Why do we spend so little on generations under age 45?

Why do we spend so little on generations under age 45?, asks Dr. Paul Kershaw or readers of The Globe and Mail.

“As a generation of retiring parents risk watching their kids and grandkids fall behind, what do we make of current policy priorities in Canada?…The federal government spends more subsidizing livestock and agriculture than it does subsidizing moms and dads to spend time with a new baby. Provincial governments spend nearly as much subsidizing agriculture as they do child care (other than in Quebec).

“Why do we spend so little on generations under age 45? Part of the answer is that we are spending more elsewhere – including on older generations.”

The author identifies major areas where government spending or taxation favors the Boomers, principally in pensions and health care.  Then he posits that, “Spending on older Canadians doesn’t have to come at the expense of spending on younger generations.”  Well, short of across the board tax increases, Yes it does.  Oh…I see where this is going.

“We now collect 5 per cent less of our economy in taxes than we did in the year 2000. That’s an $80-billion annual tax cut…Data show this massive tax cut hasn’t helped the average young family to bridge the gap between stagnant wages and high housing costs.”  He points out that cutting taxes while increasing payouts to Boomers has walloped  young families.  Hard to argue with that.

But what’s the fiscal solution – restore tax revenues to where they would have been, sans cuts?  Or trim benefits to Boomers by a similar amount and passing the benefits to our kids (in the form of greater incentives for saving, more affordable housing, lower cost student loans, dental care, child care, etc.)? (I need a separate Post to elaborate on this list.)

Neither of those fiscal solutions is going to be very attractive to Boomers, especially those who continue to pay taxes.  Since taxes are legislated and legislators are elected and Boomers are a big part of the electorate and Boomers have traditionally voted in their narrow self-interest, I don’t think either of these “solutions”  is likely to come about within the current mindset.  What’s needed is a new mindset on the part of Boomers who are in a position to make a difference.  I’ll need yet another post to flesh that one out.

Dr. Kershaw is an associate professor of public policy at the University of British Columbia’s Human Early Learning Partnership. His work specializes in “inter-generational inequities” – my kind of guy.  He’s got a blog, A Canada that Works for All Generations,

Defined Benefit Pension Plans – Boomers changed the rules

Defined Benefit Pension plans used to be the norm.  The pension plans were run by the employers and provided employees with specifically defined benefits in retirement.  Working and retired Boomers have benefited from these plans while their employers and former employers struggle to fund the plans.

Defined Contribution Pension plans are now the norm.  It’s the contribution of employees that is defined; the benefit received at retirement will vary according to the market returns on the investments and the costs of administering the plan.

An obvious explanation for the shift from DB to DC is that employers a.) found the DB plans increasingly expensive to manage, and b.) found that younger employees coming in to the work force would accept Defined Contribution plans.  The less obvious explanation is that Boomers changed the regulations regarding employer-provided pension plans.  A summary of these regulatory changes is included in a 2008 Discussion Paper, Large Declines in Defined Benefit Plans Are Not Inevitable: The Experience of Canada, Ireland, the United Kingdom, and the United States, by John A. Turner and Gerard Hughes of The Pension Institute.  The authors posit that regulatory changes (Boomer regulators) have made in increasingly expensive for DB plans.

“While pension legislation has had a number of goals, increasing the likelihood that employers provide defined benefit plans has not been one of them. Regulations have been designed to make defined benefit plans more secure for those participants covered by them, and in the process shifted risks to employers.
“Regulations have been designed to limit the loss in tax revenue to the government Treasury by restricting the amount of funding allowed in defined benefit plans. Regulations affect plan costs, but the effects are not the same for defined benefit plans and defined contribution plans. Regulations could have raised the cost of providing a dollar of benefits through a defined benefit plan relative to a defined contribution plan, and evidence suggests that has occurred.”

  • Compliance Costs
  • Regulatory Disincentives to Funding Plans: Ownership of Surplus Assets
  • Disincentives to Funding Plans: Funding Limits
  • Volatility of Asset Markets
  • Volatility of Contributions
  • Problem of Underfunding
  • Incentives for Terminating Defined Benefit Plans
  • Accounting Rule Changes
  • Early Retirement Subsidies
  • Decline in Real Value of Maximum Pensions for Upper Income Workers
  • Effects on Retirement Age

The working paper includes country-specific analyses for Ireland, the Unites States, the United Kingdom and Canada.

“In all four countries, it appears that unexpectedly large increases in life expectancy have played a role in the decline in defined benefit plans. Defined benefit plans in none of these countries provide benefits that are indexed to increases in life expectancy. Thus, generally the plan sponsor bears the cost of increased life expectancy.
“Regulatory changes could be considered to make it easier for defined benefit plans to deal with the increased cost arising from increases in life expectancy.”

