Wednesday, December 22, 2010

The fiscal nightmares of Generation X, Y

From the 27 December 2010 Greater Niagara Newspapers


By Bob Confer

Generations X and Y will have a rough go of it. They may be the first generation of Americans to have a quality of life that is unimproved over – and probably less than - that of their parents.

Their personal finances and the job market they must survive in represent just the tip of the iceberg. They have considerable fiscal situations to address that will put even greater pressure on the advancement of their generation. Two social welfare programs will be hitting crisis mode at various points in the lives of today’s young adults.

The oldest of the programs, Social Security, is quickly nearing bad territory. By 2015 it will be in the red for the long haul (due to the Baby Boomers all hitting retirement age) and by 2037 its trust fund will be completely wiped out; that is, if the federal government ever returns the $2.5 trillion that it “borrowed” from the fund.

The people of the United States do not have the backbone to overhaul Social Security. Just look at the ire faced by George W Bush when he tried. So, Generations X and Y will be forced into retiring at a later age (it’s already legally bound to be 67 by 2022) or increasing their rate of contribution (it will have to rise by 25% as we near 2037 just to keep up with promised payments).

Americans also lack the wherewithal to remodel Medicare. Its trust fund could be in the red as soon as 2017. Those who penned Health Care Reform said that legislation has pushed Medicare’s Doomsday to 2029. But, politicians will say anything to sell the citizenry on government growth. Remember, Lyndon Johnson deliberately lied about the cost of Medicare in order to get it passed.

Medicare’s woes far dwarf those of Social Security. We currently have $37.8 trillion in unfunded obligations, which is more than 2.5 times the size of the US economy. By 2050, 10 cents of every dollar spent in the country – and 50 cents of every dollar spent by the government - will be on Medicare. In order to satisfy those growing demands, its payroll tax (which is 2.9% split between employer and employee) will have to grow as well. Health Care Reform has already pegged high-income individuals for that duty starting in 2013, but, as their ranks decrease as a result of slow or stagnant growth of the economy, everyone will have to foot the bill. By 2020 one can assume that the payroll tax for all workers will rise by a third. It has to if all else remains the same.

There’s also the national debt that Generation X and Y must contend with. Washington recently voted to temporarily cut the Social Security tax for 2011. That sounds good at first, but as you dive deeper into the bill you’ll find that the $112 billion lost by the cut will be picked up through borrowing. That keeps with America’s recent methods of managing and/or hoping to excite the economy with debt. The total debt load is now $13.8 trillion, just a tad under America’s total economy of $14.3 trillion. That national debt is growing quickly (its growth has exceeded $1 trillion in each of the past 3 years) while our economy is not (it grew at a 1.8% clip over the past decade).

Imagine a company the output of which will soon be outstripped by what it owes the bank. It will die. Since, once again, Americans lack the gumption to change the way things are done in government, the only method by which the US can overcome a similar fate is by further taxing its people (which, by the way, will have the simultaneous effect of shrinking our economy, making matters worse for the long term). What will that do to the income taxes paid by Generations X and Y as various portions of the debt come due in the coming years? I shudder to think of the possibilities.

For these 3 issues alone, which do not include the numerous fiscal crises to be faced at the local and state levels, Generation X and Y will have to make some significant sacrifices to keep the country afloat. The question is: Do they have what it takes to save America? They might, but the cards are really stacked against them.

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