Tuesday, July 8, 2003

Baby boom generation is shafting Generation X

A column by Ed Lotterman published today in Pioneer Press says that marital status and age are playing a major role in the redistribution of wealth in the United States.  Money is flowing from Generation X to Baby Boomers and from singles to married couples.

Lotterman explains that an intergenerational transfer is occurring with changes to erase any "marriage penalty."

The irony is that no one ever set out to "penalize" married couples. It is nearly impossible, however, to write tax regulations that take into account marital status without favoring some group and hurting another. While some households did pay higher taxes before the most recent legislation, many others got a "marriage bonus."

Jiggering the law so that no household ever pays more income tax as a result of marriage inherently means that single people will always face a higher effective tax bite than do married couples. Since the age of first marriage has risen in recent decades and since a smaller proportion of people in the 20s are married than those in their 30s through 50s, "abolishing the marriage penalty" means taxing younger working people more.

People in their 20s generally have lower incomes than those in the groups above them and are less likely to benefit from housing subsidies embodied in our tax code, so once again this "reform" will transfer money from poorer people to richer people.

True, 20-year-olds eventually become 40-year-olds. My children's birth cohort will eventually achieve higher income and wealth than they have now. It is clear however, that those born between 1920 and 1940 will get much, much more out of the Social Security/Medicare system than they paid in, those from 1940 to 1960 will come out about even and those born after 1960 will pay in increasingly more than they will ever get out.

Whatever one's political affiliation, that doesn't pass basic fairness tests.

Consider another example: the Medicare drug benefit currently in process in Congress.  This proposal would shift income from younger, poorer age groups to older, wealthier ones. However, these income transfer effects were not intended, and though foreseeable, really have not been discussed.

Any discussion of the drug benefit addition to Medicare is necessarily a bit tenuous. While both houses of Congress have passed bills, these differ substantially and need to be reconciled in a conference committee. As the Minnesota Legislature has shown us, what comes out of a conference committee may be quite different than what went in from either house.

The basic outline for Medicare changes is clear, however. People eligible for Medicare will get some level of subsidy for their prescription drug purchases. The funds will come from taxpayers, either through the portion of FICA payroll taxes earmarked for Medicare or from general tax revenues that largely come from the individual income tax.

Lotterman emphasizes that people now retired or close to retirement will get a benefit for which they paid little or nothing. Drug costs are a serious problem for some, but not all, retirees. Having taxpayers assume part of those costs apparently is something that we as a society want to do.

But it will lower the level of consumption for the age groups who will pay the taxes and increase it for those who receive the benefit, whether they are poor or not.

When Social Security was instituted in the late 1930s and Medicare added in 1965, retirees were, on average, substantially poorer than those of working age. That is no longer true.

One source calculates that in 1968, the average household headed by a 70-year-old had a per-capita level of consumption 30 percent lower than that of households headed by 30-year-olds. (Consumption, rather than cash income, is used so as to include the value of owner-occupied housing and thus provide a better estimate of true relative living standards.) But by any standard, retirees were poorer than those in early adulthood.

By 2000, this was reversed. The average 70-year-old consumed 20 percent more than the average 30-year-old and had substantially more net worth. Moreover, the proportion of 70-year-olds with any form of health benefit is now far higher than that of 30-year-olds.

The new drug benefit will, on the whole, transfer money from poorer households to wealthier ones. If it is financed by FICA payroll taxes, this effect will be greater than if the funds are drawn from general tax revenues, since payroll taxes generally take a bigger slice of poorer people's incomes than those of wealthier households.

This income transfer could be limited if the new drug benefit were means-tested the way other welfare programs such as food stamps are. In other words, the benefit would only be given to people whose "means" or income falls below some level.

The Republican house wants modest means testing, but Democrats, in their eternal search for social justice, don't want to make billionaire Warren Buffett pay more for his prescriptions than Ma and Pa Kettle. Don't bet on any means test surviving the conference committee.

The younger the age cohort, the greater the transfer. I only have 14 years before I am eligible for full Social Security, but my working children have at least 38 years and 42 years to foot the bill. Once again, the baby boom generation is shafting Generation X.


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