Why 67 Years Old Is the Best Age In America

Even with the S&P 500 (INDEX: ^GSPC  ) and Dow Jones Industrial Average (INDEX: ^DJI  ) hitting levels last seen since before the recession, it seems the country has yet to find a steady direction.

While Congress figures out a scheme to escape from enduring its self-imposed fiscal cliff, the United States' debt grows higher and GDP growth estimates fall. The hole we dug ourselves in the last recession is deeper than any since World War II, and the current pace of job growth is lower than what's needed to simply keep up with population growth.

Even so, living today is much better than what the prospects look like for tomorrow. Take a look:

Living it up today
That chart shows how much each age bracket benefits from current policies, and how much future generations, yet to be born, will have to pay to cover the benefits consumed today. The age group that benefits the most is made up of those aged 65 in 2010, who will receive $332 billion in benefits over what they pay in taxes. And of course, the age group that pays the most is made up of those who have no vote, the unborn, who will have to pay in $388 billion to cover previous costs. It's important to note that these numbers don't mean all of the government's debt must be repaid but simply must keep up with interest payments on the debt.

With a bleak tomorrow
According to the IMF, "a typical American in the future might face net tax rates at least 21.5 percentage points higher than today." It also states, "the main drivers of the U.S. generational imbalance are the 2001 and 2003 tax cuts ... and the projected rapid increase in health care spending." Even with repealing those tax cuts, future taxes would be 18% higher than today.

The IMF report also uses an interest rate of 3% for its calculations, which means future dollars are worth that much less each year. Today, however, inflation over the past 12 months has been 1.7%, and a majority of the Federal Reserve members now believe the Fed won't increase interest rates until 2015. That would total six years of near-zero interest rates and could put us in Japan's situation of low rates and increasing debt, although recent strength in housing gives the U.S. a point of difference from Japan. But it also means that the 3% rate the IMF used to calculate the future burden could undervalue future dollars and actually increase the amount future generations will have to pay.

No matter the math
That interest-rate issue highlights one of the issues of the practice of calculating future tax burdens, called generational accounting. As the Federal Reserve Bank of St. Louis writes, "This is potentially problematic because the true discount rate is not known -- and even if it was, it would probably not stay constant over time." The St. Louis Fed also points out, "assuming that future taxes, transfer payments, population, and government spending all increase at a fixed rate seems implausible."

Even with these issues inherent in generational accounting, the fact that we can't keep up with current spending and low taxes without having future generations incur a heavier tax burden is clear. The Economist puts forward some solutions, such as faster growth, strict austerity, or higher inflation. However, each has its own problems. Growth is limited by high debt and a lack of infrastructure spending, which was "3% in the early 1960s" and "roughly 1% in 2007." The level of generational imbalance would require a nearly politically impossible 35% cut in transfer payments and a 35% increase in taxes. And inflation would help younger debtors but hurt older savers.

Help out your future children
Short of a major reorganization of taxes, policy, and changing from short-term to long-term thinking, this represents why you must plan for your family and yourself. The fiscal cliff offers an opportunity to practice the planning required, no matter what Congress decides. For example, there's a chance that dividends could be taxed at your income-tax rate instead of 15%, so you might want to look over possible REITs. They already incur income tax rates on the dividends they pay out, so current investors wouldn't see any change in how they are taxed. Retail Opportunity Investment (Nasdaq: ROIC  ) , to name one, offers a 4.3% dividend yield with the chance to easily grow from its small-cap stature.

To help out your kids and grandchildren further, look for companies to invest in that have a history of returning value to shareholders with competitive advantages and high profit margins, or quality companies for short. Some holdings of one of my favorite funds, the GMO Quality fund, include Johnson & Johnson (NYSE: JNJ  ) and Coca-Cola (NYSE: KO  ) . Both companies typically have double-digit profit margins that held up well in the last recession, along with strong brands, worldwide operations, and dividend yields above 2.5%.

How the generational accounting works out is anyone's guess, but right now we can set up a plan to help out future generations for the best. For two other relatively easy buy decisions, including more information on investing in Coke, grab your copy of our free report: "3 Dow Stocks Dividend Investors Need."

Fool contributor Dan Newman is putting the word "sorry" in a time capsule. He holds no shares of any of the above companies. Follow him on Twitter, @TMFHelloNewman.

The Motley Fool owns shares of Johnson & Johnson and Coca-Cola.
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Read/Post Comments (7) | Recommend This Article (21)

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  • Report this Comment On October 02, 2012, at 7:53 PM, michnow wrote:

    So you are saying the trillions being spent now had no effect on the amount to be repaid? it just the fact that people were able to keep more of their own money in the 2000's that created this debt.

  • Report this Comment On October 02, 2012, at 8:06 PM, smartP12 wrote:

    Sorry you wrote this despicable article.

    I paid into the system for 44 years--- Congress spent the money instead of investing it. Now you and Romney /Ryan want to justify why they should take away my Medicare and social security. A voucher plan is that exactly--- no insurance company will sell insurance to old people---you want all the old people to be dependent on insurance companies.

    Talk about throwing grandma under the bus---that is what the present day Republitards want to do. Seniors pay attention-- they have their hands in your pockets.

  • Report this Comment On October 02, 2012, at 8:49 PM, TMFHelloNewman wrote:

    Thanks for reading.

    @michnow

    Of course it's all spending and taxation policies, but the IMF singles out one source as providing a significant portion of the generational imbalance.

    @smartp12

    I believe I wrote the article from as neutral a viewpoint as possible, and said nothing of taking away benefits. Take what you will, however.

  • Report this Comment On October 02, 2012, at 11:17 PM, millsbob wrote:

    until you explain what the benefits in the chart are -- and prove that they don't contain social security or medicare payments -- i will agree with smartp12.

    frankly, i don't see how those numbers are possible without those programs that we all pay into, so calling them government benefits is deceptive, not "neutral".

  • Report this Comment On October 03, 2012, at 2:00 AM, TMFHelloNewman wrote:

    @millsbob

    The benefits do include social security and medicare. As the St. Louis Fed explains:

    "This amount is the difference between the expected taxes that must be paid, less the expected transfers—such as Social Security or Medicare—that will be received."

    http://www.stlouisfed.org/publications/re/articles/?id=1778#...

    How else would you like me to describe them? Additions to net income? The opposite of taxes? I don't see how calling them benefits is deceptive. Yes, we pay into the system to receive them, but I doubt many today have an expectation that they'll get all that they pay in. Which really is the point - older generations will get greater 'benefit' from the system than future payees. I'm not saying that it's wrong that you should expect to get a portion of what you pay in back, but the facts are that future generations will likely get less out of any system than those alive today.

  • Report this Comment On October 03, 2012, at 2:03 AM, TMFHelloNewman wrote:

    For reference, "Americans aged 18 to 34 are least likely to believe they will ever see benefits":

    http://www.gallup.com/poll/141449/six-workers-hold-no-hope-r...

  • Report this Comment On October 22, 2012, at 1:29 PM, Anysimplefool wrote:

    Who ever heard of funding wars without increased government income (aka: taxes)? The great recession has generated huge deficits on top of those from the wars and earlier tax cuts. I'm 65 and just beginning to collect my "benefits". IMHO, the real source of the problem is the unwillingness of a majority of Americans to face the reality that we have been living on credit and deferring expenses to the next generation(s) for decades. We would rather whine instead of paying realistic (increased) tax rates to pay for what we want from government, including wars. There is no free lunch, whether you are a Republican or Democrat.

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