Generational Balance, Not Budget Balance: Laurence Kotlikoff

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Professor Laurence Kotlikoff of Boston University has a unique perspective on the world, he looks at the long view and the intergenerational view. In the field of retirement planning he avoids the traditional targets and number goals and rather focuses on the goal of maintaining ones lifestyle during both the both pre and post retirement periods. His views are refreshing. His view on the budget and deficit is likewise refreshing with a dose of reality that our politicians could use and we should pay attention to.  Here is an except from a recent article on Bloomberg.com

Generational Balance, Not Budget Balance: Laurence Kotlikoff

Aug. 3 (Bloomberg) — Debt crises make great drama. The big shots attend meetings, look terribly worried, then stomp out, accusing each other of bad faith. Finally, at the witching hour, they reach agreement and tell us all is fine, for now.

The tough thing is sorting out what’s really going on. In the U.S. case, the answer is: not much. We need tax increases and spending reductions far beyond what’s being negotiated. Cutting the deficit by $1 trillion to $2 trillion over 10 years sounds like a big deal, but not when our unfunded Medicare and Social Security liabilities, by my calculations, are growing by more than $4 trillion a year.

Whatever you think of the House Republicans, they understand that our country is broke. But they have no idea how broke. They are pushing hard for a balanced-budget amendment. What we need is not budget balance, but generational balance.

If we are going to amend the Constitution, let’s prohibit today’s adults from leaving tomorrow’s generations with higher lifetime net tax rates. A Generational Balance Amendment would specify that, absent prolonged states of emergency, each generation would pay the same share of its lifetime labor earnings in taxes, net of benefits received.

Stabilizing lifetime net tax rates isn’t just a matter of fairness. It’s critical to our country’s long-term economic survival.

Taxing Our Progeny

If we keep raising successive generations’ lifetime net tax rates, we will eventually be hitting up our progeny for every penny they earn, leaving them unable to consume or save. If they can’t save, they can’t invest, which means they won’t be able to maintain — let alone increase — the economy’s stock of capital needed to produce goods and services.

The U.S., incidentally, has a national savings rate of zero and a domestic net investment rate of only 4 percent of national income. Both are postwar lows.

Memo to House Republicans: Budget balance doesn’t imply generational balance.

Read the full story, including the tale of a country called Taxdonia

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