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Tough Times Ahead for Elder Boomers?

© Peter G. Peterson
2004

Editor's Note: The following is excerpted from the book Running on Empty, by Peter G. Peterson. This section, Tough Times Ahead for Elder Boomers can be found on pp. 48-55 of Chapter 2, which is titled, "Why Deficits Matter to You."

In 2008 the first boomer will be able to retire on Social Security at age sixty-two. In 2039 the youngest boomer will turn age seventy-five. The intervening era from roughly 2010 to 2040 promises to be a fateful one for America's prospects, at least fiscally if not in other respects as well. Which way this fate turns will depend in part on how this large generation exercises its electoral power and how leaders exercise power on its behalf.

If boomers insist on clinging to every benefit and tax promise extended to today's elderly, they might find a way to succeed -- but only at terrible cost to their own children and grandchildren. A "winning" strategy would require Congress to squeeze all non-benefit federal spending into an ever smaller box. It would require pushing the allocation of government benefits, already steeply tilted toward retired Americans, even more in that direction. To avoid runaway deficits and complete fiscal meltdown, some taxes would have to be raised. But a "we-first" boomer strategy would ensure that any new tax burden would fall mainly on working-age adults, either by focusing mainly on payroll tax hikes or by exempting retirees from general income tax hikes. The creation of special tax favors for seniors (on real estate taxes and on the taxation of pension income and investment accounts) already has ample precedent, especially at the state and local level.

At best, this course would ensure that younger generations end up giving even more and receiving even less from government than they now expected -- a "deal" which has already gotten a lot less sweet over the years. Let me offer some examples. A single male with average earnings who retired in 1965 received lifetime Social Security benefits that were worth an 8.5 percent annual real return on his lifetime payroll taxes. A single male who retired in 2000 is projected to receive a 1.6 percent return. A single male who will retire in 2030 is projected to receive a return of just 1.0 percent. These numbers assume no changes in taxes or benefits. If payroll taxes are raised to ensure that boomers get all their promised benefits, a growing share of today's younger workers will end up with a return of less than zero, meaning they will actually get back less than the real value of their contributions. If the whole projected federal deficit were to be closed entirely through extra taxes on working-age adults, these younger couples could wind up experiencing no rise or even a lifetime decline in their real after-tax wages -- an outcome without precedent for any prior generation in American history.

At worst, this course would end in unforeseen disaster even before the boomer retirement is complete. A nation that expects progress and plays a dominant role in world affairs cannot suddenly turn away from the future without inviting a crisis -- perhaps economic or military or political -- that would rudely interrupt even the best-laid plans. In this case, all generations would end up losers.

Fortunately, most boomers don't want this future. They are mortified to learn that their kids might be heavily burdened by their own retirement. Get boomers in focus groups, and they talk passionately about "stewardship" and a commitment to "future generations." Poll them, and most will say that current policy is unsustainable. According to one recent survey nearly nine in ten agree that "government has made financial promises to [their] generation that it will not be able to keep" to several surveys, large majorities agree that senior entitlement programs are in need of major reform -- and soon. As many as 70 percent of boomers are fully prepared, at least in concept, to remain employed in some fashion beyond the traditional retirement age. The majority concede that the main motivator will be financial necessity.

But here's the paradox: although boomers seem to have some abstract understanding of what lies ahead and what's at stake, most are unable or unwilling to take concrete steps to prepare for this future. They certainly are doing little to organize politically and to change public policy. Nor are they doing much to prepare their lives and to boost their household finances. This widespread negligence could itself have major political consequences.

Dozens of studies have appeared on the boomers' retirement prospects, and they make for dreary reading. The good news, according to most of them, is that boomers on average are projected to have somewhat higher real incomes than their parents had in retirement. The bad news is that they will experience larger drops from their pre-retirement incomes and will have to spend much of their retirement gains on health care. Very few boomers are preparing for the extra cost of infirmity in old age-for example, by purchasing long-term care insurance. Few understand that Medicare doesn't pay for this, and many aren't aware that one in three of them will someday enter a nursing home. According to one gerontology professor, "Much less is said about what happens when the postwar baby boomers become not golf-playing sixty-five-year-olds sipping chardonnay at the nineteenth hole, but wheelchair-bound eighty-five-year-olds being fed Ensure through a straw."

Another bit of bad news is that few of these projections assume any cuts in government benefits. Surprisingly few boomers realize that on their watch, Social Security benefits we already starting to become less generous (as a share of their pre-retirement earnings) -- for example, that the normal retirement age is already rising from age sixty-five to sixty-seven and a growing share of benefits is subject to taxation. Even fewer fully grasp that this generosity is likely to be cut still further.

The income averages beloved by researchers, moreover, hide a widening distribution of boomer incomes. Though the top 10 percent will be much better off than their parents, the bottom 40 or 50 percent are likely to be worse off in retirement by every measure. And though the more affluent half of today's retirees are doing very well, the less affluent half remains dependent on government benefits, especially Social Security, for four-fifths of their money income and nearly all of their health care. That dependence is on track to grow, setting up tens of millions of boomers for genuine hardship if benefits are suddenly cut across the board. One researcher sums up the overall situation as follows: the top third of boomers don't have to worry, the middle third had better start worrying, and the bottom third should seriously rethink their life expectations -- starting with their retirement age.

