A Generational Divide? By Jeffrey Folks
In Running on Empty, Peter G. Peterson excoriates the "we-first" attitude of retiring baby boomers. Having read Peterson's take on boomer retirement, one is left with the impression that boomers are selfishly intent on bankrupting future generations and driving America into permanent decline to boot. Happily, Peterson concludes, there is a solution: higher taxes and reduced benefits. This is what Peterson calls "real leadership."
Breaking promises and raising taxes may seem like "leadership" to some, but in fact it is just another effort to excuse and facilitate irresponsible spending by future administrations. The common refrain of every liberal commentator on Social Security, and even of those like Peterson who claim to be non-partisan, is that there is simply not enough revenue to meet future retirement obligations (which Laurence Kotlikoff and Scott Burns in The Coming Generational Storm estimate now stand at $51 trillion). There is just not enough accumulated in the Trust Fund to fund the retirement of 77 million boomers. But if government had run the Trust Fund in a responsible manner, there would have been.
The core of the problem is the investment performance of the Social Security Trust Fund. As the Office of Management and Budget stressed in its FY2000 report, the "special" bond obligations held by the Social Security Trust Fund "do not consist of real economic assets." They are not marketable bonds, nor do they pay market rates. They represent nothing more than political promises to fund future retirees based on future revenues. In that sense, no matter what the reported rate of return of Trust Fund "bonds," and the recent rate of return has been abominable, the Trust Fund has earned nothing whatsoever in actual interest. Even the Fund's principle rests on nothing more than the words of politicians like Al Gore, with his fantasy of a Trust Fund "lock box."
As Peterson himself admits, even the Fund's reported performance has been disappointing, to say the least. During the era of the greatest bull market for both stocks and bonds in American history, the Fund's real return has ranged between 1.6% and 0%. For many retirees, its future return may well be negative. In other words, retirees who have loaned the government their retirement savings over a period of 40 years or more will receive less in benefits than they paid in.
Compared with returns in the private market, those returns are dreadful. Not to single out one fund, but the Vanguard Wellesley Income Fund, a popular option among retirees, has returned 10.23% since 1970. Had investors entrusted only $100,000 to the Wellesley Fund in 1970, in place of the estimated $250,000 in 2011 dollars that each boomer will have contributed over a lifetime to the Trust Fund, that investment would now total nearly $5,000,000. Instead of merely getting back what they paid in, or less, boomer retirees would have been driving Bentleys and flying off for spa vacations in Anguilla.
The problem, in other words, is not that boomers expect too much from their government-sponsored retirement: it is that they expect too little. Had contributions been partially privatized in 2005, as many conservatives urged, prospective retirees would already be far ahead. The five-year return on the Wellesley Income Fund's Admiral Shares has been 7.12%. Compounded at that rate, the nominal value of contributions will more than double every decade.
Liberals continue to respond to calls for privatization with the usual politically motivated scare tactics. The immediate response of the Democratic Party to Rep. Paul Ryan's budget plan, with its call for a real start to entitlement reform, was to demagogue the issue. Within hours of release of the Ryan Plan, the DNC and its front organizations were robo-calling seniors, convincing them that Republicans were planning to take away their Medicare and Social Security.
An equally cynical and divisive politics underlies the left's efforts to convince younger voters that they are having to pay for "greedy" boomer retirees. As Obama has already made clear, Democrats hope to energize younger voters ahead of the 2012 election. One way to do so is by stirring up envy and resentment among GenXers and Millennials over the seemingly excessive benefits that boomers are set to claim.
It is true, of course, that younger generations will be called on to fund those benefits: that fact is inherent in the structure of Social Security and Medicare as they have existed since the beginning. What is new is the sense of younger voters that they should not have to meet their obligations -- based partly on the conviction that they are unlikely ever to collect benefits themselves.
Sadly, even though the left is responsible for failure to address the Trust Fund's mounting obligations, it is the left that is also attempting to play on these fears. With Democrats blocking every attempt to reform the entitlement system, it is certain that the Trust Fund will "run out of money" (not that it holds any to begin with), whether in 2037 for Social Security or 2024 for Medicare, as now projected, or even sooner. So the fears of younger generations are justified: their reluctance to fund boomer retirement is entirely rational, given the bleak prospects ahead. What is less understandable is their refusal to blame the left for these prospects.
Envy and resentment are fertile emotional grounds for political campaigns, and one should expect Obama's re-election team to exploit it to the hilt. By playing off the interests of the young against the old, Obama hopes to energize those same voters who assured his election in 2008. In this divisive strategy, Obama plays on a common myth that retiring baby boomers are set to receive more than is fair. If that myth were true, shouldn't boomers be willing to accept a reduction in benefits?
President Obama and his allies at organizations like AARP have been busy selling this myth. They have done so in connection with proposals to means test benefits and with calls to shift the Social Security benefit calculation from wage inflation to CPI. Again and again, these proposals are accompanied by the insinuation that it is immoral for boomers to "burden future generations," as if Social Security's pay-as-you-go structure had not been burdening future generations from the start.
In fact, there is nothing "moral" at all about this argument. As he has done throughout his career, Obama is engaging in the cheapest form of political demagoguery. Suggesting that retirees "sacrifice a little bit," as Obama did at a May 18 fundraiser in Boston and as he has done repeatedly in the last few months, is nothing less than contemptible, given the retirement savings that boomers have already sacrificed to government mismanagement.
For conservatives, it is crucial that the truth about the nation's entitlement obligations be communicated to the public ahead of the 2012 election. Boomers need to know that they are not responsible for the impending shortfall, and younger voters need to understand that the burden falling on them is not the fault of their elders. It is the fault of a government that raids the nation's retirement fund to pay for ever greater spending on unconstitutional programs
