The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.
It is not the young people that degenerate; they are not spoiled till those of mature age are already sunk into corruption.
It is no exaggeration to say that rising inequality has driven many of the 99 percent into a financial ditch. It also helped spawn the housing bubble that gave us the financial crisis of 2008, the lingering effects of which have forced many OWS protesters to try to launch their careers in by far the most inhospitable labor market we’ve seen since the Great Depression. Even those recent graduates who manage to find jobs will suffer a lifelong penalty in reduced wages.
MILLENNIALS VS BOOMERS, A TALE OF TWO GENERATIONS
The Housing and Education markets reflect policies that on balance overwhelmingly favor the elderly at the expense of the younger generation. Young people’s incomes are depressed, while the state makes every effort to support elderly pensions.23 This is a striking example of how the “pie” of economic wealth and income has been deliberately cut in favor of a few well-organized voting groups by politicians seeking to be re-elected. In this case, the elderly, disciplined voters, are favored over the undisciplined young, sparking a largely unspoken but very real generational conflict.
The housing market’s stratospheric rise has become emblematic of this problem. Rising property prices are perceived by older people, who tend to own homes, as a source of increased wealth. As a result, the demand that provides for home-buying – and even renting – has pushed prices far beyond the means of millennials. Consequently, Generation Rent is either staying home with their parents, co-renting with others, or even illegally renting in industrial parks. In the UK, for instance, more than a quarter of young adults,24 3.3 million, still live with their parents Guardian.
The Millennial generation, truth be told, cannot be too focused on getting a mortgage anyway, as it is burdened by crippling student debt. Such debt has grown in concert with the rising cost of higher education. Most young people who pursue higher education can expect to be paying off debts for the first 10 to 20 years of their working lives.
While the state is unable to pay for the higher education of young people, it is spending more than ever on the elderly. Public expenditures on old age benefits across OECD countries is now above 8% of GDP and steadily rising. Italy spends over 15% of its GDP on pensions. Japanese pension payments have risen since 1990 from 5% of GDP to over 10%. Without that increase, Japan would be running a balanced budget or something close to it today, rather than the deficits we see.
These fiscal trends are the natural results of demographic ones. Fertility in developed countries has decreased while life expectancy has risen. The portion of the population above 65 is now close to 20% in OECD countries and is expected to reach near 30% by 2050. David E. Bloom
But shifting budget allocations do not simply reflect a growing elderly population. While government spending on higher education per student has dwindled, spending on those 65 years and older has increased not just in gross terms, but in per capita terms as well. It increased by 7% in France from 1990 to 2011. The reallocation of resources in favor of the elderly has been such that poverty is now highest among young adults – reversing the early 20th century problem of impoverished retirees that inspired Western governments to spend massively on social security and other pension schemes. According to the OECD, people 65-75 are now the least likely to live in poverty while the highest rate (well above 150% of the rate for the general population) is found among those ages 18-25 OECD.
I vividly remember the proud speech given by the Chancellor of the Exchequer in London in 2011 announcing the British “Triple Lock”: Basic pension cannot grow less than inflation, 2.5%, or the average earning growth, whichever is highest. This is one mechanism that explains what the OECD calls “systematic upward pressure on pensions spending as a share of GDP.” The U.K., like most Western countries, is overpaying for the past and left with little to invest in the future: The government spends nearly twice as much on pensions as it does on education (20% vs 11%). But young people cannot or do not vote.
Most OECD countries have taken some measures in recent years to make their retirement systems more affordable in the long term. This has included increasing the retirement age in line with increased life expectancy or decreasing future pension indexation. However, this is where political considerations trump budgetary strictures OECD.
There is a so-called “golden rule” of good governance that states that over the business cycle the government should only borrow to invest. But “straightjacket” budget rules or treaties, such as the Maastricht Treaty, the founding treaty of the Euro, have encouraged a decrease in investments even as governments continue to borrow. This may not hurt the elderly, who will be dead before the time comes to pay the piper, but it will certainly end up affecting the productivity of the younger population for decades to come by forcing them to labor in an economy that has not sufficiently invested in education or infrastructure.
This dynamic of resource diversion to the elderly creates a vicious cycle. For the countries involved, it translates into lower investment, lower growth and lower future abilities to support their aging population in the future. It certainly helps explain the low birth rate.
OLD PEOPLE’S POLITICAL CAPITAL TWISTS RESOURCE ALLOCATION
These imbalances are largely a result of political power. Governments for the past several decades, have repeatedly looked to winning the next election by pandering to the elderly, who vote in higher numbers than younger cohorts, at the expense of designing long-term sustainable policies.
The political mechanics that are leading to this systematic arbitrage, or tainting of policies, in favor of the elderly population is clear. Not only is the percentage of the elderly population rising, but the voter participation rate of the elderly is significantly higher. Depending on the country, a 70-year-old is about four to five times more likely to vote than a 25-year-old. The compounding effect of a more numerous elderly population and a higher voter participation rate implies that in the next 20 to 30 years OECD countries would systematically have an above 65 majority of voters at each election. Democratic Audit
It is imperative for aging developed countries to find politically and democratically acceptable ways to correct this imbalance. Providing for the elderly is fundamental to society and a moral imperative. However, if a voting majority that is no longer economically productive diverts excessive resources for their unique benefit, this would be a recipe for long-term stagnation, a situation most elderly would not wish on their grandchildren. It is time for a collective rethink of how to balance the rights of all, to protect both our elders and our children.
Even more fundamentally, Western governments have to stop using social spending, which has crowded out critical investment and core government functions, as a vote-buying tool. Too often we hear politicians in the media claiming they have increased this or that allocation. The not-so-subliminal message is: “I have given you money. Vote for me next time.” However, in truth, it is not their money, for they have not done anything but redistribute what has been produced by others. This rhetorical sleight-of-hand is even more of a scandal when it compromises the future of young people.
Not only is it unfair and abusive, we can simply no longer afford it. Politicians must re-orient themselves towards long term vision of development that benefits the entire society. Of course, in democratic systems, it is ultimately up to voters to throw out the bums and install responsible adults. Next year for Christmas the elderly should consider skipping the stocking stuffers and give their grandchildren a more valuable gift: Casting their votes for politicians who offer a sustainable approach to fiscal policy. If they don’t, young people will continue drifting towards increasingly radical and angry political options.