A front-page article in last weekend’s Australian Financial Review spoke darkly of the federal government’s budget preparations ‘pitting one generation against another.’

A tired locution, no doubt, but has the claim any substance, or is it mere journalistic inflation?

Back in 1959, Abba Lerner compared the standard economic treatment of public pensions to a ‘swindle’ or a ‘chain letter’, criticizing it for neglecting transfers between generations living today, in favour of a spurious infinity of mutual benefit:

[The] “new” welfare economics… cannot consider the distribution of the product between younger and older people living at the same time… They are limited to the consideration of the distribution of an individual’s consumption between his working life and his own retirement.

Through ‘the fairy tale of the time-travel of interest-collecting savings… the authorities can pretend that “social security” is not a “socialistic” tax and give-away program by the government but a “saving” by each worker out of his current income to provide for his old age.’

But, said Lerner:

[From] the social point of view, the pensions of the old can come only out of current output of consumption goods… The essence of the matter is that the fable of the time-travel of consumption is accepted with implicit faith by the accountants, as guardians of the private point of view of savers who are putting money aside for their old age. It is the duty of economists, as guardians of the social point of view, to explode this fairy tale… The only real problem from the social point of view is the allocation of current output of consumption goods between current consumers of different age. This can never be achieved by any kind of trading or lending, but only by a one-way transfer of current consumption from some citizens to others with no genuine quid pro quo. It is only a somewhat more sophisticated fable that today’s transfer from workers to pensioners is a “repayment” of yesterday’s transfer from workers to pensioners… The tax-and-pension is nothing but a device by which today’s pensioners are maintained out of today’s social product, which is, of course, produced by today’s workers.

Lerner derided ‘the accountants who insist on the “solvency” of the Social Security Administration.’ Pre-funding was a red herring: ‘the “new” welfare economics, by limiting comparisons to the utility of the same individual at different dates, fits in fatally with the accountants’ predilection for considering social security as the translation of savings over time.’

Paul Samuelson, against whom Lerner was arguing, had declared with typically folksy glibness:

Outside of social security and family altruism, the aged have no claims on the young: cold and selfish competitive markets will not teleologically respect the old; the aged will get only what supply and demand impute to them… Once social coercion or contracting is admitted into the picture, the present problem disappears. The reluctance of the young to give to the old what the old can never themselves directly or indirectly repay is overcome. Yet the young never suffer, since their successors come under the same requirement. Everybody ends better off. It is as simple as that.

This Elysian vision depended upon the premise that ‘each and every today is followed by a tomorrow’:

If each man insists on a quid pro quo, we apparently continue until the end of time… Let mankind enter into a Hobbes-Rousseau social contract in which the young are assured of their retirement subsistence if they will today support the aged, such support to be guaranteed by a draft on the yet-unborn.

Yet the future would not last forever, Lerner averred: growth would slow or the day of reckoning arrive. And when it did, Samuelson’s fairy tale of optimal saving, an attempt to legitimize PAYG, would have left Social Security exposed to attack from its enemies: the ‘accountants’ and their backers:

In our society many people feel that social security by redistribution of income by the government is alien to the pure essence of the individualist capitalist system so that, if “social security” has to be provided it should take the form of individual saving for old age. This has led to the belief that a social security system cannot operate honestly unless it has acquired a fund actuarially corresponding to the savings of all those members of society who have paid in their contributions in the past and who will be taking them out as benefits in the future… [The] fact is that such a fund is completely unnecessary. It is called for only because accountants look on the social security program as old age insurance provided by an enterprise that must accumulate assets to match its contingent liabilities. Such accounting practices are completely justified for a private insurance company, which must be prepared for the eventuality of failing to enrol any new customers and still having to pay the covenanted benefits to its old customers.

Lerner’s objection provided a downbeat and untimely interruption during the postwar golden age of capital accumulation. Samuelson, heedless, could dispatch it with characteristic insouciance: ‘The beauty of social insurance is that it is actuarially unsound… A growing nation is the greatest Ponzi scheme ever devised.’

But, as public retirement provision has come under attack during the last three decades, it has become more congenial for its opponents to acknowledge, and profitable for them to belabour, Lerner’s point that pensions are simply a tax-based income transfer between generations or birth cohorts.

Abruptly, the principle of intergenerational equity has entered the journalistic lexicon (the Stern Review having sped the acquisition).

To its horror, conventional opinion has discovered that the elderly are cosseted, not abiding by Samuelson’s social contract of give-and-take.

Society’s rules are ‘seriously biased against the young.’ This alleged fact is finally discerned just as a looming demographic shock — increased life expectancy and reduced fertility rates — lowers the natural rate of workforce growth, promising a higher dependency ratio in the advanced economies.

