Social Security and Medicare: Robbing the Young?

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In my last post, I reviewed the case for why deficit-financed public investment is an essential tool of the federal government and is not “generational theft.” This week I’ll address the issue of social insurance programs—namely Social Security and Medicare.
 
The key to understanding the effects of government spending on subsequent generations is to consider the impact over an entire lifetime. Such a perspective captures not only the liabilities created by future taxes, but also the benefits produced by effective public spending. It's when we focus solely on the net tax burden for specific generations, such as the method of “generational accounting,” that we fuel concerns we are increasing liability for tomorrow's youth. This in turn has supported the perspective that spending on the elderly—largely through Social Security and Medicare—crowds out spending on the young.
 
Proponents of this perspective cite that the share of children’s spending in the federal budget is half the size of spending for the elderly.  (It should be noted this argument vastly understates spending on children; the majority of public expenditures for Medicaid and primary schools occurs at the state level.) This situation, they contend, is worsened by our nation’s aging population—starting with the baby boomers—and will only exacerbate the generational inequities we currently face. They also point out that the material and health outcomes of the elderly have dramatically improved, while those of children have stagnated or worsened.
 
This view is flawed on two levels. Fundamentally, it ignores the possibility that different generations can contribute to one another, and in turn, that government policies can have additional effects beyond cash transfers. Social policies have many positive externalities--for the direct recipients, their families and the broader economy.
 
For instance, social policies that pool and diffuse uncertainty and risk encourage workers to undertake long term investments, such as training, education, or pursuing new employment that better matches their skills. These are activities that will ultimately benefit both the worker and the economy. But they are less likely to be undertaken if individuals do not have a safety net should they fail. The government can insure against risks that private markets cannot.
 
Social insurance programs can also have positive spillover effects to the family by encouraging non-monetary exchanges of time and care between generations. Nearly four million children are being raised by their grandparents and one-third of older Americans report providing some child care for their immediate family members. In addition to directly contributing to children’s welfare, child care offered by the elderly is often what allows young parents to participate in the labor force, especially in the case of low-income mothers. Conversely, the economic independence generated for the elderly by social insurance programs, such as Social Security and Medicare, relieves families of much of the economic cost of supporting their elderly relatives, which allows parents and guardians to invest resources in their children.
 
The “zero-sum” perspective of government spending is refuted by empirical analysis, as well. Extensive cross-national studies have shown there is no trade-off between spending on children and spending on adults. In fact, these studies have found that countries that spend relatively more on one group also spend relatively more on the other.
 
Arguments regarding generational inequity and conflict are generally strategies to initiate retrenchment of social programs in the United States and other post-industrial economies.
 
Compared to other developed (and even some developing) nations, the well-being of American children clearly lags. But cutting spending directed towards the elderly will not automatically improve living standards for children; in fact, it may lower them. Furthermore, there are still large disparities in socioeconomic status for the elderly, such that cutting benefits any further could be highly detrimental.
 
While the elderly and retired have indeed enjoyed significant material and health gains—largely due to the success of Social Security and Medicare—a significant portion still remain near poverty (with minorities and women starkly overrepresented ). Thus, while the reduction in the average elder poverty rate over the past century is certainly cause for celebration of effective government action, much work still remains to be done for both the young and the old alike.
 
(Image by Mbjerke)
 
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