Screwed by Seniors

The people expected to pay for Social Security and Medicare can't afford it.

Remember Occupy Wall Street, when thousands across the country took to the streets, sleeping in tents to protest the ultra-rich 1 percent? The occupiers' frustration was real, but their ire was misdirected. They should have launched an Occupy the AARP movement instead.

Government policies that transfer cash from the relatively young and poor to the relatively old and wealthy are the real scandal. In 1970, Social and Medicare accounted for 20 percent of federal spending. They have since grown to 40 percent; by 2030, they will be more than half. And these numbers understate the level of federal spending for the elderly. According to the Centers for Medicare and Medicaid Services, some 28 percent of spending on Medicaid, a program designed to offer health care to families in poverty, goes to older Americans.

But these days, unlike in the era before Social Security and Medicare were created, most seniors are doing just fine, with various general indices of well-being all pointing to higher standards of living for the elderly. When Social Security was born in 1935, the average life expectancy was 65. Today, it's 78.8. In 1959, the U.S. Census Bureau found more than 30 percent of Americans 65 and older living below the poverty line. In 2013, the percentage had dropped to 9.5. According to a report by the Federal Interagency Forum on Aging-Related Statistics, the average net worth of Americans over the age of 65 increased by almost 80 percent between 1988 and 2008. Today's seniors are healthier, better educated, and richer than their predecessors.

Of course some seniors remain poor. But as the University of Chicago economist Bruce Meyer wrote in 2011, "Even over the past 10 years, those 65 and older with the lowest income are now living in bigger houses that are much more likely to be air conditioned and have appliances like a dishwasher and clothes dryer." And seniors aren't just doing well compared to previous generations; they're doing well relative to their younger counterparts.

In short, a group that's better off than ever before is receiving ever more generous benefits subsidized by younger, poorer Americans.

Looking at both consumption and income data to assess changes in living standards, Meyer and the Notre Dame economist James Sullivan find that Americans 65 and older have much lower poverty rates than most other demographic groups, and that these rates have fallen significantly faster for them than for other groups, too.

According to the Pew Research Center, as of 2009 "the typical household headed by an adult 65 or older had $170,494 in net worth, compared with just $3,662 for the typical household headed by an adult younger than 35." This is to be expected, since people generally accumulate assets and pay off debts as they grow older. But the authors were surprised to find that the gap has actually been widening. In 1984, when the Census Bureau began tracking these numbers, "the age-based wealth gap was 10:1. By 2009, it had ballooned to 47:1."

Sadly, this trend is not just a product of older Americans getting wealthier. Younger Americans are getting poorer. According to Pew, the net worth of households headed by people younger than 35 shrunk by 68 percent even as the net worth of households headed by people 65 and older grew by 42 percent. Meanwhile, a 2011 paper by Jeffrey Thompson of the University of Massachusetts Amherst and Timothy Smeeding of the University of Wisconsin–Madison shows that households whose head was under 34 were hit much harder during the recession than households headed by people in other age groups. Thompson and Smeeding also found that younger Americans recovered much more slowly from the damage.

And the situation will get worse as spending on Medicare and Social Security explodes. Without reforms today, vast tax increases will be needed to pay for the unfunded promises made to a steadily growing cohort of seniors.

Fortunately, numerous workable solutions are available to lawmakers. Way back in 2003, Cato Institute scholars Chris Edwards and Tad DeHaven listed several sensible reforms, including adding a system of personal savings accounts to Social Security, liberalizing Medical Savings Accounts, and making the latter permanent "to reduce health care costs by increasing competition between providers and making consumers more responsive to tradeoffs." These options are supposed to encourage families to save more, but also to use their money more responsibly and in a manner more consistent with their long-term needs. And since taxpayers remain in control of their cash, they can also pass it along if they don't use it all before they die—giving the next generation a head start when it comes to building assets.

In the September 2012 issue of reason, Reason TV's Nick Gillespie and I offered a more comprehensive option when we argued against having separate programs for the elderly and the poor. Because the important distinction is the inability to pay, not the age of the beneficiary, we suggested that "the most obvious, effective, and just approach is to end Social Security and Medicare and replace them with a true safety net that would help poor Americans regardless of age. To the extent that seniors qualify for income supplements, food stamps, and other transfer programs, they should be added to those rolls. They can also be added to Medicaid rolls (currently about 9 million seniors are so-called double-dippers, receiving benefits from both Medicaid and Medicare)."

Unfortunately, there is almost no appetite in Congress for even mild reforms of Social Security and Medicare. Most lawmakers won't touch entitlement programs, because older Americans vote. Driven by a desire to get re-elected, politicians refuse to reform the program at the core of our country's future fiscal woes.

That behavior makes sense even if it's deplorable. Harder to understand is why younger Americans don't object when wealthy seniors take funds from those who can least afford it.