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What about the children? Well, maybe we should try not to make things worse for them …

What about the children?

by digby

“We must embrace the need for modest reforms—otherwise our retirement programs will crowd out the investments we need for our children.” President Obama, State of the union address, 2013

Is that really true?

Here’s Dean Baker:

The Very Serious People in Washington have been running around arguing that the country should be very worried about the aging of the population. The story is that we face an enormous crisis because the ratio of workers to retirees is projected to fall from 2.8 to 1 in 2013 to just 2.0 to 1 over the next two decades. This declining ratio is supposed to mean that our children will face an enormous burden in supporting a rapidly growing population of retirees.

While this projection produces much hand wringing and head nodding among the Very Serious People (VSP), fans of arithmetic know that it provides little basis for concern. The reason for the lack of concern is often given by the VSPs themselves. When pushing the scare story they often throw in the tidbit that the ratio of workers to retirees used to be 5 to 1 back in the 1960s.

Of course the country is far richer on average today than it was in the 1960s even though we have much lower ratio of workers to retirees. The secret is productivity growth. Output per worker hour is more than twice as much in 2013 as it was in the 1960s. As a result, we can both have a larger share of output diverted to supporting retirees and have higher living standards for both workers and retirees.

The same story holds going forward. In 20 years average output per worker is conservatively estimated to be more than 40 percent higher than it is today. This means that even if workers were to see an increase in their payroll tax of 2 or 3 percentage points (almost certainly more than would actually be the case – we can also raise the cap on taxable wages) they would still have much higher after-tax wages in 2033 than they do today.

Furthermore, the longer-term story looks even brighter. After 2030 the demographic picture actually improves slightly as us pesky baby boomers die off and then is projected to worsen very gradually through the rest of the century as the life expectancies continue to rise.

This means that the gains of productivity growth will be able to go to active workers in these decades with no additional burdens due to demographics. That would mean wages could rise by another 15 percent by 2043 and another 15 percent on top of this by 2053. There is nothing close to the story of impoverishing our children pushed by the VSPs.

Unfortunately, we do have a problem, but it’s not because the old people are sucking up all the money by living too long. It’s something else entirely:

At this point alert readers are jumping up and down yelling that most workers have not been seeing the gains of productivity growth over the last three decades due to the upward redistribution of income over this period. If this trend continues then workers will have little increase in before-tax wages to offset any tax increases that might be needed to support Social Security.

This is completely true and precisely the point. The real threat to our children’s living standards has nothing to do with the possibility that Social Security might require additional tax revenue in the decades ahead. The threat to their living standards is the risk that the upward redistribution of the last three decades will continue for the decades into the future. If this proves to be the case, then the top 1-2 percent of the population will get almost all of the gains of economic growth and most of our children and grandchildren will see nothing.

The demographic argument is misdirection. The wealthy elites are trying to get people to believe that the problem is that that workers just can’t contribute enough to keep up with all the takers (which they themselves are too, when they expect to collect in their old age.) But they are. The problem is that the wealthy are keeping it all for themselves.

Krugman hit this yesterday too, from another angle. He points out that the argument for austerity has switched from being an immediate crisis that requires us to cut spending immediately or face Armageddon to a long term crisis that requires us to cut spending over the long term or our children will face Armageddon:

… Pundits who spent years trying to foster a sense of panic over the deficit have begun writing pieces lamenting the likelihood that there won’t be a crisis, after all. Maybe it wasn’t that significant when President Obama declared that we don’t face any “immediate” debt crisis, but it did represent a change in tone from his previous deficit-hawk rhetoric. And it was startling, indeed, when John Boehner, the speaker of the House, said exactly the same thing a few days later.

What happened? Basically, the numbers refuse to cooperate: Interest rates remain stubbornly low, deficits are declining and even 10-year budget projections basically show a stable fiscal outlook rather than exploding debt.

So talk of a fiscal crisis has subsided. Yet the deficit scolds haven’t given up on their determination to bully the nation into slashing Social Security and Medicare. So they have a new line: We must bring down the deficit right away because it’s “generational warfare,” imposing a crippling burden on the next generation.

What’s wrong with this argument? For one thing, it involves a fundamental misunderstanding of what debt does to the economy.

Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump. And the main reason businesses aren’t investing more is inadequate demand. They’re sitting on lots of cash, despite soaring profits, because there’s no reason to expand capacity when you aren’t selling enough to use the capacity you have. In fact, you can think of deficits mainly as a way to put some of that idle cash to use.

Yet there is, as I said, a lot of truth to the charge that we’re cheating our children. How? By neglecting public investment and failing to provide jobs.

So, once again, fixing problems that don’t exist while ignoring the ones that do.

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