By: Daniel Ammann and Michael Krobath From The Finalist

It’s a simple fact: Most countries in the Western world don’t take in nearly as much money as they spend. And so they borrow. By the billions. Make that trillions. And if concerns about the unsustainability of national debts are nothing new, neither is the fact that we still can’t seem to stop ourselves from continuing to let the IOUs pile up. Some say that’s just finance. Others consider it a moral problem, and point out that we’re borrowing from – and bankrupting – our children and grandchildren without their consent. Count Laurence J. Kotlikoff, an economics professor at Boston University, among the latter group. Co-author of the 2012 book “The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy,” Kotlikoff, 63, recently sat down with Credit Suisse to talk about our crimes against posterity, the deceptive accounting of government, and the folly of our financial future.

Credit Suisse: Professor Kotlikoff, you warn of a “clash of generations.” Can you elaborate?

Laurence J. Kotlikoff: We’re waging a war against our own children. And the worst of it is that we’re winning. It’s not being waged with tanks and howitzers, of course. It’s a war of funding shortfalls and ever increasing consumption by older people at the expense of coming generations. We’ve turned retirement into a well-paid, long-term occupation. It’s extremely unfair to our children, grandchildren and great-grandchildren. We’re burdening them with massive government debt in order to pay for that generosity. These unfunded bills will stretch into eternity, and our children won’t be able to pay them.

CS: What’s the first step we can take to avoid that clash?

LK: First, we need to acknowledge how dire the situation is. When private individuals or companies are unable to pay their bills, they’re bankrupt. And when countries are unable to pay their bills, they’re bankrupt, too – even if they print money and other countries are still willing to accept it.

Consider my country, the United States. It’s flat broke – and we don’t even know it. The American government isn’t even capable of calculating our fiscal gap as it stretches into infinity. And it isn’t willing to reveal whether its investments will be able to cover the explicit and implicit liabilities of the future. This is deceptive accounting, worse than Bernie Madoff’s Ponzi scheme or Enron’s accounting fraud.

CS: Could you explain what you mean by a fiscal gap?

LK: The fiscal gap is the government’s credit card bill. It’s the difference between expected future income and a country’s total anticipated expenditures. The problem isn’t even the official government debt that is listed in official statistics. The problem is the hidden debts, the implicit commitments that are deliberately kept out of the government’s books. If we add these implicit commitments to Social Security and healthcare, the fiscal gap of the United States exceeds that of Greece or Spain.

CS: How large is it?

LK: The American government has $202 trillion less than it needs to fund all of the commitments it has made to the American people. The gap is 12 times as large as our GDP. Most Western industrialized countries are faced with a similarly bleak situation. The pension systems of most industrialized countries are nothing but pyramid schemes that have been in place for decades. They will collapse like a house of cards as soon as younger people are no longer willing to pay the bill – or are unable to do so.

CS: You’re also proposing something no politician ever would, which is to take something away from the elderly. How do you come to that point of view?

LK: In 1960, the average 80-year-old consumed roughly two-thirds as much as the average 30-year-old. Today, 80-year-olds consume 50 percent more than 30-year-olds. Members of the older generation are consuming more than they should. Period. We need to cut entitlements for the older generation. But there are no painless solutions. To close the fiscal gap, the American government would have to immediately and permanently raise taxes by 57 percent or cut all benefits by 37 percent. And we need to radically reform and simplify our tax, healthcare and Social Security systems.

CS: Can you be more specific?

LK: I propose abolishing our existing system of retirement provision and replacing it with a system of personal security accounts. All accrued benefits would be guaranteed by the state and paid as they come due. Then, all workers would be required to contribute 8 percent of their pay to a personal security account. The account balances would be invested by a computer in a global index fund of stocks, bonds and real estate. When people are between ages 60 and 70, the same computer would convert their account balances into annuities based on average life expectancy at that time.

CS: How much money could this approach save?

LK: In the United States, approximately $60 trillion in retirement benefits alone.

CS: Would today’s young people then receive benefits that are lower than those of today’s retirees?

LK: Substantially lower, yes. Lower than the benefits they have been falsely promised, which they never would have received in any case.

CS: Do you believe politicians are ready to pursue new solutions?

LK: No, it’s already too late. That’s something they should have done 30 or 40 years ago. I no longer believe that either the Republicans or the Democrats will take the necessary action.

CS: So is the middle class finished?

LK: The American middle class is doomed. We used to promote the American dream: Our children would do better than we have. Increasingly, the American dream is becoming a nightmare. It’s a foreseeable disaster, but we’re not taking the necessary steps to prevent it. This is tragic – and irresponsible.

This interview has been edited and condensed for space.

For more on this story go to: http://www.thefinancialist.com/bankrupting-the-next-generation/