How the Baby Boomers Stole Trillions of Dollars from the Millennials

Is "generational theft" a bunch of nonsense aimed at bolstering the campaign to cut Social Security and Medicare? Yes and no. 

In critiquing the arguments of billionaire Stanley Druckenmiller, who's been talking about generational theft on college campuses, my colleague Bob Kuttner rightly pointed out that what's hurting young people the most are lousy low-wage jobs, a stalled unequal economy, and a sharp fall in public investment in higher education that's left young people buried in student debt. Kuttner writes:

The next generation, and the one after that, will have a shot at a decent life if we can get growth and a fairer distribution of earnings back on track. That project has nothing whatever to do with Social Security or the federal deficit. 

Kuttner is right that what matters most to young people is the larger economic and distributional picture. But it would be wrong to say that entitlements and the deficit don't figure in how young people have been screwed. 

In fact, generational theft has occurred on a massive scale. Let's walk through exactly what happened and why. 

The most important fact in this story is a simple one: Over the past two decades, all the surpluses generated by Social Security and Medicare -- several trillion dollars -- have been used to cover current government operating expenses. This extra cash has allowed taxes to be much lower than would otherwise have been the case for Boomers in their prime earning years (especially on capital gains) and, among other things, enabled the government to take good care of the Boomers' aging parents through new Medicare prescription drug coverage and relatively generous nursing home care through Medicaid.

In return for shoveling all their surpluses into the U.S. Treasury, the trust funds for Social Security and Medicare were given a big pile of IOUs in the form of special government bonds. The trust funds are currently comprised of roughly $3 trillion of these bonds, with Social Security accounting for the lion's share of that. 

One day, in the not very distant future, these programs will begin drawing down the trust funds to finance benefits (because payroll taxes will no longer be enough). Social Security will start tapping its $2.6 trillion trust fund around 2022, according to the latest projections, and will rely heavily on this money to pay benefits over the next thirteen years, until its trust fund is exhausted. 

Mind you, all the dates could be extended if we make some nips and tucks to entitlement programs, like raising the payroll cap. Also, as I have written before, reducing income inequality could boost Social Security's solvency by bringing more income below that payroll cap. Stronger growth and lower unemployment could also greatly extend the date at which the trust funds run dry. 

But none of that will ultimately change the fact that the big entitlement programs will eventually have to draw on the trust funds to pay full benefits. In practice, that means the following: As Social Security begins redeeming its IOUs, the U.S. Treasury will have to pay out that money by drawing on general revenues. These redemptions are classified as interest payments on the national debt. And the expected sharp rise in such redemptions partly explains why, if you look at the CBO's latest long-term budget projections, interest payments on the national debt are expected to skyrocket.

Today, payments on the national debt equal 1.3 percent of GDP. By 2023, that share will more than double, to 3 percent -- or about $857 billion a year. (In 2013, by contrast, we'll pay about $224 billion in interest.)

And interest payments will keep rising fast through the 2020s as the trust funds step up redemptions. By 2038, the CBO projects that interest payments will reach 4.9 percent of GDP, well north of a trillion dollars a year. Again, a good chunk of those payments will be to cover Social Security and Medicare benefits for retired Baby Boomers. 

Taxes on today's younger Americans will finance these interest payments, leaving less money around to spend on other things that Millennials might want, like better schools for their kids. And by the time the Millennials get around to retiring, the trust funds will be long ago depleted, guaranteeing cuts in benefits unless taxes go up sharply on the generations behind the Millennials. 

This isn't the way things were supposed to turn out. The surpluses generated by Social Security and Medicare should have been put in the "lock box" that Al Gore wanted and taxes should have been kept high on Boomers during their peak earning years. If the trust fund were filled with real money, not IOUs, Millennials would not have to shell out $3 trillion in interest payments during the 2020s and 2030s. 

If this isn't an example of generational theft, I don't know what is. The Boomers blew the surpluses and the Millennials will be the stuck with the tab. Oh, and I haven't even discussed all the other debt piled up by the Boomers so they could enjoy low tax rates. Millennials in the prime of their working years will be paying the interest on all that debt, too. We're talking about easily $15 trillion in federal interest payments during the decade of the 2030s alone -- or 4-5 percent of all national wealth generated during that decade. Money that won't be free for other things and will, in some cases, go straight to America's top economic competitors, China and Japan, so they can invest in their future. 

Now, does all this mean the Boomers deserve to get their entitlements slashed? I don't think so. As a practical matter, we'll actually need to raise Social Security payments, since so many Boomers don't have retirement savings. But all this does raise the question of how to address a historic wrong and ensure generational equity. I'll take that up in another post.