The Coming Generational Storm

A bonus book review, as events in Wisconsin have made the subject matter of this book more pressing than ever before. Understanding the full weight of government’s unfunded liabilities is what is at the heart of the battle in Wisconsin and elsewhere. As The Coming Generational Storm shows, the politicians in Washington (and in the state capitols) do not have the courage to tell you the truth.

In 2002, Secretary of the Treasury Paul O’Neill asked Dr. Kent Smetters to prepare a report for the President’s 2004 budget showing the federal government’s long term liabilities. Dr. Smetters asked a friend, Dr. Jagadeesh Gokhale from the Federal Reserve Bank of Cleveland, to assist him. Just days after Secetary O’Neill was fired from the Treasury, the report was yanked from the 2004 budget. However, their study lives on, and can be read in its entirety (in PDF form) at The American Enterprise Institute. The fiscal bill they estimated in 2002 was $45 trillion! Waiting 15 years would bring it to $76 trillion!

This figure was arrived at using a form of accounting known as generational accounting. It’s nothing new, having been used in 30 countries and by such institutions as the Bank of England, Her Majesty’s Treasury, and the Bank of Japan. It includes local, state and federal spending and it’s comprehensive. In order to correct the generational fiscal imbalance we are placing on future generations, the Smetters-Gokhale study found we would have to do one of the following in 2003:

Increase federal income taxes: 69%
Increase payroll taxes: 95%
Cut federal purchases: 106%
Cut Social Security and Medicare: 45%

And the difference in 5 years if nothing was done? Even worse:

Increase federal income taxes: 74%
Increase payroll taxes: 103%
Cut federal purchases: 115%
Cut Social Security and Medicare: 47%

Nothing has ever been done about this problem. In 2003, the truth about Social Security’s unfunded liability was hidden in the Trustee’s Report. It was at $10.5 trillion. The 2009 report says it’s $107 trillion. And that’s not including the other unfunded liabilities, it’s just Social Security.

In the course of The Coming Generational Storm, the authors call this monetary recklessness what it is – fiscal child abuse – for placing the burden of paying for today’s spending with the next generation’s (as of yet unearned) wages. They also review various plans to bring these liabilities under control, dismissing many of them as being not nearly enough to avoid the inevitable: tax increases and benefit cuts. No politician wants to be the messenger with this news, so they inevitably continue to leave the burden on the children. After all, it’s easy to raise taxes on those too young to vote.

The implications for the coming fiscal crunch are different for different groups. Younger workers have time to adjust their financial plans for retirement, but there are different considerations for those retiring sooner rather than later. Kotlikoff and Burns discuss the best ways to protect retirement savings for both groups, mainly by avoiding tax-deferred retirement plans since the rate of taxation in the future is a complete unknown, and future taxes could seriously undermine the retirement budgets of those who didn’t think to plan for higher taxes in retirement. Their advice is to pay the taxes up front, since you know the rates today.

While it might require blood pressure or heartburn medication, The Coming Generational Storm is one of the more important books every American should read. The battle in Wisconsin is to maintain this status quo or stop with the fiscal child abuse. The time to confront entitlement reform is now, and the plain truth is that includes all public pensions.

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