In summary, when working Boomers realized that their Defined Benefit pension plans would be at risk when their kids joined the work force they, changed the rules – closing the door on Defined Benefit plans.

Boomers Hogging All The Teaching Jobs

Governments are trying to cut spending by reducing public service payrolsl.  Teachers seem to be easy targets and the teachers’ unions are understandably agitated: it’s the union’s responsibility to protect their members, right?  What if the union’s responsibility was to protect the earning power of all teachers, not just the one’s who currently have jobs?

What if union leadership decided to represent unemployed teachers as well as employed teachers?  And what if, in their bargaining positions, they emphasized full teacher employment rather than protecting compensation (salary, benefits, pensions) of the teachers with the most seniority?

Well, the first thing that would happen, I guess, is that there would be some new union leaders who knew better than to mess with the boomer rank-and-file.

I’m out on a limb here, but can you imagine a world in which teachers’ unions and school boards negotiated with the objective of providing full-time jobs for all certified teachers, while still setting limits on total compensation?  The effect would be to reduce average salaries while increasing the number of salaried teachers. At some point salaries for beginning teachers might fall so low that the supply of newly minted teachers would stabilize.

What am I missing here?  We’d have lots of teachers, more teachers per pupil, possibly more teachers per classroom, all while holding the lid on total teacher compensation.

One final thought: to minimize the initial hit of this full-teacher-employment policy on the salaries of existing teachers we could cancel the contracts of all the retired (boomer) teachers who have come back to work, freeing up compensation dollars for younger teachers.

Wealth Gap? It’s due to politics.

In a largely uninspiring article on Old vs. Young, The New York Times Sunday Review (June 22, 2012) describes the significant disparity in the wealth of the boomer generation and our kids”

“The wealth gap between households headed by someone over 65 and those headed by someone under 35 is wider than at any point since the Federal Reserve Board began keeping consistent data in 1989. The gap in homeownership is the largest since Census Bureau data began in 1982. The income gap is also at a recorded high; median inflation-adjusted income for households headed by people between 25 and 34 has dropped 11 percent in the last decade while remaining essentially unchanged for the 55-to-64 age group.”

The reason? Less political power:

“Younger adults are faring worse in the private sector and, in large part because they have less political power, have a less generous safety net beneath them. Older Americans vote at higher rates and are better organized. There is no American Association of Non-Retired Persons. “Pell grants,” notes the political scientist Kay Lehman Schlozman, “have never been called the third rail of American politics.””

Politics?  Really?

The Next Crisis – Sponging Boomers

The Next Crisis – Sponging Boomers, The Economist, Sept 29, 2012

A great article – citing data and research on the situation in the United States.

The article begins with a recitation of the numerous one-time benefits that fell in to the laps of baby boomers.  (Let’s face it.  We were lucky.  Like winning the lottery.  And like too many lottery winners, we blew it.  Wasted the opportunity.  Instead of leaving our kids with a national budgetary surplus we’ve left them with big hole in the ground.  That’s me talking, not The Economist.)  The article continues with some macro-economic examples of how we stacked the deck against our kids.

Boomers elected politicians who promised tax cuts and increased benefits.  This Ponzi scheme was possible because the government could borrow or print money to pay the bills. “Erick Eschker, an economist at Humboldt State University, reckons that each American born in 1945 can expect nearly $2.2m in lifetime net transfers from the state—more than any previous cohort.”  That’s outrageous.  Who in their right mind would lend the government money to finance these transfers?  (Hint: Be nice to your grandchildren.)

Describing the findings of an IMF study, the Economist continues, “The boomers are leaving a huge bill. Those aged 65 in 2010 may receive $333 billion more in benefits than they pay in taxes (see chart), an obligation 17 times larger than that likely to be left by those aged 25.”

The Economist is not happy. “Sadly, arithmetic leaves but a few ways out of the mess”. The article identifies three possible outcomes:

  • Growth (unlikely, given the depressive effect of the accumulated debt);
  • Austerity, including reduced transfer payments (not politically likely since boomers are moving into the period where they will be drawing maximum benefits (social security, medicare, medicaid); and
  • Inflation – the silent killer of boomer investment portfolios.

Hmmm, what would it take to engineer a might decades-long inflationary boom?  I guess you’d start with record low interest rates, quantitative easing, and – oh!  I see where this heading.

Ill-gotten Gains

Ill-gotten Gains

“It’s only fair that older people are better off than the young. They’ve earned it.” The Guardian (UK) (column)

This is nuts. The article overlooks the fact that many older people have become rich at the expense of younger people and have stacked the deck against these same young people to preserve the new status quo. The comments/responses to the article are instructive.