Uwe Is Not Paying Attention

Speaking of unreasonable addiction to Ponzi schemes, here is Prof. Reinhardt writing at a New York Times blog. He asks, "Can Americans Afford Medicare?" He answers: "What if we couldn't? What would we do – push the elderly into the ocean on an ice floe?" Mercifully, he rejects that option. But then adds, "The best we can do today is to put in place public policies that can help G.D.P. grow now and in the future, to ease the pain of sharing."

Isn't that a little like saying that if you're headed toward a brick wall at 70 mph, the best you can hope for is to slow down to 60 mph? Read what Larry Kollikoff says about the coming generational warfare here.

Fortunately, there are many better things that can be done, as outlined here. My back-of-the-envelope calculation of what we need to do to leave our grandchildren with no higher tax burden (as a percent of national income) than what we are paying today is shown in the table.

To reach mid-century (2050) with a funded system under which each generation is mainly paying its own way we need 10% of every payroll check saved, invested and earning a return beginning today. (Call it a compulsory social insurance tithe.) Prudence requires another 5% of private saving, for a total of 15% of payroll. So, whereas the current generation of near-retirees is getting by with a 15% payroll tax and perhaps 5% saving, all future generations will need to abstain from consuming 30% of income.           

And that doesn't get us through the baby boomer retirement years. Assuming they don't go on the ice floe (especially since I am one of them), we will need up to 10% to 15% additional payroll tax under the best of circumstances, sometime over the next 30 years.

Note this is the least painful way out of our elderly entitlement Ponzi scheme. If, like Bernard Madoff investors, we pretend there is no problem, the cost of transition will be much higher.

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