Old News

It’s time to tear up the intergenerational contract and construct public policy around the one core group of people for whom social investments really pay off: kids.

The list of issues on the progressive agenda for 2009 is long: universal health care, slowing climate change, improving public education, aiding foreclosed homeowners, rebuilding our crumbling infrastructure, and ending the war in Iraq. These are all important and vital efforts, especially after eight years of George W. Bush. But the sad fact is that the money to pursue any of these objectives doesn’t exist. With a deficit approaching three quarters of a trillion dollars in the next decade, neither the will nor the way exists for future big-ticket initiatives.

Rolling back the Bush tax cuts for the wealthy or curbing earmarks won’t pay for all of the campaign proposals being advanced by the Democratic or Republican presidential candidates. And no candidate has a credible plan to address the large deficits that are projected for 2009 and beyond.

What we do know is that there are three basic policy responses to this situation: allow deficits to balloon to still higher levels, cut spending in addition to forgoing new initiatives, or raise taxes well beyond anything currently contemplated. In the absence of a longer-term strategy, any new administration will likely muddle through with a mix of all three, and in the process fail to address either the nation’s domestic problems or its fiscal conundrum. What’s needed instead is a fundamental rethinking of the intergenerational contract–what the government provides to whom–and when in their lives the government provides it.

Right now, the intergenerational contract favors the old at the expense of the young. It operates under the premise that the wide base of working-age Americans can, and should, support the relatively small number of Americans in retirement. But over the coming decades, there will be far more older Americans, including many in their sixties and seventies, who can work and who, with proper planning, should have sufficient assets to contribute far more to supporting themselves than was possible in the past. Right now, thanks to the current contract, older Americans are the only group in our society that has access to universal, fee-for-service medical care. Younger Americans do not have such access, have seen their incomes stagnate in recent years, and yet will be expected to pay for the current generation’s morally indefensible fiscal policies. As a result, without a major change, working-age families and their children will not receive the kind of help that will eventually make the nation more productive. And a country that gives priority to its elderly over its young is arguably a country that doesn’t have much of a future.

A new contract, then, would tighten the flow of funds to older generations and invest more resources in younger families and their children. During a transition period designed to protect current beneficiaries, any new commitment of resources to the young may require some tolerance of continuing deficits. But if accompanied by a simultaneous and enforceable commitment to reining in future spending on the big entitlements, such as Social Security and Medicare, those deficits need not be especially troublesome. These investments in the young would be designed to make them more productive over their lifetimes, to spread the benefits of growth more broadly, and to increase opportunity by giving more people a shot at the proverbial American Dream. As younger Americans age, the public investments made in them will pay off in higher wages, better skills, and higher savings, lessening the need for public support in their retirement years.

If we fail to tackle entitlements and invest in the young, we risk muddling through the next eight years pretending that a set of small-bore but inexpensive policies with politically appealing labels (remember “school uniforms”?) will do the job. What’s really needed is a fundamental rethinking of the assumptions that underlie our current intergenerational contract.

The Rising Tide of Red Ink

The heart of the problem is that we are not paying for the government we now have, much less for the one that many progressives would like to see. Instead, we have a budget out of control and dominated by spending on the elderly.

While the fiscal waters have been relatively calm in recent years, they are about to be hit by a perfect storm. The economic downturn is already ballooning the deficit, but the real problem is structural, fueled by the retirement of the Baby Boomers, increased longevity, and above all, rising health care costs per person. Social Security is a problem, but because of growing health care costs, Medicare is an even bigger problem. As a result, by the end of the new president’s second term in 2017, the projected deficit will be a truly staggering $674 billion under reasonable assumptions. And things continue to worsen. Within just a few decades, the three major entitlement programs–Social Security, Medicare, and Medicaid–will absorb as much money as the entire federal government does today. These three programs already account for 42 percent of the budget, and they are growing at a frightening pace. Their growth over the next three to four years will exceed the total investments devoted to children in the federal budget in just one year.

The young already are losing out to the old when it comes to government aid. Per capita federal spending on the elderly is almost five times as great as per capita spending on children, and that imbalance will continue to grow. To be sure, state and local spending is more heavily oriented toward the young because of the way we finance public schools. But this has its own set of problems, related to the fact that spending per child varies widely at this level, depending on where that child’s parents can afford to live. Moreover, at the state level the growth of Medicaid spending on nursing home care is crowding out spending on education.

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