The Achilles Heal of Liberalism: Unfunded Liability for Future Generations

SadPiggyBank

By Professor Robert C. Fellmeth

Most child advocates are aligned with political liberalism.  Some of this is the result of a conservative trend toward radical self-indulgence – the notion that the greatest good comes from categorical withdrawal of government.  The concept here is akin to the idea skewered by Voltaire in the classic essay “Candide.”  The religious zealots of his time embraced the idea of “optimism” – all is right with the world no matter how it appears or which loved one has just cruelly died – because God controls all and He must have willed it.   We have some conservatives who adopt a similar idea about the current market – whatever it produces unconnected to state interference is “the Good,” and any alteration is “interference” with that grand design.

Of course, the market is largely a creation of man, and of particular humans often seeking the protection of the wealth they inherited.  There are clear advantages to a functioning market – bottom up determination of outcomes, efficiency incentives, allocation according to consumer preference, et al.   But there are also flaws, and the state properly intervenes to restore its function absent those flaws, or adjusts it to ameliorate them.   And one flaw is the need for humanity to “pass down the line” the achievements of each generation to the ones that follow it – a goal involving long term impacts often missing from market assessment and incentive – unless it is provided either through the rules of the market (which are created by man) or by additions to its previous design.

But the irony of this meritorious critique of conservatives is that – as to a major aspect of intergenerational equity – the conservatives seem to recognize a market flaw that is unseen by liberals.  The latter are rather infected with the malady of the Dire Straits lyric “Money for nothing, and chicks for free.”   In the middle of their blind spot is the undeniable fact that we of the Boomer generation are imposing a series of unfunded liabilities on our legatees that is unprecedented in human history.

There are two types of pension/medical plans: “defined contribution” and “defined benefit.”   In the former, one deposits money in an account and then benefits are drawn on its value later.  That is an ethical arrangement.  Those who benefit, pay.  In the latter, one promises a level of benefits, and then provides them at a later time – whatever their cost and whatever the amount deposited by the beneficiaries to provide them.  This last alternative has been increasingly exposed for its seminal flaw: the imposition of a possibly untenable obligation on future generations to provide promised benefits.  Liberals often talk of the “obligation” to pay social security and MediCare benefits to those who contributed money for both.  But it is a Big Lie, for they have not contributed close to the amount promised and expected in benefits.

Former Comptroller General David Walker projected in 2008 an accumulating deficit, including Medicare and Social Security, at over $52 trillion in unfunded obligations (at current taxation/collection) over the next three generations.    These and related obligations (Medicare, Medicaid, Social Security and debt interest) already subsumed 48% of the federal budget in 2006 and now make up the majority of it.  Discretionary spending has declined from 67% of the budget in 1967 to less than 38% today.

And it now appears that the overall unfunded liability projection has been overly conservative.  More recent data suggest that the total projected debt may not be $52 trillion, but over $60 trillion.  Those additions include a $4 trillion increase in the national debt since the 2006 data used by the Comptroller General, and the pharmacy and other benefits now going to the elderly in Medicare.  Moreover, this last source is especially likely to push the actual total well over $60 trillion, since it comes from a source of irresistible growth with little to moderate it.    Indeed, subsidies for the elderly are cast as “their right live, and with dignity.”  (Similar sentiments do not appear to persuade when applied to the 8 million uninsured children at 1/7th the per capita cost).  Any limitation on medical benefits to those in their last several years of life as “rationing” health care, or government “death panels” that will kill Grandma.  Our point is not that benefits should not be provided, perhaps generous benefits, but that we should PAY FOR THEM, and not assess our children – just as our parents did not assess us, they rather invested heavily in the rebuilding of Europe, in our defense, our parks, our highways and airports, and our education.  We got college at low tuition and home ownership.  What are we passing on to them? The answer: less of that but a mind-boggling public debt so they will finance our care and comfort.

Nor does the likely federal “unfunded liability” of $60 trillion plus from Medicare, Social Security and federal budget deficits include unfunded, sometimes extraordinarily generous pensions for local and state employees,  utility workers and others with substantial presence in state capitals.  During the last months of 2011, a Stanford University study counting the unfunded liability for public employee pensions placed California’s total (counting not all of them) at $500 billion.   And none of this includes other financial embezzlement from our children, such as California’s system of property taxation based on  the “market value” of the property, but which caps that taxable value at just above 1977 levels for the Boomers, so they effectively pay now 1/5th to 1/10th the property taxes as do new buyers (our children).  A Boomer owned home will pay a fraction of the taxes as will his child buying a home next door with the same market value, for the same state and city services.

Nor does it include the new “back end” bond practice of funding schools and other public capital projects not over 20 years so that $100 million borrowed will cost $180 million in total to repay, but in schemes that pay it off in 50 years (after whatever is financed will likely be gone or obsolete) with the payments all loaded at the back end, and requiring not $180 million to finance $100 million now, but $950 million or more.  All to be paid by our children and grand children.

Forgetting about all of these deeply unethical state and local deferrals, how much is $60 trillion to be due from the federal funds?  Consider how much $1 trillion is.  Take $ one million every day since the birth of Christ, through the Roman Empire, the Medieval era, the Renaissance, the Age of Discovery, and the independence of the United States 235 years ago… that $ one million every single day, week after week, month after month, year after year, century after century.  As we sit here today, the total would not reach $1 trillion.  It will take almost another one thousand years to reach it.  Think about that.

The federal and state debt for the Boomers and their children will require our grandchildren and their children to spend well over $25,000 per household per year in current spending just to carry it (without reduction) at a modest 4%.  That amounts to about one-half of the family median income – before other taxes.  Can such a disaster actually be in the offing?  If so, why is it only discussed by expert economists in obscure reports or neo-conservatives – who themselves avoid two of the real cost sources (Social Security and Medicare) and blame it all on the federal deficit and public pensions?  But all four of these generational sources of “takings” are involved.  And the two exempt from complaint (MediCare and Social Security) are by far the largest.

Changing demographics in terms of longer lives and smaller families make these future consequences both more likely and of greater concern.   A much reduced population of young and producing adults per elderly beneficiary will now be paying their unfunded liability – adding to that burden for this smaller number.  The pyramid allowing four or five persons in productive adult years to pay for each senior citizen is narrowing.  It is less a graduated pyramid than a Washington’s Monument spike – with a lot of weight on the bottom blocks.

Adding to the concern is the disastrous consequence of either another economic downturn or even a small increase in required interest payments to finance these current and future deficits.  A 2% increase in the amount needed to attract investment in the government bonds that provide the backing for all we print would have a momentous impact on the amount we shall owe for its repayment.  And as uncertainty about full repayment grows, that interest rate will rise, exacerbating the cost, further jeopardizing repayment, and producing the kind of spiral that we do not seem to recognize until it happens.

How ironic that the major source of current security for the U.S. is the full faith and credit from the People’s Republic of China, a totalitarian regime.  Our officials rightly warn of the pitfalls of dependency on Middle Eastern nations and the OPEC cartel, but less attention is paid to our supine posture before the nuclear weapon-holding Communist regime that is now our largest national creditor.  The share of U.S. debt held by foreign investors was 28% as recently as 1996.  It is now over 50%.

Child advocates properly have a long range perspective.  We essentially represent the future.  And we measure the merits of policies by imagining how our grandchildren and their grandchildren will judge what we are doing now.  Liberals like to think that is what they do.  Not on this seminal and defining issue.  Not at all.

BrokenPiggyBank

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