Samuelson’s roseate vision of mutual benefit no longer fits the bill. ‘Intergenerational catastrophe’ has now taken its place.

As his own generational cohort has been succeeded by the likes of Martin Feldstein, and collegial academic debate given way to ambitious policy programmes, it has been acknowledged (as Milton Friedman once insisted) that retirement income does involve redistributing today’s output between currently living social groups.

Hysterical claims about trillions of dollars worth of unfunded pension liabilities over an infinite horizon have been just one of several tactics used by advocates of ‘individual saving for old age’.

As I suggested in an earlier post, policy circles have also luridly announced a ‘war’ between young and old, a zero-sum game for scarce resources, in which benefits for one generation can only come at the expense of another: ‘welfare policies have favoured the elderly at the expense of the young.’

The crudity of this divide-and-rule campaign — pursued with asinine zeal by politicians as well as academics, journalists, media commentators and policy analysts — can scarcely be exaggerated.

This year the Australian treasurer, Joe Hockey, has spoken repeatedly of public spending on pensions as ‘intergenerational theft’. So has his parliamentary secretary, Steven Ciobo.

Looking ahead with trepidation to fifty years of a ‘greying’ population, and invoking Hayek for comfort, minister for Social Services Kevin Andrews has described ‘intergenerational theft… [an act that] picks the pockets of our children who’ll be left to pay the bill. It’s a raid on the future prosperity of young Australians, both born and yet-to-be-born.’ So has his assistant minister, Mitch Fifield.

Josh Frydenberg and Brett Mason, both parliamentary secretaries, have also deployed the term.

Thus the welfare of future cohorts — the youth, our nation’s shining future — provides the satisfyingly elevated creed served up to the mass electorate, a thin gauze veiling a ruthless distributional claim to today’s social product.

At stake is the price of state debt and valuation of the chief asset on the government balance sheet: the discounted present value of all future primary surpluses (net private-sector tax liabilities imposed by the state). State bonds promise their holder a stream of interest payments financed out of tax revenue.

Behind the putative conflict between baby boomers and subsequent generations is, therefore, an elite constituency seeking to sustain, rather than diminish, the value of interest-bearing government debt.

To accomplish this, the claim on future net output represented by the state’s obligations to the elderly, infirm and other dependants must be reduced.

Why, as this goal of the propertied classes finds popular expression, is it embellished as intergenerational conflict? Why risk such strident and incendiary terms, when more decorous evasions, more pious expressions of national harmony, might conceivably be found?

In the first place, electoral mobilization depends increasingly on appeals to narrow demographic groups (the Australian Greens have sought to convert young adults into a vote-bank), with today’s parties lacking the broad social constituencies, and the programmatic variety, of the past.

The increased salience of non-class forms of social classification or ascribed status (ethnicity, race, gender, generational cohort) is also a pacifying factor during recessionary phases of business cycles or more enduring periods of instability.

In Australia, privatization of public pensions (supplemented by a means-tested system of residual relief for the poor) arrived long ago. In other, more stubborn jurisdictions, it has been the desired end-goal (‘one of the most important conservative undertakings of modern times’). In every case the accompanying rhetoric has involved panic over the solvency of a system of unfunded liabilities (‘the current system is heading for an iceberg… That reality needs to be seared into the public consciousness’).

Local talk of an ‘ageing tsunami’ simply partakes of this global idiom.

Finally, the demographic shock, apparent by no later than the mid-1970s, does pose a genuinely epochal challenge to Australia’s state elite. The diminished natural rate of labour growth has called forth an assiduous policy response including mass immigration, pro-natalist subsidies, efforts to increase workforce participation rates through ‘social migration’ of housebound women and disabled people, etc.

Yet the impact in Australia of the demographic shock is broader and deeper still.

Even in the absence of full employment, a less elastic supply of employable labour imposes a constraint on profitable investment, especially when technical change is stunted (as it has been since the 1970s). Slow capital accumulation in recent decades — reducing productivity growth and channelling funds into unproductive and speculative pursuits — has therefore maintained the relative bargaining position of Australian firms in conditions where excessive labour demand might conceivably have raised the bargained wages of employees.

This curtailing of productive investment, involving the diversion of the surplus into residential expenditure, asset markets and luxury consumption, has been the decisive feature of Australian society in the last three decades.

The turn from long-term investment to shareholder value has entailed restructuring of the labour market towards sporadic, tenuous and low-paying employment, a change that has disproportionately affected young adults. Youth, lacking the savings and the borrowing capacity of their elders, and contributing much of the necessary slack in the labour market, then provide an aggrieved constituency for those intent on stoking intergenerational rancour.

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Tags: age pension, demographic transition, demography, intergenerational equity, life-cycle saving, overlapping generations model, Social Security