While this describes the world financial collapse and what is happening to older and younger generations, it echoes this website’s goal of enhancing life experience. The problems identified adversely affect the quality of most people’s lives. While it identifies actions the U.S. must take to turn the economy around, the suggestions could apply to the EU and elsewhere.
We need to increase employment opportunities, reduce the cost of quality education and the related burden of debt our youngest have assumed to pay for it. Failing this, our society will not turn our economy around and it faces the wasting of an entire generation. We need to save our children from paying their entire lives for our society’s failings.
We got here through a sequence of mistakes. We relied too much on real estate to serve as our principal nest egg. We failed to regulate banking, financial, and real estate industries allowing them to take advantage of our desire to grow the value of our nest eggs. We financed debt we could not afford to pay back and lenders approved loans they shouldn’t. These and a host of other failures led to the collapse of our worldwide economic system. The effect in the U.S. was that middle income Americans lost 39% of their wealth from the housing market boom and bust and the stock market collapse.
We did not stop there however. Because of the individual loss of money in the 2008 downturn, the baby boom generation decided it could not retire and needed to extend its working life. This was in addition to many of the world’s employers seeking to survive the downturn and falling demand by reducing expenses largely through job eliminations. It also prompted them to bank and save the easy money they could earn from the Federal Reserve’s reductions of the cost of money. They received huge benefits from this cheap public money little of which has trickled down to the average person.
Baby boomers are in the way. This has led to our present situation where rates of youth unemployment are far higher than those of the generations that were expected to retire. As an example, unemployment rates amongst people who are 55 years and older are at 5.4%, unemployment within people 45 to 55 years old is at 5.9%. This is while unemployment of young people between the ages of twenty to twenty-four years is at 12.5%. Breaking this down by ethnic groups and educational attainment we see pockets of much higher unemployment.
Lest we feel alone, the New York Times had a November 16, 2013 article that shows unemployment for the same age group in other developed countries is much higher; for young people 24 and younger unemployment in Spain is 56%, 57% in Greece, 40% in Italy, 37% in Portugal and 28% in Ireland. “For people 25 to 30, the rates are half to two-thirds as high and rising….According to Eurofound, as many as 14 million young Europeans are out of work and disengaged, costing European Union member states an estimated €153 billion (about $206 billion) a year in welfare benefits and lost production.”
Parents and friends fell back on old truths and advised their children to get more education to insure future employment. After all, it had worked for them and their parents.
We didn’t pay enough attention when taxpayer funding of public educational institutions was systematically reduced. In reaction, our public universities began to view themselves as profit-making businesses. They progressively abandoned their traditional role of providing an affordable first class education for the citizens of the state that financed them. In order to offset rising salaries and expenses universities started raising tuitions and going after non-resident students from other states or countries that paid significantly higher fees.
Higher education tried to insulate itself from the larger society. In their world, raising tuition and conducting layoffs of lower paid and middle management people were how they protected the faculty, endowments and top administrators. They divided their personnel into two groups, people who predated the downturns (and most often had tenure) and new people who were hired later, paid less and offered little to no tenure.
Leadership rationalized this as necessary to protect the universities and maintain the quality of education. It was however, highly self-serving for the existing leadership and entrenched educators in these institutions.
For example, it is not unusual for college professors and college presidents who predate the downturns to make over a million dollars per year in salaries. This is also true for other positions at these “non-profit” colleges and universities such as chief investment officers, coaches and vice presidents of various departments and schools.
We find this same exorbitant and rising compensation in other non-profit charities and institutions. With public higher education setting an example of ever-rising compensation, a business bonanza occurred giving birth to a raft of new charities and for-profit educational businesses.
These charities and businesses grew quickly. Looking just at for-profit education, PBS reported, “Over the past five years, veterans have spent nearly $30 billion on tuition and related higher education costs, most of it at for-profit schools.” Unfortunately the history of these new organizations is one of making promises they cannot keep. They have inflated descriptions of services rendered, job placement rates and transferability of classes. It appears rationalization and avarice knows no bounds.
Based upon what is happening now, retirement of the boomers will not happen. Educational costs will continue to rise and the pursuit of foreign students who have the ability and willingness to pay for an American education will grow, crowding out seats that were previously given to local, American students.
In addition, there will be little reform of our financial, real estate and banking system. Non-profit and for-profit educational institutions will continue raising tuitions and increasingly profiting from the massive debt younger generations are taking on. On the course we are following, society’s ship will not right itself.
So the question is how to turn this situation around. Measures proposed to maintain the status quo include extending unemployment benefits for longer and longer periods of time until the economy turns around. Other proposals have been for large government expenditures for “shovel ready” reconstruction of our infrastructure. The thought was they would create jobs and do necessary work.
The problem with these proposed solutions is there is no magic bullet or single step that will address our multi-layered problems. For this reason, we need a series of steps that break the problems into successive layers to be dealt with. While what is proposed is counter-intuitive, what follows are actions designed to inject increased spending into the economy, get the baby boom generation out of the way, create jobs and reduce outstanding debt.
