America's Coming Retirement Crisis

Volume IV, Number 7 June 29, 1998

On July 1, the Concord Coalition and the AARP will co-host the second in their series of national forums on Social Security. The forum will explore the future of retirement in the next century--and place the debate over Social Security in a broader context.

Much of the public equates America's coming retirement crisis with the projected insolvency of Social Security. Unfortunately, it's worse than that. Social Security faces real difficulties--including yawning long-term deficits and steadily declining returns on contributions. But its projected insolvency is only part of a much bigger problem: the unaffordability of current retirement expectations in an aging society.

This broader context explains why Concord is impatient with those who argue that Social Security's future fiscal burden, considered in isolation, is bearable. Social Security's insolvency is due to arrive in the midst of a demographic revolution that threatens to overwhelm the federal budget--and to transform the very shape of our national economy, our society, and even our culture. Insisting that Social Security is its own self-contained deal is like telling a homeowner that no single rock matters in the landslide that buries his house.

A Stupefying Tax Burden

For starters, Social Security is not the only growing fiscal burden an aging America will face. From now to 2040, the cost of Social Security is projected to rise from 11 to 18 percent of workers' taxable payroll--an increase which, while large, is perhaps "affordable." Add in both parts of Medicare, however, and the total burden reaches 32 percent of payroll. Add in Medicaid for seniors as well, and it reaches 40 percent.

Raising tax rates anywhere near this high would not only wreck the economy. It would doubtless trigger a political backlash from younger workers, who are already due to get a much worse return on their payroll contributions than their parents. Understandably, they would resent a "reform" that pretends to safeguard their future by further cheapening the deal. All of this is lost on apologists for the Social Security status quo, who apparently believe that younger workers won't mind paying a stupefying tax burden so long as many different federal agencies are collecting and spending the money.

The apologists reassure us that tomorrow's more affluent workforce will be able to pay higher tax rates and still enjoy a rising living standard. Again, this might be true if Social Security were the only program whose costs are due to rise. But when we take into account the total burden of young to old transfers, it is not. Hiking taxes enough to pay for the major senior benefit programs would, under the Trustees' official scenario, erase all growth in real after-tax worker earnings over the next half century. Under an alternative "high-cost" scenario, whose key demographic and economic assumptions more closely reflect historical experience, take-home pay would suffer a catastrophic decline.

Harvest Years

We could of course try to avoid the fiscal burden by borrowing rather than hiking taxes. But this is a road to ruin, leading to resurgent budget deficits that would just as surely wreck the economy. Under a do-nothing fiscal policy, according to the Congressional Budget Office, the federal deficit would shoot past 10 percent of GDP by 2040. Even if private savings remains unchanged, federal borrowing alone would be enough to drive the U.S. net national savings rate far below zero.

What's more ominous is that the aging of America will probably depress the national savings rate even if the federal government never again borrows a penny. The reason: Private savings will not remain unchanged. With more of the population entering its harvest years, household savings will undoubtedly decline. And keep in mind that the United States is today already a low-saving economy, compared both with its own long-term historical record and the record of other developed nations. A critical policy objective, therefore will be to raise national savings above what it is today--and provide tomorrow's zero-growth labor force with the tools they need to keep the economy from stalling. Getting households to save more may be difficult unless we find some way to pare back the unfunded obligations (now over $15 trillion) of senior programs. Once again, the story is bigger than Social Security alone.

Forget the Yuppie Stereotype

Is there any alternative to these gloomy scenarios? The only obvious option is a sizeable cut in senior benefits. But there's a catch: The generation whose benefits must be cut is highly dependent on them.

However you look at it, Boomers aren't saving nearly enough to meet their retirement expectations. Less than half of the private-sector workforce is covered by any employer pension--even a meager plan that can be cashed out long before retirement. The median U.S. household has a net financial worth of just $1,000; even among households in their late fifties-the age at which workers are staring straight at retirement-median net financial worth is still shy of $10,000. According to one study, Boomers would have to triple their current saving rate to enjoy an undiminished standard of living in retirement--even assuming Social Security isn't cut.

Then there's the matter of long-term care. Boomers will not only live longer than their parents. As elders, a much larger share will be divorced, living alone, have one or no children, or have children who are themselves elderly and disabled. One in three will someday enter a nursing home. Yet very few are preparing for the extra cost of infirmity in old age--say, by planning to work longer. Boomers, say the surveys, expect to retire earlier than ever and with no reduction in living standards.

Is there anything that can bail them out? Some point to the $10 trillion in inheritances they will receive from today's seniors. But let's get real. Yes, Muffy and Buffy will do just fine. But because this wealth is highly concentrated among relatively few families, the median bequest will only amount to about $30,000. After settling Mom's or Pop's estate, that doesn't leave much.

When you think of this generation, forget the yuppie stereotype. Only a minority of Boomers are riding the Dow, and even if the stock market roars forever, only a few will be able to cash out big. If old-age entitlements have to be cut across the board, many ex-yuppies could become what retirement expert Craig Karpel calls "dumpies"--destitute, unprepared, mature people carrying signs reading, "Will work for medicine."

The Larger Agenda

Benefit cuts are thus only the first step in facing up to America's coming retirement crisis. While restraining pay-as-you-go promises, we must also encourage or require people to develop alternative means of support in old age. If we wait until Boomers are about to retire, it will be too late. Benefit cuts will likely come in the midst of social and economic crisis--and will fall most heavily on the very workers who are least able to bear them.

From trimming COLAs to raising eligibility ages, the public is fast becoming familiar with the types of policy changes needed to reign in the cost of senior benefits. Now it's time to start focusing on the larger agenda of how to make retirement in the next century secure and sustainable--and on the profound changes this will require in our expectations about everything from work and savings to family and health care.

Here are seven things Americans need to do now:

  • Increase their voluntary retirement savings. It's time for a return to the thrift ethic, once so strong in America.

  • Encourage leaders to mount the bully pulpit and spread the word. The government sets guidelines to tell us when we're overeating. Why not for when we're undersaving?

  • Consider enacting a system of mandatory personal savings or funded child endowments. This is especially important for low-earners-who are saving nothing today and will be hit hardest by benefit cuts tomorrow.

  • Acknowledge that the pursuit of good health must be balanced against available resources. An aging society will have to abandon the ideal of open-ended health care without regard to cost.

  • Prepare to assume more personal responsibility for the long-term care of elderly family members--and recognize that government cannot always pay the bills.

  • Move beyond the "three box" life cycle of work, retirement, and leisure. An aging society must throw off outmoded stereotypes and learn to take advantage of the productive capacity of the elderly.

  • Invest in the education and training of the young--not just because we love them, but because our fiscal future will depend on their productivity.

  • For too long, Social Security has been regarded as an isolated policy arena--and its financial problems as a narrow actuarial concern, solvable with a bit of tinkering that won't make much difference in our lives. The truth is otherwise. Social Security is part of a much bigger challenge. How we deal with it will have a profound impact on our economy and society--and, indeed, on the kind of world we leave to those who come after us.


    . Last updated: 7 Jul 1998