I’m giving a presentation today to the Michigan Intergenerational Network. The topic is: Do the Old Gain At the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget. The Powerpoint file, MIN-IntergenerationalTransferPrograms-30jul2013 is available here.
Here’s the bottom-line, despite the constant chatter from politicians and others about the need the cut Social Security and Medicare in order to “save” them or to “protect our grandchildren”, the reality is quite the opposite. Intergenerational transfer programs are economically necessary in any society because the very young and the very old simply cannot “earn” their own way. Only people in their twenties to sixties are able to generate more income than they cost. All others must depend on them. So all societies must come up with an intergenerational transfer scheme.
The oldest and most common intergenerational transfer scheme is the family. But it’s very problematic. Support for the elderly is susceptible to severe moral hazard issues and child support is erratic. Further, reliance on family as the only intergenerational transfer mechanism causes higher birth rates, shorter lives, and slower GDP growth when compared to social insurance based schemes.
One of the greatest innovations of Western civilization of the last 150 years is the creation of social insurance-based intergenerational transfer systems. In the U.S., Social Security, public funding of schools, and Medicare are all examples. Together, they have contributed to faster, more stable GDP growth, higher standards of living for more people, and greater administrative efficiency.