"Meet the Generations": Generation X

Meet Kate, a fictitious 41 year old Generation X member. How will our leaders’ fiscal choices affect her life? In our fifth and final installment of our “Meet the Generations” series, we look at Kate’s fiscal future, based on the two alternative futures scenarios from our recent paper “America’s Fiscal Choices at a Crossroad: the Human Side of the Fiscal Crisis”. {See also the related event and winners of the video contest “Voices of America”.)

Turning 41 this year, Gen-X member Kate is entering her most productive years. Among the most critical fiscal issues for her are those affecting family and career. Retirement issues will be more important down the line (including the retirement situation faced by her parents, who will be living longer than previous generations). As she ages, the well being of her children and grandchildren and her legacy to them will become an even higher priority. Looking back from the year 2050, when she is 80, how will Kate see the choices our leaders are making now?

Scenario One: Fiscal Gridlock. If our policymakers do not change our fiscal path, Kate and her family will be worse off from the effects of higher than normal interest rates related to national debt pressures, probably quite visible by the end of the decade. (As the economy matures, large and rising levels of national debt will increasingly compete with private investment for financial resources. Interest rates will rise more than normal as the business cycle advances and private investment will be crowded out.) Higher interest rates will hurt her job prospects and income. Her home ownership dreams will disappear as affordability declines with higher mortgage interest rates. Credit card financing will be more expensive. Education finance will be more problematic. And, over time, her standard of living will be lower than otherwise as a consequence. And then as Kate and her fellow Gen-Xers age, national fiscal pressures get worse. When she and her cohorts reach retirement age, they will no longer have full health and Social Security benefits because the trust funds will be exhausted. Her children (who she was counting on for some income support after she retired) may be hit with large taxes to fund Social Security and Medicare, as well.

Furthermore, in a world of fiscal gridlock, Kate will experience a fiscal crisis sometime in her lifetime. The fallout from a fiscal crisis will devastate her, whether she is in mid or late career. It often takes years for jobs and income to recover from these types of crises – if they ever do. Kate will forgo considerable amounts of income and savings.

Scenario Two: A Fiscal Recovery Plan. Initially, fiscal consolidation could be tough on Kate and her family, but, if done sensibly, there will increasingly be a big payoff for them. If our leaders fix our problems through a gradual, but credible fiscal recovery program, Kate will have better job opportunities and greater income gains when interest rates are lower because debt-related pressures have diminished. Her standard of living will be better over time if private investment is not displaced by massive government borrowing (and if public investment is better targeted at policies that can boost basic growth – such as education, research and development, and infrastructure, according to research). For Kate’s retirement, making changes soon to put Medicare and Social Security on unquestionably solid footing will allow her to adjust her savings plans well in advance of retirement and will eliminate the fear and uncertainty she would otherwise have about how the burden of fixing trust fund financing problems would be managed in the end.

Preventing a fiscal crisis through more gradual fiscal downsizing will mean that Kate can more easily manage and adjust to the fiscal changes needed to put our borrowing on a sustainable path. If the economy is not disrupted by a debt-related crisis, Kate’s career will not be derailed by hefty negative effects from our debt build-up (with earnings power lower and human capital lost as a result). Kate and her family will be better off.