How America's Youth Will Get Nothing for Something

National debt burdens do not burden everyone equally...

THE THIRD President of the United States, Thomas Jefferson, was opposed to a 'national debt'. He thought it was immoral that one generation should spend on credit, forcing the next generation to pay the bill, writes Daily Reckoning founder Bill Bonner.

Jefferson knew what a burden debt could be – especially when it is debt for spending he didn't enjoy himself. He had inherited debts from his father-in-law. You've heard of 'something for nothing'? On the flip side is a second condition as disagreeable as the first is pleasant: nothing for something.

'Nothing for something' describes the financial situation of America's youth. If things go according to plan, they will pay a large portion of their incomes (if they have incomes) to pay for social welfare 'benefits' that they will never enjoy themselves.

Professor Laurence Kotlikoff of Boston University puts the total of US government debt and unfunded pension and healthcare liabilities at $222 trillion. The biggest part of that money will be spent on the baby boomer generation...as it heads into retirement homes, nursing homes and hospitals. This is such a huge sum that it cannot be paid. But the burden of trying to pay it (and not succeeding) will fall heavily on younger generations.

Large debts also retard growth. This is the conclusion of professors Rogoff and Reinhart in 'This Time it's Different' – their study of 800 years of financial folly. Much of current output must be used to pay for past consumption.

That is part of the reason that today's growth rates are only about half of those in the 1960s and 1970s. Low growth means fewer new job opportunities. Those that do become available are generally at lower salaries. The real growth that doesn't happen leads to the real jobs that will not be created and to the real careers your children and grandchildren may never have.

High debt levels also mean higher taxes. Taxes tend to be levied on earnings, not on pensions and healthcare consumption. An estimate for how high taxes on young people would have to go (if it were possible) to finance this debt: about 80%.

Today, I take up the cause of our children and grandchildren. In the modern vernacular: They're screwed.

Our job is to unscrew them. First, by trying to understand how the system works. And second, by setting up parallel or alternative systems of our own that help them protect themselves.

Let's begin with the big picture. The economies of the US and other modern, developed social welfare nations are based on several conceits and delusions.

Serious observers keep saying that if we continue doing what we're doing bad things will happen 'sooner or later'. We never know when sooner or later will get here. But it's a fair bet that it will come during our children's and grandchildren's lives.

Remember Herb Stein's law: Things we all know can't last forever will come to a halt sometime. Most likely, it will be during the working careers of our children and grandchildren.

For example, the credit expansion that began after World War II had to end sooner or later. For the private sector, it ended in 2007. It almost ended, too, for many governments – such as Japan, Greece, Spain, California and others.

But large nations with their own printing presses are still going at it – with public debt-to-GDP ratios reaching up over 200% already. (If you included the aforementioned unfunded pension and health obligations, the ratio for the US is already at nearly 1,400% and growing 20 times faster.)

The system of indirectly funding deficits through money printing (QE), while holding interest rates at the zero bound, will also have to end sooner or later. More alarmingly, the current system of fiat money is one for the record books. None has ever lasted this long. But it, too, will go away sooner or later.

So too will the system of intergenerational wealth transfers to fund health and retirement benefits. This system, developed in the 19th century, and brought into wide service in the 20th, was an illusion from the get-go.

In a stable society, the contributors – in the aggregate – can never get out of the system what they put in. Bureaucratically managed programs are too wasteful and beset by too much fraud. And it doesn't really make sense for people to go along with a system where they get less out of it than they put in.

Nevertheless, there was – and still is – wide support for these programs. Why? Because people still expect to get 'something for nothing' – or at least more than they put in. That has been the experience of the last 100 years.

Citizens were able to get more than they put in because the following generation was always bigger and richer – until now. Now, in the US, Japan and most of Europe, birthrates are so low that the native-born population is falling. And, for the first time in US history, the next generation may actually be poorer than we are.

In other words, our children and grandchildren are getting a bum deal in more ways than one.

The short version of this story is simple: Old people vote. Politicians found they could be bribed. Promise them something they couldn't get by honest labor – someone else's money – and you are a shoo-in for elective office.

Year after year, the promises got to be more and more costly. How high have the promises gone? The median retiree has a total of about $120,000 in net savings. But he'll consume about $275,000 worth of healthcare services before he finally adjourns. Who will pay the difference? Who bears the burden of this unfunded liability?

The Social Security Fund – which was the source of the phony 'surpluses' of the Clinton era – is now in deficit. This year, it will pay out about $100 billion more than it takes in. That's $100 billion more to retirees than working people contribute in Social Security tax payments. And the baby boomers have only just begun to retire!

Old people vote for higher Social Security payments. They vote for more healthcare. They vote for pills, wheelchair access and senior discounts. They vote for spending in the here and now...and a few brief tomorrows. As to the long term, it can take care of itself...

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