First we need to get the baby boom generation to retire and make room and jobs for succeeding generations. As has happened repeatedly in the private sector, the government should offer early retirement plans giving financial incentives to older citizens to increase rates of retirement.
In addition, there should be tax incentives that encourage businesses to offer early retirements to their older employees in jobs for which they will hire replacements. This will also require that employers have larger training programs. They should have incentives to pay for these measures from their large caches of on-hand cash.
At the same time we should reduce the mandatory retirement age and eliminate incentives that encourage people to wait until an older age to retire. Retirement and offering early retirement plans should both be re-defined as patriotic duties much as buying government bonds during the world wars.
In our misguided approach, we hear our legislators want to cut back on payments and increase the age when people can retire with full social security benefits. This forces people to continue working. The actions we are taking are heading in the wrong direction. Cutting expense and stranding people does not work.
There are many benefits to the actions this article proposes. First they inject significant funds into older generations that will offset some of their financial losses and provide additional cash flow. Boomers in turn will immediately spend this money and put it back into the economy. They will reduce future expenditures on other safety-net programs softening the impact of greater expenditures. Finally they get baby boomers out of the way of younger generations and create a large number of openings in the work force.
In terms of how we pay for these expenditures we may have to reduce social security benefits for earlier generations. While the simplest calculation is to reduce everyone’s benefits under a certain age, we should use a formula that places the greatest burden on those who benefit the most.
In this sense we should start removing social security benefits from our youngest citizens who will benefit the most and longest from the new opportunities. Their future benefits should be cut the most, if not eliminated, beginning with the youngest and working our way forward until we have extracted the funds for identified offsets of early retirement funding.
We should aggressively regulate the industries that violated the public’s trust leading to the financial collapse. They should be changed structurally so they cannot threaten everyone’s financial viability ever again. Banks should be broken up with clear separation between parts that make speculative bets with corporate money and those that have a fiduciary responsibility of protecting customer deposits. Implementing a tough Dodd-Frank bill is a start.
In addition, we should prosecute financial institutions that gouged younger generations when they made educational loans. We should prosecute for-profit educational institutions for making the false claims that have brought them many billions of dollars in past years and left a generation of children with educations that would not produce a living wage. They should be fined on the same or higher level than those of the financial industry. Funds from imposed fines should be earmarked and used exclusively to retire educational debt.
To reduce the debt of our younger generations and insure the tuitions charged in the future are affordable, we need to look at the very “businesses” that have created the problem. First we should look to the endowments of these non-profit institutions. Over the years these endowments have continued to grow as a result of alumni donations that have been tax deductible. Their tax deductibility means citizens of the United States are consciously paying for a sizable portion of the donations to schools and universities.
For example, heading the list of large endowments according to a 2013 report from the National Association of College and University Business Officers and Commonfund Institute, is Harvard University with over $30 billion dollars, followed by Yale with almost $20 billion dollars, the University of Texas system with over $18 billion and Stanford with over $17 billion dollars.
While the economic downturn had a short-term negative effect on the size of endowments, they have all had a good year in 2013, growing on average at a rate of 11.7%. Institutions with endowments between $500 million and $1 billion have seen growth on average of 12.7%. According to this 2013 report from the Commonfund Institute over 70 institutions have endowments greater than $1 billion dollars. In fact over twice that number have endowments greater than $500 million dollars.
Presently there is no requirement that these institutions by law spend any portion of their endowments. Only public foundations have a requirement to spend 5% of the value of their endowments each year. Other non-profits such as universities and charities have no such requirement. This needs to change. There are two sources of funds we should focus on, past endowment donations and future donations.
We should pass laws forcing universities to disgorge some portion of existing endowment funds and should institute a lower fixed level of deductibility of future donations. In other words, donations to non-profits should bear a higher rate of taxation to produce more revenue.
This additional money and money from the fines imposed on the various businesses should be redirected to create dedicated monies expressly for reducing the cost of tuitions for American citizens and directed at progressively retiring student educational debt that presently stands at over $1 trillion.
If you are a baby boomer, a millennial, someone who has outstanding student loans, or have lost a significant portion of your savings in the real estate or stock market busts or just someone who wants to see an end to the economic malaise, you should care deeply about these issues. We need to ignite the imagination of people who can champion these issues.
These may be select friends, other voters, former presidents and/or existing elected members of Congress. We should each forward the link for this article to people anywhere in the world who we think could help us make a difference. We should never underestimate the power of a new thought or new way of looking at something.
Use the following links to obtain more information or see source documentation.
Go to www.forbes.com, select search and look for December 2009 “Nonprofit Millionaires”.
http://www.pbs.org/wgbh/pages/frontline/education/ . Scroll down and select “Bill Tries, Again, to Curb For-Profit Colleges’ Share of GI Cash.