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REVIEW: of The Coming Generational Storm: What You Need to Know about America's Economic Future
by Laurence J. Kotlikoff (Howard Davies, Times Literary Supplement)

[I]f one can fight one's way through the undergrowth of cliche, and avoid hyperbole above, there is a powerful line of argument running through the middle of this book. First of all, the authors have a point. The combination of increasing longevity, highly generous benefit entitlements and politically driven tax reductions is a dangerous one. The budget arithmetic which results does not add up. The authors focus almost exclusively on the position in the US, but the thesis they advance is certainly relevant elsewhere, too. It is a little less forcefully applicable in the United Kingdom, given our relatively higher birth rate and relatively less generous benefits than in continental Europe, but the position is worrying here, nonetheless.

Kotlikoff and Burns claim that the concealed US deficit, on its social security and medical account, is now $45 trillion. Deficit is a rather loose term in this context and perhaps their favoured "black hole" is not an unreasonable description. They maintain that this calculation can be sourced to a piece of analysis prepared in the US Treasury on the instructions of the previous Secretary to the Treasury, Paul O'Neill. The intention was to publish the basis of the calculation at the time of last year's budget, but just before the budget emerged O'Neill was summarily dismissed, and the figures have not officially seen the light of day.

They go on to argue that the principal remedies often cited as cures for this fiscal crisis are unlikely to be successful. There are those who argue, for example, that if we could be induced to lengthen our working lives by just a year or two, that would have a major impact on the calculation. The authors say that this would have only a modest impact. What are the beneficial effects of immigration, as younger people are added to the workforce? In theory, this could do the trick. But they point out that to maintain the ratio of workers to dependants at the current level, in other words using immigration fully to offset the ageing of the population, would require the US to admit between 4 and 6.5 million immigrants every year for the next two decades.

What of the benefits side of the equation? Is it possible, as conservatives typically argue, to cut out fraud and waste in the public sector on a massive scale and solve the problem that way? Correctly, Kotlikoff and Burns argue that even a pessimistic view of the efficiency of the public sector at present is hardly likely to generate savings on any scale which would make a dent in the $45 trillion target.

It may be, however, that they are too dismissive in each case. Surely, in combination, some increase in working lives, a modest uplift in immigration and a resolute attack on the inefficiency of the state sector could begin to make an impact? Perhaps, but it becomes clear that Kotlikoff and Burns are not interested in minor improvements, because they reveal that they have themselves devised "the only system that could possibly make sense".

This silver bullet is the heart of the book, though it is relatively briefly described. Essentially, it amounts to a significant cut in benefits for future (not current) retirees, the introduction of a new federal retail sales tax to fund accrued benefits, and a new system of personal security accounts, invested in a single market-weighted, global-indexed fund, which is gradually transformed into inflation-protected pensions -- but though these accounts are supposedly individual, any surplus balances in them are used to pay off deficits in the fund when an individual dies.

Why not both? We should boost retirement ages, cut benefits, encourage immigration and boost reproduction. But we should also establish universal private accounts--funded by the individual though, rather than a sales tax.

Posted by Orrin Judd at June 13, 2004 9:12 AM