The Coming Generational Storm

Additional praise for The Coming Generational Storm

“This is a book any serious investor should absorb and act upon. If you’re one

of the 77 million American baby boomers to whom it is addressed . . . you’d best

read it soon.”

—Jonathan Chevreau, National Post

“A serious attempt to look at a problem that most people are trying to ignore.”

—Alan Beattie, Financial Times

“The Coming Generational Storm documents in frightening detail America’s

reckless fiscal trajectory as it barrels towards bankruptcy. The need to revamp

Medicare and Social Security is urgent. This book is a must-read for anyone who

cares about our nation’s future.”

—Janet Yellen, University of California, Berkeley, Member, Federal Reserve

Board (1994–1997) and Chair, Council of Economic Advisers (1997–1999)

“Kotlikoff has been one of the pioneers of the new economics of generational

accounting. If anyone foresaw the deterioration of the U.S. government’s fiscal

health, he did. Now, with journalist Scott Burns, he has written a book that spells

out, in crystal-clear laymen’s terms, the disturbing truth about the rising tide of

red ink.”

—Niall Ferguson, Stern School of Business, New York University, and author of

Empire and The Cash Nexus

“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 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)

“Kotlikoff and Burns document and analyze the most serious issue facing the

American government today: the looming intergenerational conflict created by

its gross failure to develop a consistent plan to fund and manage entitlements

for the elderly, the cost of which will explode when the baby boom generation

retires. This book is essential reading for those concerned about their own future

and their children’s.”

—Daniel McFadden, Cox Professor of Economics, University of California,

Berkeley, Nobel Laureate in Economic Sciences (2000)

“The Coming Generational Storm is one of the most important (and refreshingly

irreverent) policy analyses of recent years. Laurence Kotlikoff and Scott

Burns . . . using the innovative techniques of ‘generational accounting’ developed

by Kotlikoff and others, demonstrate how close we are to a genuine fiscal

precipice and the hard landing that awaits us.”

—Robert J. Shapiro, Senior Fellow of the Brookings Institution and the Pro￾gressive Policy Institute, and former Under Secretary of Commerce for Economic

Affairs

“There’s a lot of frivolous criticism of our politicians, but this book hits the mark,

convincingly documenting their biggest sin: the failure to account for the mag￾nitude of a huge government deficit crisis. The accounting scandals of Enron,

WorldCom, and Parmalat pale by comparison. Read this book so you can start

preparing for much higher taxes in the future for you and your children.”

—Robert J. Shiller, Yale University, author of Irrational Exuberance and The

New Financial Order

“Between a rock and a hard place. We must all too soon realize that we want

to spend more on transfers (Social Security, Medicare, and Medicaid) than we

are willing to pay in taxes. And the prospective $51 trillion shortfall is, almost

literally, beyond ordinary comprehension. Documented diagnosis, along with

suggested reforms, are first steps toward constructive dialogue.”

—James M. Buchanan, Distinguished Professor Emeritus, George Mason Uni￾versity and Virginia Polytechnic Institute, Nobel Laureate in Economic Sciences

(1986)

“The Coming Generational Storm is a well-written summary of an impressive

and important body of carefully documented research. The book demonstrates

clearly the folly of existing tax and transfer policies in the face of the impend￾ing retirement of the baby boom generation. Anyone interested in the future

economic viability of American society and the economic problems we are

bequeathing to our children should read this study.”

—James J. Heckman, The University of Chicago, Nobel Laureate in Economic

Sciences (2000)

“No economist has thought more clearly or spoken more resolutely about our

long-term fiscal challenges than Larry Kotlikoff. In plain talk backed by eco￾nomic rigor and the powerful models that he and his colleagues have pioneered,

Kotlikoff and coauthor Scott Burns expose the shoddy thinking and false

premises that lie at the heart of U.S. fiscal policy and that risk the economic well￾being of future generations. . . . This book is a must-read for a country adrift in

fiscal short-sightedness and political spin.”

—Jeffrey D. Sachs, Director of the Earth Institute, Columbia University

The Coming Generational Storm

The Coming Generational Storm

What You Need to Know about America’s

Economic Future

Laurence J. Kotlikoff and Scott Burns

The MIT Press

Cambridge, Massachusetts

London, England

First MIT Press paperback edition, 2005

© 2004 Massachusetts Institute of Technology

All rights reserved. No part of this book may be reproduced in any form by any

electronic or mechanical means (including photocopying, recording, or informa￾tion storage and retrieval) without permission in writing from the publisher.

This book was set in Sabon by SNP Best-set Typesetter Ltd., Hong Kong.

Printed and bound in the United States of America.

Library of Congress Cataloging-in-Publication Data

Kotlikoff, Laurence J.

The coming generational storm : what you need to know about America’s

economic future / Laurence J. Kotlikoff and Scott Burns.

p. cm.

Includes bibliographical references and index.

ISBN 0-262-11286-8 (hc.), 0-262-61208-9 (pb.)

