The Coming Generational Storm

This study takes a careful look at our nation s fiscal finances. It questions the much-heralded short-term federal budget surpluses, scrutinizes Social Security s and Medicare s long-term finances, and examines the nation s overall long-run fiscal balance based on a new generational accounting for the U.S. The study also examines how the economy will respond to population aging and Social Security s privatization using a state-of-the-art life-cycle dynamic general equilibrium computer simulation model. The study s final sections a) use a highly detailed micro simulation model to determine, on an actuarial basis, the effects of possible Social Security reforms on different postwar cohorts and income groups within those cohorts, b) use ESPlanner -- a sophisticated life-cycle financial planning model -- to assess how much baby boomers need to save as they approach retirement, particularly in light of potential major Social Security benefit cuts, and c) question, again with ESPlanner, whether saving in tax-deferred form really delivers the lifetime tax savings that are generally advertised for the majority of American households. The study s findings are striking and discouraging. The much-heralded short-term federal budget surpluses are primarily the product of the Congressional Budget Office s (CBO) wishful thinking about Washington s ability to shrink federal spending while growing the economy.

Taxes/generational policy/401(k) participation and balances

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