The raw numbers are sobering enough. As of 2000, according to Census Bureau data, only 50 percent of all workers (60 percent of full-time workers) aged twenty-five to sixty-five participate in any kind of retirement plan other than Social Security, and most of these are voluntary defined-contribution accounts that are liable to be cashed out well before retirement. Incredibly, a survey by Hewitt Associates shows that over 40 percent of workers who change jobs cash out their plans rather than roll them over into new accounts. As of 2001, according to the Fed's Survey of Consumer Finances, half of all households aged forty-five to fifty-four possess total financial assets (everything from bank accounts to insurance policies to 401 (k)s) of less than $46,000

Take this $46,000 figure and place it next to another figure we met earlier in this chapter-$200,ooo. That is what each household would need in its savings account today in order to pay for growing structural deficits in the federal budget over the next seventy-five years. The mismatch is painful to behold. And it gets worse. Even the $46,000 figure is in some ways an overestimate. It does not include the 7 percent of households with no financial assets of any type. And it is not netted against the extensive personal debts of today's midlife households (remember all those credit cards).

One out of three families has earned rights to some sort of defined-benefit company plan, whose assets are not reported to households. But this brightens the picture only slightly, since most of these families already reside in the "top half" of the Fed's asset distribution. Also, the reliability of these defined-benefit plans has recently been called into question. Many boomer workers are seeing their expected company payouts shaved by the move to "cash balance" formulas (which penalize today's older workers who have spent their careers with one company). Under-funding is another problem -- with promises now exceeding assets of company plans by about $400 billion. In July 2003 the General Accounting Office put the US. Pension Benefit Guarantee Corporation, which insures these plans, on its list of "high-risk" agencies. Pension plans covering 17 million state and local government workers are in even deeper trouble. An estimated four in five are underfunded; many have already engaged in desperate borrowing ploys. States in chronic fiscal distress may have no choice but to cut benefits across the board to pay their bills.

During the 1990s many boomer families figured they could make up lost ground by investing in an endlessly rising stock market. That hope has faded. Some still expect to receive an inheritance bonanza with the death of their last surviving parent, though this hope too is running aground. A small number of families are indeed inheriting large estates. But according to the Fed, only 27 percent of boomers say they either have received or ever expect to receive an inheritance. Of the 17 percent who have already received an inheritance by 2001, the median amount reported was $48,000 -- which, after settling the parents' estate, is not enough to make a large impact on retirement.

Yet another unpleasant surprise that may rough up the affluent edge of this generation is the impact of raw demographics on financial markets. When they reach retirement age and the time comes to sell off their mutual funds, where will all these boomers find enough willing buyers? At home, among the smaller and economically troubled Generation X following behind them? Overseas, in developed economies where younger households will be even scarcer? Or, in the emerging market and developing economies, like China and India-which will themselves be aging rapidly in the 2030s and which will in any case remain much poorer than America for several decades? Some financial analysts go so far as to predict that a "great depreciation" in financial assets is likely to accompany the boomer retirement.

One needn't subscribe to any dire financial outlook to be genuinely concerned about how most boomers will fare, especially if old-age entitlements are suddenly and belatedly slashed. Many ex-yuppies could become what retirement expert Craig Karpel calls "Dumpies" (Destitute Unprepared Mature People) carrying signs reading "Will Work for Medicine."

No one wants this future for any generation. Yet to plan for a better outcome, it's not enough simply to wait until boomers change their savings behavior on their own. Very soon elected leaders in both parties must exercise real leadership on this issue. At the very minimum, they should educate boomers about the nation's fiscal future and explain what kinds of limitations must ultimately be placed on which future benefits and who would be most affected. Ideally, they should go further and immediately frame legislation that would both increase future tax revenue and reduce the projected growth in benefit outlays while phasing in all reductions gradually and protecting benefits (in some cases, perhaps even increasing benefits) to those who are least able to fend for themselves. I would offer families new opportunities to provide for their own future and indeed require them to put aside some minimum savings for their retirement. Setting clearer expectations about what government can afford would itself encourage more household savings, which would further strengthen our economic prospects.

When President Bush recently remarked that our deficits are "just numbers on paper," he missed a great chance to explain to Americans what's at stake. America's vast prospective gap between outlays and revenue-measurable in the trillions of dollars -- is more than just a number. It is more than just a potential fiscal or even economic disaster. It is a colossal mismatch between what Americans expect to give to their nation and what they expect to receive from it. As such, it is a civic tragedy which arose through a dysfunction of political leadership and which threatens to cause serious hardship measurable in tens of millions of American families.

Left uncorrected, this fiscal gap will force our nation to make an odious choice, between our obligations to our children and our obligations to our elders. It will permit us to be either a forward-looking society or a humane society-but not both. Again, no one wants to arrive at this impasse. Yet to avoid it America must change course, decisively and soon. The only other way to avoid it-for now-is to pretend that it won't happen and that the official fiscal projections, like many other long-term projections, are highly uncertain. Some supporters of the fiscal status quo even dismiss them as guesswork.

We hardly know what the economy will do next year, they say. How can we possibly make fiscal projections forty years out? That would be a mistake. Even if the size and timing of ocean waves cannot be predicted, the size and timing of ocean tides can be. Budget experts inside and outside of government agree with remarkable unanimity on the magnitude of the cost growth in federal entitlement payments. This agreement, in turn, rests on demographic forces that can in fact be more reliably forecast than nearly any other trend monitored by policy experts. Remember: tomorrow's retirees have already been born and can be counted. The aging of America is about as close as social science ever comes to a certain forecast. Absent a Hollywood catastrophe of a colliding comet or an alien invasion, it will surely happen.

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An excellent book. Post your comments here.

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Other articles of interest:
McNosis, Aging Boomers and the Silent Crash
The Truth About the Great Depression
Ron Paul: Inflation and War Finance
A New American Dark Age
Ron Paul for President!

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