By Sam Gutterman
Although society has always paid attention to investments needed to sustain and enhance future generations, how it should allocate its resources across generations.
It seems to me that members of each generation should act in a manner that affects the next generation, similar to the way they would want other generations to treat them. This has been referred to as an intergenerational social contract—not written formally but understood by all.
For instance, we make certain commitments toward the financial and health care support of our parents and grandparents; our actions may result in climate risks and environmental overuse and irreversible damages; and we bequeath public debt to future generations who may not be able to manage it effectively.
What value is intergenerational equity? In economic terms, its cost is a social externality, external to the direct costs and benefits involved. John Rawls, a leading late-20th-century political philosopher and a leading proponent of liberalism, spoke of the respect and fairness the current generation owes to future ones.
The tension between a generational social contract and self-interest represents the intergenerational balance. This balance has always played a part in our everyday lives and strategic decision-making—it should always be considered.
The sustainability of society and its primary institutions can be of paramount importance, affecting costs and benefits for future generations. What type of world will we bequeath to future generations? These considerations are embedded in our investment decisions—e.g., education and security that can transmit intergenerational advantages, like a good home life, activities, and nutrition. Not achieving these objectives represents a personal and societal systemic risk.
It seems that every generation has been better off than its prior generations, whether measured in standard of living, longevity, healthiness, efficiency, or knowledge. But this is not guaranteed. For instance, possibly for the first time in a long time, future average longevity may not be greater than that of the prior generation.
Humanity has always bequeathed technological developments and mutual respect (reciprocity) to help address future challenges. I hope this continues, but we need to plan for adverse contingencies, including through private-sector and social assurance.
We haven’t always done a good job in financial planning for the future, either as a society or in most households. Our relationship with past and future generations is asymmetric, as they cannot exercise power over us, except through our own actions. Public debt is, whether expressed in financial or environmental terms, in essence a loan from future generations. We take money to pay for current projects and send future generations the bill—without giving them a voice in the matter.
The U.S. national debt is huge and ever-increasing—except through default or high inflation, there is no way to avoid paying its interest (last year’s interest payments were about $325 billion; in 10 years—several times that amount, the fastest growing segment of governmental budget). I have not seen a plan to effectively manage this federal obligation, currently over $22 trillion.
It’s easy to justify incurring debt to pay for projects believed necessary today, such as national security or a social safety net. But is it fair to reduce the capacity of future generations to pay for their projects so they can pay for ours? Conversely, we could presume that the world’s standard of living will continue to improve—maybe the next generation will be able to better afford their goods and services than we can.
Actuaries have a large role to play in preparing for our and our children’s future. One is to help manage the fulfillment of promises made by financial institutions and governments many years into the future. Our work with contingent future events makes us aware of the risks and costs involved.
It is debatable how much wealth should be transferred. I don’t believe most people wish to overburden their children and grandchildren with excessive debt and irreversible environmental damage. Our contributions to future deficits represent a form of intergenerational injustice. We can’t do much about the injustice that was thrust upon us by prior generations—but we can and should work to discontinue the cycle of such actions in order to benefit our descendants.
Each generation has a fiduciary responsibility to those who follow. This is the responsibility of society as a whole, as well as individuals in society. We need to remember our unwritten intergenerational social contract.
SAM GUTTERMAN, a member of the Academy and a fellow of the Society of Actuaries and the Casualty Actuarial Society, retired after many years as a director and consulting actuary with PricewaterhouseCoopers LLP in Chicago.