Intergenerational Games

Game theory has something sad to say about the state of intergenerational relations in the US. 

Imagine that you had to support your retired parents if they could not support themselves on their savings and private pensions.  One thing would be true, at least in somewhat functional families: the intergenerational transfer from younger to older would be negotiated with some attention by the elders to the solvency and happiness of the younger generation and its offspring.  We care about our children and grandchildren.

But what if we can rely on Social Security and Medicare to care for our retired parents?  Or more, important, what if our parents do not have to impose on us directly because they get support from us indirectly?  The consequence is that there is nothing our parents can do to relieve us of the burden of caring for them.  Our payroll taxes are due no matter what.  Of course, wealthy parents can give gifts, but we’re talking about parents of modest means with parents of modest means.  Where those parents might, absent Social Security, try to accommodate their children’s economic needs, they don’t have to do that for the mass of payroll tax payers who support elders’ entitlements.  The oldsters can say “we’ve earned it,” and demand that the bills be paid by someone other than their own children, unable to do anything about the fact that someone else is making those children pay for them. 

Without socialization, we could assume that the aggregate intergenerational transfer would be the sum of what the younger generation can afford.  With socialization, the amount of the transfer is dictated by the voting power of the respective generations, or the ability of the young to impose inflation on seniors, something the latter have dealt with at the ballot box by indexing Social Security benefits and providing Medicare benefits in kind.  Because I cannot protect my kids from the tax voted by others, I might as well vote for those taxes so that I get what I've “earned.”  It’s a version of the tragedy of the commons, which is really a massively multiplayer prisoners’ dilemma game.

No one wants to ration healthcare.  But Medicare is on a bad trajectory, one that cannot be saved by tort reform or “insurance reform” or “pay for outcomes” or any other increase in medical productivity.  What we need are fewer old people consuming less care.  But not only can’t you always get what you want, sometimes, you can’t even get what you need.  Who will put the bell on that cat? 

David Brooks argues in the NYT today that we need oldsters to step up and match their aggregate demands to their kids’ aggregate ability to pay.  But where is the political will to do that?  How do we get seniors to reduce their entitlements to fund the war in Afghanistan or pay for better schools?  Or healthcare for the uninsured.  Hard to see a happy ending…