Monday, October 7, 2013

Inheriting Squalor

Another night in any town
You can hear the thunder of their cry
Ahead of their time
They wonder why

The old generation, the one that is in the process of dying, has generally been a group of savers. They eschewed debt, preferring instead to limit their consumption (a.k.a. standard of living) to a fraction of their incomes while putting the remainder aside for the future. People in the old generation were also early beneficiaries of federal welfare programs. In any ponzi scheme, those who get in early benefit off of those who get in later. Because they have realized far more in entitlement benefits than they have paid into the system, the old generation has been able to keep more of their savings into old age.

The mature generation constitutes those people in their prime to latter working years. This group has preferred a lifestyle that has required more resources than their incomes have brought in. Moreover, this group has been funding the old generation's welfare program. As as result, this generation has borrowed heavily and has little set aside in the future. Low interest rate policies of the Federal Reserve have enabled this generation to take on their debt to extraordinary levels.

The mature generation does have an ace in the hole, however. They are inheriting the sizable nest egg that the old generation leaves behind. Undoubtedly, many in the mature generation are counting on this inheritance to help make them whole. While their inheritance will help the mature generation get closer to even, this group's lifestyle preferences plus their transfer payments to the old generation reduce the likelihood that they will have much savings into old age. Therefore, the mature generation is also counting heavily on the welfare system to bail them out as they get older.

This leaves the young generation. These are young adults in their early work years plus the children. This generation faces a difficult situation. Many who have entered the work force cannot find work that seems commensurate for their level of schooling. They struggle to pay their bills. Some are already deep in debt.

This should not be surprising. The mature generation's profligate lifestyle coupled with requisite transfer payments to previous generations have robbed the system of savings. With less savings, there is less capital. With less capital, there is less investment in productivity improvement. With less investment in productivity improvement, there are fewer good paying jobs. Standard of living stagnates, then declines.

The young generation also bears the burden of paying for the mature generation's welfare draw. In classic ponzi fashion, this welfare draw is likely to be orders of magnitude higher than the draw of the old generation.

Unfortunately, the young generation will have little inheritance to fall back on. The current set up suggests that the mature generation is likely to die largely penniless, leaving the young generation with an inheritance of squalor.

1 comment:

dgeorge12358 said...

This program [Medicare] I promise you will pass just as surely as the sun will come up tomorrow. And behind it will come other federal programs that will invade every area of freedom as we have known it in this country, until, one day… we will awake to find that we have and I are going to spend our sunset years telling our children, and our children’s children, what it once was like in America when men were free.
~Ronald Reagan, 1962