined.

The moment of reckoning can come at any time, and when the markets finally realize that our fiscal problem is enormous and cannot indefinitely be papered over by the Fed’s money creation, things will change abruptly. We’ll have a tremendous financial collapse that hits the bond and the stock markets, and not on a short-term basis. That will accelerate the fiscal collapse, which will reinforce the financial collapse—in short, a vicious cycle. By design, our financial institutions have built no firewalls separating themselves from one another. Instead, there are only fire paths, waiting to ignite.

The hour is extremely late. We can no longer afford doing too little too late, putting off tough decisions for tomorrow, and enduring political gridlock. To fix America, we need to start from the ground up. Only radical, fundamental reforms of the financial system, the tax system, the health care system, and Social Security will solve our problems and get our country turned around. But it can be turned around.

From Chapter 12: Becoming Our Own Solution

In an ideal world, one inhabited by wise and compassionate human beings blessed with flexibility and foresight, our postcard solutions might become a reality. We’d have a broad consensus on our social contract. Government would be the primary instrument for having that contract work. The problems we face would be solved.

But that isn’t our world.

Since 1935 the budget of the U.S. government has been in surplus (and you’ve seen how unreal that is) a total of eight years. Other than 1999 and 2000, you have to go back a half-century, to 1960, to find another year of surplus. And the 1960 surplus was trivially small—a mere $3.9 billion in today’s dollars. Over the long sweep of seventy-five years, the evidence is clear: balanced budgets are un-American. We do deficits.

Unfortunately, as discussed above, official deficits—changes in the stock of federal debt—represent less than the tip of the iceberg when it comes to the growth in our overall liabilities. While federal debt owned by the public is now approaching an entire year of U.S. output, our nation’s true debt—the fiscal gap, which includes all of Uncle Sam’s unofficial spending commitments, net of all the taxes he’ll likely to collect to cover these commitments—is a gargantuan 14 times GDP.

We’re broke beyond broke. But like General Motors before its bankruptcy, we’re lumbering on because of our enormous size and borrowing capacity. And given our long history of dumping both formal and informal debts in the laps of youngsters, while legislating greater and greater benefits for oldsters, don’t hold your breath awaiting a rational solution. The most likely scenario is the simultaneous and colossal fiscal, financial, and economic meltdown portrayed in the prologue.

This returns to the question you have, no doubt, been asking since page 1: How can we protect ourselves?

We’re all asking this question, and the answers are getting more and more unusual. A visit to a bookstore is instructive. While Barnes and Noble saw the vampire romance trend early and created an entire section devoted to “teen paranormal romance” novels, it has yet to create an “American Armageddon” section. But the books are there, mixed in with the ever-growing shelf of survivalist tomes. So if you think the future will require having emergency food and water supplies that you defend with your newly purchased AK-47 or assault rifle, there are a lot of instruction manuals you can buy.

Our personal salvation advice is far less extreme. There are lots of straightforward small steps you and your family members can take that will leave you in a safer position for facing what’s coming. So there’s no need to join freedom fighters in Montana, transcendent new age groupies in California, or defiant religious cult members in Texas.

Let’s start with a mental reboot—an understanding that we can change our personal fate far more readily and quickly than government policy.

Trust Yourself, Not Short-Lived Institutions

Most of us have years of conditioning telling us that we are small and temporary while the institutions around us are big and permanent. Nothing could be further from the truth. The notion of small and temporary versus big and permanent persists in spite of some obvious realities. It is a good bet, for instance, that regardless of your age or marital status, you’ve had your name longer than your current bank has had its name. One banker Scott knows likes to tell people about having worked at the same desk, in the same office, for thirty years while the bank he works for has been taken over, digested, and renamed four times.

With Americans now living an expected eighty years, few things or institutions have our duration. In the material world, we’re outlasting our computers, our cars, our home appliances, our household goods, even some of our homes, and certainly the tenure of whatever political party is in office.

Only one of the original twelve companies in the Dow Jones Industrial Average still has the same name: General Electric. The other eleven companies have been sold, renamed, liquidated, or otherwise become something else since 1885. According to Jeremy Siegel’s classic Stocks for the Long Run, 987 new names were added to the Standard & Poor’s 500 Index (an index of large-capitalization stocks that accounts for about 74 percent of all stock market value in the United States) between its creation in 1957 and 2006. In its single greatest year of change, 1976, a whopping sixty new stocks were added to the list and sixty were displaced. However you slice it, most of us will be around longer than a typical large American enterprise whose average life expectancy is less than fifty years, about the life span of the average American more than a century ago.

As individuals we are a lot stronger and more durable than we think, and we are likely to become more so. In futurist Alvin Toffler’s prescient 1970 book Future Shock, his driving theme was accelerating change in technology, information, knowledge, products, and businesses. In addition to the idea of the information economy, much the same was predicted in Fritz Mazlop’s classic 1972 book, The Production and Distribution of Knowledge. Both authors were incredibly prescient about a growing truth—things don’t last.

In the last chaotic decade alone we’ve seen the decline of the newspaper industry, a revolution in the distribution of music that has now spread to movies and books, a need to dramatically shrink the U.S. Post Office because people aren’t using traditional mail, and the familiar list of big corporate failures. We’re not talking about the constant change in small retail stores or restaurants. We’re talking about the institutions that define our world. And the fact that they are relatively short-lived makes their long-term promises inherently untrustworthy.

Think about it. Thirty years from now, today’s politicians and all their lofty promises will be gone. Many of today’s banks and insurance companies will be gone. Many of today’s investment advisors will be gone. Many of today’s employers will be gone. Many of today’s pension funds will be gone. Many of our tax breaks and benefits will be gone. Much of our good climate may be gone. Our two-party political system may be gone, and the list goes on.

They’ll be gone, but we’ll, for the most part, still be here. It’s an uncomfortable mind reset, but the truly durable institutions in society are people—that is, us. We generally outlive the supposedly eternal institutions that we rely upon so heavily. As a we have no option but to make careful long-term plans for ourselves. That’s a big responsibility and most of us aren’t prepared for it because we are beset by thinking traps, unrecognized cognitive failures.

From Chapter 14: The Coming Generational Storm

There are about 70 million Americans between eighteen and thirty-five years old. Imagine they all march on Washington. Imagine they let their elders know they aren’t happy with their treatment. Imagine they join together in a party—the Generational Equity Party—and start voting for candidates who represent the interest of today’s and tomorrow’s young generations. Imagine how that would change the conversation.

And imagine those older than sixty seeing their faces and hearing their voices and saying Yes, they’re right. These are our children and grandchildren. We need to protect them. They are on earth, if not in heaven, our only true future.