Monday, September 06, 2004

That which cannot continue...

Social Security and Medicare (especially Medicare) are transfer programs that take money from young people and give it to old people. As the ratio of young people to old people greys, young people are going to have to be much more productive than before to continue giving money to the old people at the rate the old people have been promised. Or they are just going to have to give more of their income in % terms. Most likely both.

It's worth thinking, for a moment, about what other transfers may kick into place, transfers that will take money from old people and move it to the overtaxed young. Some places, such as Japan, are well down this road already, and it's interesting to see how they have been coping to date.

On obvious-in-hindsight tactic is that young people stay with their parents for longer. As the parent does not charge the child rent, this is essentially a transfer from old to young, and helps to balance out the payments going the other way. Another is the rising cost of education -- old people invest in the human capital of young people, capital that they then put to work throughout their lives. Young people can also ask the old people to donate their labor -- through cooking meals, doing laundry, taking care of the kids, etc.

If you put all that together, it seems that there are many mechanisms young people can use to help defray the looming old-people bills.

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