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Last Updated: Tuesday, 23 March, 2004, 06:38 GMT
Why your parents are ripping you off
By Laurence Kotlikoff
Professor of economics, Boston University

Are we heading for conflict between the older and younger generations? It's the scenario played out in this week's drama documentary If...the Generations Fall Out.

Professor Laurence Kotlikoff
Will the young rebel against paying to support an ageing population?
Far-fetched? Not so, says Laurence Kotlikoff, professor of economics at Boston University, who thinks that unless the baby boomers pay up, parents and children could soon be at war.

Whether we want to accept it or not, the entire developed world is getting old, indeed, very old.

Over the next three decades the numbers of oldsters in the EU, Japan, and the US will more than double, while the number of workers expected to pay the elderly their state pension and health care benefits will rise by less than 10%.

The developed world is not just getting old. It's going to get old and then get even older. In 2100, the elderly share of developed world populations will be higher than in any year in this century.

The magnitude of the prospective ageing is hard to wrap one's head around.

In 2030, the population of the United States will be older than in present-day Florida, a haven for retirees.

Imagine visiting Washington DC and not meeting anyone younger than 100
Two decades later, the number of old-old Americans, those 85 and older, will suffice to fill up New York, Los Angeles, Chicago, and several other major US cities.

And the number of American centenarians in 2050 will suffice to populate Washington DC.

Imagine visiting Washington DC and not meeting anyone younger than 100.

Fiscal strain

If this sounds old, note that America will be the young kid on the block. Both Europe and Japan will be significantly older than the United States.

This demographic phenomenon is unprecedented in human history.

It will generate enormous social, political, economic, and fiscal strains, the prospects of which are being largely ignored by our political leaders.

When an unstoppable force meets an immovable barrier, something has to give
With respect to fiscal strains, we need to realise that right here and right now the developed world is bankrupt; there is no possibility of raising taxes high enough to cover all the pension and health care benefits promised to current and future retirees.

And trying to drop the entire bill into our children's laps isn't any solution. It's not only immoral, it's also infeasible. Doing so would entail more than doubling their lifetime rates of taxation.

Unstoppable force

Radically and immediately restructuring and cutting benefit programs is essential, but, it seems, politically unacceptable. But when an unstoppable force meets an immovable barrier, something has to give.

What will give in this case is the printing press.

Governments throughout the developed world will resort to printing money to "pay" what they owe. The result will be extended periods of very high inflation, if not hyperinflation, during which governments renege on what they owe by paying their bills with waterdown currency.

There are meaningful, if very painful, policy reforms that can still save the day.

Protest placard used in the BBC's programme
In the film, the young protest under the slogan: We pay, they play
But they have to be undertaken immediately.

These reforms include asking the current rich and middle class elderly to help pay off existing government pension liabilities and then setting up a rational, efficient, inexpensive, and highly diversified system of individual compulsory saving accounts.

Another key reform is providing government health care to the elderly through a voucher system in which individual vouchers are determined based on the elderly recipient's current health status and the overall expenditure on vouchers is capped at what the country can afford.

Another Argentina?

Another key reform is to switch from economically meaningless deficit accounting to generational accounting - a new method of long-term fiscal planning that focuses on the fiscal burden to be handed to young and future generations.

These and other reforms could keep the developed world from becoming another Argentina, but their acceptance by the public will require a degree of maturity and concern for the next generation that goes far beyond anything we've seen to date.

This grim assessment suggests that we each need to look out for ourselves and plan for a much rougher retirement ride than we had expected.

This entails saving much more, thinking about how to avoid future taxes, looking out for high future rates of inflation, and realising that when the fiscal system implodes, the economy will do likewise.

Professor Kotlikoff has written a book on the issue called: The Coming Generational Storm: What You Need to Know About America's Economic Future.

He also took part in the BBC programme If...the Generations Fall Out which was broadcast in the UK on BBC Two on Wednesday, 24 March, 2004.



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