"Meet the Generations": Seniors
Meet Edna, a 75-year-old fictitious senior citizen. In the third installment of our "Meet the Generations" series, we take a look how policymakers' action (or inaction) could affect her life, as outlined in CRFB's March 10 paper "America's Fiscal Choices at a Crossroad: The Human Side of the Fiscal Crisis".
Edna is retired and relies on the fixed income from her savings and pensions. She is very vulnerable to deteriorating economic conditions (including inflation) and reductions in income. Services (especially health-related) and personal security issues have become increasingly important. The well-being of her children and grandchildren and her legacy to them are crucial to her.
How will our leaders' fiscal choices affect Edna?
Fiscal Gridlock (Scenario One). Two programs are essential to Edna’s life: Social Security and Medicare. While she will probably be able to continue drawing on their resources into the future, these programs are not fully sustainable for seniors down the road without major changes. If the difficult decisions are delayed, Edna’s children and grandchildren will be worse off as a result of the amount of adjustment required (which could include reducing benefits sharply, raising taxes on the working age population and/or shifting funds from other government programs). The burden of the adjustment that will be passed on to Edna’s family (the successor generations) only increases the longer policymakers delay putting in place a plan to gradually phase in any policy changes.
Fiscal gridlock will also have immediate costs for Edna. National debt-related pressures on the economy will reduce the value of assets she relies on for her income, particularly if they contribute to a fiscal crisis. Plus, if our policymakers are tempted to inflate their way out of our debt problems (i.e. put pressure on the Federal Reserve to accommodate higher inflation, which lowers the inflation-adjusted value of the debt we are repaying), Edna will see the value of her savings eroded. (Inflation is Enemy No. 1 for anyone on a fixed income.) In the end, any fiscal crisis - whether gradual or sudden - will probably require austerity measures which could significantly affect programs Edna relies on (including programs related to pandemics, food borne illness, crime prevention, and public transportation).
Adopt a Fiscal Recovery Plan (Scenario Two). Edna and her family will be better off with a stronger economy - which is what we’ll see when the upward pressure on interest rates from fiscal gridlock subsides. In a stronger economy, Edna’s children will not be as likely to ask her for financial help (or move her in with them), and the value of her assets will probably be higher. Another plus is that if our policymakers better manage our fiscal future, the likelihood of a fiscal crisis will be diminished. For Edna, her children and her grandchildren, it is always better to avoid a crisis and to manage change gradually. Most importantly however, fixing our fiscal problems gradually but comprehensively could help ease the massive income transfer from the younger generations to senior citizens that would otherwise take place. By putting in place a gradual and balanced plan to fix the Social Security and Medicare trust fund financing problems, Edna’s family and seniors that come after her will be able to plan for retirement well in advance and on balance will be better off. For Edna and her family, it’s a matter of living standards - and her legacy.