Written by: Eugene Steuerle
Older Americans “splurging on travel and dining,” younger consumers “spending more on basics,” and a “growing generational gap”—that’s how a recent Washington Post article by Asha Bhattarai began a summary of a recent Bank of America (BOA) study. The Post article gave some examples, such as a middle-aged worker whose immediate family cut back on travel while his parents went on two cruises a year.
BOA based its research mainly on credit card spending changes from May 2022 to May 2023. It concluded that cost of living (COLA) adjustments in Social Security for older households, along with higher housing costs and the pending end of a moratorium on student loan repayments, may have been responsible.
In general, one year of data may indicate only a temporary change. But there’s a much bigger story here – and a trend that goes back decades. Congressional Budget Office (CBO) data from 1979 to 2019 show that the elderly and nonelderly have switched statuses when it comes to who is richer and who is poorer.
In 1979, individuals living in households with at least one elderly person had total incomes, after both transfers and taxes, that made them more likely than their younger peers to be in the bottom or poorer 40 percent of the income distribution. By 2019, roles had reversed. Individuals living in non-elderly households, whether with and without children, now are more likely to be poorer, at least by this measure.
It's not hard to understand how this happened. Most growth in federal government spending over that 40-year period went for Social Security and health care (mainly Medicare). Ultimately, the money must come from somewhere. Households pay for benefit expansions in Social Security and Medicare not just with their current taxes. They pay through federal debt left to their children and cutbacks in other areas of spending.
The recent budget compromise from Congress and the President could very well exacerbate the income gap between young and old. That agreement substantially cuts discretionary spending, the source of much spending for the young and middle-aged, while keeping Social Security and healthcare – which predominantly benefit the elderly – on their very high-growth paths. The current House Republican effort to pare total federal outlays further does likewise.
The cuts threaten domestic discretionary spending in areas like educational supports for the poor and handicapped (or special education students), preventative health care, science and research, community development, environment and transportation—programs primarily oriented both to the young and to all age groups.
A look at growth rates in spending on programs for the elderly provides perhaps the easiest way to visualize what is happening. Outside of some wartime lags, that spending has absorbed an increasing share of national income ever since 1940. And it is scheduled to do so for as far as the eye can see.
This also occurs on a per capita basis; real benefits per elderly household grow continually faster than per capita income in the population. That means the share of national income for everything else goes down continually, and some combination of taxes, debt, and other program cutbacks – borne mainly by the young and non-elderly – go up continually.
Now, there’s a lot more going on that I don’t have space to cover here, including what has happened to wage growth, how the costs of healthcare can mess up how we measure the incomes of both elderly and nonelderly households (the CBO numbers I cite include the value of healthcare benefits in income), the increasing share of wealth held by older generations, and whether ability to pay taxes and poverty should be adjusted for those who can but do not work.
But the basic math is irrefutable. Set up a system where per capita transfers to each succeeding generation of retirees grow continually faster than per capita income in the population overall, and eventually retirees will be richer on average than the rest of the population.
While imminently reasonable when the elderly was poorer than the nonelderly, does it make sense to continue down that path when the roles are reversed? Or when the definition of who is “old” continually expands to include, at least in relative terms, many who are in late middle aged with life expectancies of two decades or more?
You shouldn’t be surprised, regardless, when you start to see more articles that suggest “retirees splurge on leisure, younger adults stick to basics.”
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