The results of a ground-breaking study suggest the government must reconsider the problem of the low national savings rate, and the structure and even the level of entitlements such as Social Security and Medicare, for the two seem intertwined. The intriguing new study by three economists suggests it is not the baby boomers and other current workers who have been consuming too much, but retirees, abetted by the federal government.
That is, government programs designed to secure the economic well-being of the elderly have caused a drop in the national savings rate, which has led to a lower rate of investment. Lower investment means slower economic growth. In effect, the elderly are eating the seed corn.
The economists conclude in the study that the current U.S. rate of national saving would be "roughly 3.5 times as large" as it is now - were it not for government redistribution from the current young and future generations to current older ones through such programs as Social Security and Medicare, and a sharp increase in the propensity of older Americans to consume their remaining lifetime resources.
The economists - Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland, Laurence J. Kotlikoff of Boston University and John Sabelhaus of the Congressional Budget Office - found the spending of retirees has increased much more than that of younger workers. Their research is published by The Brookings Institution, Washington, in Brookings Papers on Economic Activity 1996.
"Today 70-year-olds are consuming, on average, roughly one-fifth more than 30-year-olds," they said in their study. "In the early 1960s they were consuming slightly more than two-thirds as much. The increase in relative consumption of the elderly is dramatic even if one considers only non-medical consumption."
The economists found propensities to consume were "smaller for most young and middle-aged cohorts in the late 1980s than in the early 1960s." That is, young and middle-aged Americans are saving more, so they are not to blame for the fall in the savings rate.
"This striking increase in the relative consumption of the elderly has coincided with an equally remarkable increase in their relative resources," they added.
One likely explanation for the post-war increase in the tendency of the elderly to consume is "the remarkable increase in the extent to which the elderly's resources are annuitized," the economists said.
This means the elderly no longer have to fear outliving their resources, so they have less reason to be frugal. The annuitization of resources occurred largely from the growth of government programs for the elderly, such as Social Security and Medicare.
If the study is correct, it raises difficult issues. After all, how can workers be taxed more for Social Security and Medicare when that might only contribute to more consumption, less saving, less investment, slower economic growth?
Some way must be found to encourage the elderly to do their share to raise the savings rate. Some way must be found to discourage them from consuming in excess of their annual income from government programs and their investments. If their propensity to consume were reduced to a level equal to that of 30-year-olds, the national savings rate would increase significantly.
Perhaps a consumption tax deserves serious consideration after all.