1. United States—Population—Economic aspects. 2. Age distribution

(Demography)—Economic aspects—United States. 3. Baby boom generation—

United States. 4. Aging—Economic aspects—United States. 5. Aged—

Government policy—United States. 6. Retirement income—United States—

Planning. 7. Population forecasting—United States. 8. Economic forecasting—

United States. I. Title: America’s economic future. II. Burns,

Scott. III. Title.

HB3505.K68 2004

332.024¢00973—dc22 2003069121

10 9 8 7 6 5 4

To our children and grandchildren: Stephen, Suzanne, Oliver, Alex,

David, Shelby, John Taylor, Dylan, Nathan, and Aubrey

Contents

Acknowledgments ix

Preface to the Paperback Edition xi

Prologue xvii

1 From Strollers to Walkers 1

2 Truth Is Worse Than Fiction 41

3 Driving in LA with a Map of New York 73

4 Popular Tonics, Snake Oils, and Other Easy Fixes 87

5 Going Critical 121

6 Changing Course 143

7 Grab Your Life Jacket 173

8 Securing Your Future 193

Epilogue 243

Notes 249

Index 263

Acknowledgments

No book about a $51 trillion debt gets written without its own obliga￾tions. Elizabeth Murry at The MIT Press persuaded us to write this book,

provided brilliant suggestions along the way, and ably guided its

production. Her MIT Press colleagues were equally impressive editorial

and production partners.

Alan Auerbach, Jagadeesh Gokhale, and Kent Smetters played a key

role over the years in codeveloping the generational accounting, fiscal

gap, and other analyses discussed in this book.

We’re also grateful to Boston University, the National Bureau of

Economic Research, the National Science Foundation, and the National

Institute of Aging for supporting Kotlikoff’s research over the years.

Finally, we thank the Dallas Morning News and Universal Press

Syndicate for providing Burns a special forum to research and write

about the many issues covered in the book.

Our biggest debt is to our wives, Dayle Ballentine and Carolyn Burns,

for supporting and encouraging us through the various stages of com￾pleting this work.

Preface to the Paperback Edition

The more things change, the more they remain the same.

—Alphonse Karr

When it comes to describing how America’s taxing and spending poli￾cies will affect future generations—its generational policy—the old adage

quoted above runs in reverse. The more things remain the same, the more

things change. What’s staying the same is our decades-long practice of

fiscal child abuse. What’s changing, and for the worse, is the fiscal burden

we are passing along to our kids.

Indeed, in the year since publication of the hardback edition of The

Coming Generational Storm, the official 2004 federal deficit reached a

record high—$413 billion! This amounts to $105,000 per child born

that year. Even more ominous, the nation’s implicit debt—its promises

to pay future Social Security pension benefits to retirees and Medicare

and Medicaid health care benefits to the elderly and the poor—increased

over the year by roughly $1 trillion, or $250,000 per newborn! No

wonder those babies came out screaming.

While these obligations increased, our politicians did their best to

ignore them. During the long 2004 presidential election campaign,

George W. Bush and John Kerry treated us to hundreds of speeches. Yet

they studiously avoided acknowledging the nation’s long-term insolvency

and its implications for future generations. When the issue of deficits did

come up, the Republican president said that lowering tax rates would

eventually raise tax revenues. The Democratic senator said spending

more now would eventually mean spending less later.

All of us Americans listened to this malarkey. We didn’t roar with

laughter because our leaders, regardless of party, told us exactly what

we wanted to hear. No one wants to pay more taxes. No one wants to

receive less government support. We prefer fairy tales over the truth—

and that’s what we got. But no wave of the magic wand can solve the

problem of spending more than we have and promising more than we

can afford to deliver.

Our conspiracy of denial will do more than damage our children’s

and grandchildren’s economic welfare. It’s also going to hit each of us

adults very hard and very soon. Any day now financial markets will

put two and two together and realize that our nation is making

fiscal reprobates like Brazil look like models of fiscal prudence. When

that day comes, we’re in for a financial and economic crisis of the first

order.

Comparing the present-day United States and Brazil may seem ex￾treme. But, then again, Brazil hasn’t spent the past four years increasing

discretionary spending by 33 percent, expanding entitlement spending

by 18 percent, cutting taxes by 12 percent, and raising official debt by

25 percent—all on an inflation-adjusted basis. Nor is it vowing to make

major tax cuts permanent, expand payments to the elderly, and spend

whatever it takes to win a grueling and very expensive war on terror￾ism. Nor does Brazil have an enormous cohort of baby boomers—77

million strong—poised to start retiring and begin collecting Social Secu￾rity and government health care benefits totaling roughly $21,000 per

oldster per year.

What Brazil does have are mind-boggling interest rates. As we write,

it’s paying a 20 percent rate to borrow money in the international capital

markets. In contrast, Uncle Sam can borrow at 2 percent. Apparently the

global financial markets think Brazil can’t be trusted to repay its debts,

whereas the United States can. We should be thankful the markets hold

this opinion. Just imagine what 20 percent interest rates would mean for

our economy’s ability to grow and generate tax revenues. Eventually,

however, the financial gurus in New York, London, Tokyo, Shanghai,

Beijing, Frankfurt, and Zurich will realize that the United States is not

immune from going broke. Some are already beginning to draw this

conclusion.

xii Preface to the Paperback Edition