PRESTOPUNDIT

BOOK. The Coming Generational Storm : What You Need to Know about America's Economic Future by Laurence Kotlikoff and Scott Burns. From the publisher:

"In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will America handle this demographic overload? How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government continues on the course it has set, we'll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability. The government has lost its compass, say Kotlikoff and Burns, and the current administration is heading straight into the coming generational storm.

But don't panic. To solve a problem you must first understand it. Kotlikoff and Burns take us on a guided tour of our generational imbalance, first introducing us to the baby boomers-- their long retirement years and "the protracted delay in their departure to the next world." Then there's the "fiscal child abuse" that will double the taxes paid by the next generation. There's also the "deficit delusion" of the under-reported national debt. And none of this, they say, will be solved by any of the popularly touted remedies: cutting taxes, technological progress, immigration, foreign investment, or the elimination of wasteful government spending.

So how can the United States avoid this demographic/fiscal collision? Kotlikoff and Burns propose bold new policies, including meaningful reforms of Social Security, and Medicare. Their proposals are simple, straightforward, and geared to attract support from both political parties. But just in case politicians won't take the political risk to chart a new direction, Kotlikoff and Burns also offer a "life jacket"-- guidelines for individuals to protect their financial health and retirement."

What others have said about The Coming Generational Storm:

"I lie awake nights worrying about the fiscal crisis described in The Coming Generational Storm. This is by far the single most important problem in U.S. economic policy. Every American should read this fabulous book."
--George Akerlof, University of California, Berkeley, Nobel Laureate in Economic Sciences (2001)

"Brilliant insights on the me generation versus the next generation. Better still, smart advice on equally vexing questions like whether to invest in a 401(k) or a second mortgage."
--Sylvia Nasar, author of A Beautiful Mind

"Among academic experts, Larry Kotlikoff has earned the title 'Mr. Generational Accounting.' His unfuzzy arithmetic decisively rebuts the Bush tax cuts, which are based on the delusion that 5 - 4 = 6, not 1. Read and judge for yourself the specter of our future: too many retirees dependent on too few working-age people. Fiscal imprudence now mandates broken promises later."
--Paul A. Samuelson, Massachusetts Institute of Technology, Nobel Laureate in Economic Sciences (1970)

The Coming Generational Storm : What You Need to Know about America's Economic Future by Laurence Kotlikoff and Scott Burns.

Question for Scott Burns:

Q: Recently you wrote about Social Security and Medicare and said that, priced in today's dollars, the shortfall was $43.4 trillion in 2003 and will rise to $44.8 trillion this year. Were you summing up over a 25-year (generational accounting) span of time? It was a sobering article, and we agree with you that the silence is deafening by both politicians and retirees such as us.

A: Good question. Generational accounting considers a time period considerably longer than 25 years. Let me tell you why. When Social Security was reformed in 1983, with a major increase in the payroll tax and a future increase in the retirement age, it was based on Social Security projections for 75 years. Completed, Social Security was supposed to be fully funded for at least that long.

What happens, however, is that life expectancies change each year. We lose people who were born long ago who had shorter life spans. They are replaced by newborns with much longer life expectancies. The average life expectancy starts to creep up, year by year. As expectancies in retirement rise, so do future Social Security and Medicare liabilities.

Today, only 20 years since the last reform, Social Security is as out of balance as it was before the 1983 reform and payroll tax increase.

As a consequence, the best way to estimate the real liabilities of government programs is to use what the Social Security actuaries call ``the infinite horizon,'' a method that looks well beyond the traditional 75-year projection period.

It may seem like a trivial matter, but it's not: Unfunded liabilities more than double. Taking the shorter measure allows the politicians to make promises that buy votes. But it low-balls future costs. With elections every two years, politicians (of both parties) have no incentive to deal with the long-term future and its costs.

You can read more about this in April, when MIT Press releases The Coming Generational Storm. I co-authored the book, my first in nearly 30 years, with economist Laurence J. Kotlikoff, the prime mover in generational accounting.

The Coming Generational Storm:

Read the Prologue (pdf).
Read Chapter 1 (pdf).

Kotlikoff on Alan Greenspan's Feb. 25 Testimony on the future of Social Security

"It's nice that Alan Greenspan is finally prodding our politicians to address the nation's long-term fiscal problems. But he's using a feather, when a cattle prod is what's needed. Whether or not Greenspan knows it, our country is in worse long-term fiscal shape than Brazil. Once financial markets absorb this fact, interest and inflation rates will soar and there will be economic hell to pay. Greenspan's proposed cuts in Social Security are trivial relative to what's needed and perpetuate the myth that we can finance the baby boomers' retirement with minor fiscal adjustments.

Senators Kerry and Edwards -- along with President Bush -- are fixated on the next election and ducking their responsibilities to the next generation. Like previous politicians who've failed to address our long-term Social Security, Medicare, and Medicaid problems, they are simply children masquerading as adults. What's needed are real statesmen to propose and enact the radical and extremely painful reforms required to ensure our nation's fiscal solvency."

"Going Critical" by Laurence Kotlikoff and Niall Ferguson (pdf):

"...the U.S. government [is] effectively bankrupt"

"...when rational gloom sets in, the U.S. economy will likely 'go critical.'"

"...the decline and fall of America's undeclared empire will be due not to terrorists at our gates nor to the rogue regimes that sponsor them, but to a fiscal crisis of the welfare state."

Thanks to Alex Tabarrack who comments: "I worry when intelligent people on both the right and left start to talk about the U.S. 'going critical.'"