Tuesday, July 19, 2011

Relying on the altruism of baby boomers

My parents were very good parents. I always appreciated their selflessness in raising me and my brother--from making difficult career choices at various points in their lives to rearranging finances to ensure that my brother and I could both enjoy the best possible college education--and I hope that I can emulate them as a parent in that regard.

Of course, now that I'm approaching my fourth decade on this planet--with my own job, house, and family to worry about--I'd assumed that my days of relying on my parents' kindness and selflessness had, for the most part, come to an end.

Not so fast, says Ali Alichi of the International Monetary Fund.
As the number of older voters relative to younger ones increases around the globe, the creditworthiness of borrowing countries could decline—resulting in less external lending and more sovereign debt defaults...
Studies have shown that a country's willingness to repay is as important as whether it has the resources to repay. This willingness deteriorates as voters age because they have a shorter period to benefit from their country's access to international capital markets and become more likely to opt for default on current debt. Moreover, older voters generally benefit more from public resources—such as pension and health care benefits—which could shrink if debt is repaid. If the old are a majority, they might force default, even if it is not optimal for the country as a whole. Lenders will take this into account and reduce new lending to an aging country.
There is some empirical support for the notion that aging increases the probability of default on sovereign debt, but more work is needed to draw strong conclusions. Alichi (2008) uses a panel of about 75 countries that have had at least one episode of sovereign default during 1975–2003 and shows that, on average, younger countries (those with a higher percentage of people ages 15 to 59 years) are less likely to default.
Now if the old are altruistic and care about their children as much as themselves, they will not vote for default with its negative consequences for future generations. But Altonji, Hayashi, and Kotlikoff (1997) have shown that altruism does not hold at the overall level in the United States—although there are few studies of this sort for most other countries.
As Alichi acknowledges, the empirical data is not ironclad, but the preliminary findings make intuitive sense. It's already clear that demographics--in short, how many taxpayers there are to subsidize each retired "tax-taker"--play an enormous role in determining whether a nation is financially solvent or not. But the potential impact of voting and politics--especially when we consider that voter turnout among the elderly is historically higher than among other age groups--adds a new wrinkle to the discussion.

None of this, unfortunately, is particularly good news for the country as a whole. Those of us who plan to be here for a while may find ourselves increasingly relying on the self-sacrificing altruism of the baby boomers--and questioning whether the independence (financial or otherwise) that so many in our generation have felt is our birthright is, in fact, an illusion.

(h/t Barry Ritholtz)

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