There is reason for advanced economies to have entitlements. However, the size of those entitlements should not rise out of the potential for the current generation to pay them. Unfortunately, that’s exactly what will happen in the near future–starting now. Medicare, social security (etc) are starting to become underfunded, and by 2020 will consume our entire government (100% of tax revenues at current rates). In fact, that day of reckoning may arrive faster with medical and health care costs skyrocketing.

The solution for a predictable entitlement-to-revenue ratio is to define retirement age dynamically–as the age such that the labor participation rate is constant (Something like 60%). By adjusting retirement age to keep the participation rate constant, and by capping per-capita payment growth to either the inflation rate or the fraction of per-capita GDP, the outflows for children (i.e. education) and retired people (social security) will be predictably constant. No more will the cost of entitlements spiral out of control.

As the general population ages, and as life expectancy rises, this will allow the more prosperous generation to work longer and be retired earlier (as a fraction of life span). It is not fair to pass the burden of your longer retirement onto your descendants; if you’re retired for longer, you must work for longer (in aggregate).

Without some quick action, as Thomas Friedman said today in the NYT, what is happening in Greece and London is just a harbinger for what will happen in the United States as our demographics change to reflect an increasingly older population.