Pity the poor Millennials. The government is robbing them blind.
The Pew Research Center defines a Millennial as someone between the ages of 18 to 34 this year, and there are 75 million of them, slightly outnumbering the Baby Boomers (ages 51 to 69).
The Millennials are better educated than any previous generation, and they are diligently working and paying their taxes—when they can find a job in the Obama economy.
They have been doing it right. But the government has been doing them wrong—because it’s been taking a large portion of their tax dollars to subsidize the Baby Boomers and older American entitlement programs.
And all of those entitlement programs are on a fast track to financial collapse—all of them.
Take Social Security. Millennials kick in 12.4 percent of their earned income (half from the employer and half from the employee) to the Social Security Trust Fund. The government uses that money to pay current retirees. When there’s a surplus, the balance is added to the Trust Fund, which is currently about $2.8 trillion.
The problem is, the government then borrows that money, writes itself an IOU, and spends it.
But even including the Trust Fund “assets,” the Social Security trustees estimate that the government will only be able to pay about 79 cents on the dollar in benefits by 2034—when the leading edge of Millennials will be in their mid-50s.
Several years ago, pollster Frank Luntz asked younger workers whether they were more likely to believe in aliens or that Social Security would still be there when they retired. Aliens won.
The Social Security payroll tax also pays for disability benefits for those who are injured or disabled and can no longer work. But Millennials can probably kiss that safety net benefit goodbye. The trustees claim Social Security Disability Trust Fund reserves “declined to 40 percent at the beginning of 2015, and the Trustees project trust fund depletion late in 2016.”
And then there’s Medicare, the health insurance program for seniors. Millennials contribute 2.9 percent of their earned income (again, half from the employer and half from the employee) to the Medicare Trust Fund, known as Medicare Part A, which pays for hospital bills. According to the trustees, it will make it to 2030, 15 years from now, after which time it will only be able to pay 86 cents on the dollar of hospital costs.
So while Millennials are dutifully paying into these programs, and while seniors (mostly) are gladly spending that money, it isn’t at all clear that these programs will exist when it’s Millennials’ turn, at least in their current form.
There is talk of reform, but almost all the proposals are some variation of cutting benefits or raising taxes or both, which will not solve the programs’ long-term financial problems. There’s only one way to do that in an actuarially sound manner: move to personal, pre-funded accounts—that is, allow workers to put that same payroll tax money into a personal, broadly diversified retirement account.
There are people who claim this approach is a “risky scheme,” and that Americans will be day trading with their funds.
But not if we establish accounts that invest in a broad index fund and leave them there. For example, since 1980 the S&P 500’s average annual return has been 13.3 percent (not adjusted for inflation and with dividends reinvested).
Yes, there are some scary stock market drops, like 37 percent in 2008, but also some great gains, like 32 percent in 2013. The point is that long-term investing in the U.S. economy yields enormous gains.
Most importantly, that money would belong to Millennials—not me and my Baby Boomer companions. To paraphrase Margaret Thatcher, we’re about to run out of other people’s money, and Millennials will be left empty-handed.
The good news is that safety net challenge provides an opportunity for Millennials to demand that politicians propose a way to transition to personal, pre-funded retirement accounts. It won’t be easy or cheap, but it’s the only way for Millennials to keep from being robbed.