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Mrs. Dutta Writes a Letter
The long gray wave of Baby Boomers retiring could lead to an all-engulfing economic crisis -- unless we balance the budget, rein in senior entitlements, raise retirement ages, and boost individual and pension savings. Yet politicians of both parties say that most of the urgently necessary reforms are "off the table."

by Peter G. Peterson

The online version of this article appears in two parts. Click here to go to part two.

A Nation of Floridas

Aging America Been to Florida lately? You may not realize it, but you have seen the future -- America's future, about two decades from now. The gray wave of senior citizens that fills the state's streets, beaches, parks, hotels, shopping malls, hospitals, Social Security offices, and senior centers is, of course, an anomaly created by our long tradition of retiring to Florida. Nearly one in five Floridians is over sixty-five. But early in the next century a figure like that won't be exceptional. By 2025 at the latest the proportion of all Americans who are elderly will be the same as the proportion in Florida today. America, in effect, will become a nation of Floridas -- and then keep aging. By 2040 one in four Americans may be over sixty-five.
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Go to part two of this article.

Return to Flashback: Social Insecurity.

From the archives:

  • "Facing Up," by Peter G. Peterson (October, 1993)
    "The cause of our huge budget deficits is not government waste or welfare programs for the poor -- it's the out-of-control spending on welfare programs (called 'entitlements') for the middle and upper classes. President Clinton's plan barely makes a dent in this spending."

  • "The Next New Deal," by Neil Howe and Phillip Longman (April, 1992)
    "A call for a comprehensive reform of our trillion-dollar system of federal entitlements, which favors the rich over the poor, the old over the young, and consumption over savings, and in other ways makes no economic or social sense."

  • "Kids as Capital," by Jonathan Rauch (August, 1989)
    "When we grow old, we do not depend directly on our own children. Instead, we depend on other people's children."

  • "The Morning After," by Peter G. Peterson (October, 1987)
    "America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand."

  • "Justice Between Generations," by Phillip Longman (June, 1985)
    "Unless a number of trends are soon reversed, the Baby Boomers are headed for a disastrous retirement."

  • "Entitlements," by James Fallows (November, 1982)
    "If all Americans are 'entitled' to help, who will pay for it?"

  • When we consider the great demographic shift that will shape our national future over the next fifty years, we are speaking not of a mere transition but of a genuine transformation. Just fifteen years from now the first batch of Baby Boomers will hit sixty-five, bringing changes -- economic, political, social, cultural, and ethical -- that will transform American society. This transformation will challenge the very core of our national psyche, which has always been predicated on fresh beginnings, childlike optimism, and aspiring new generations. How we cope with the cultural dimensions of this challenge I will leave to others -- to sociologists, political scientists, historians, and philosophers. I am none of these. I am a businessman who has long participated in public debates over the political economy of rising living standards. What concerns me most about America's coming demographic transformation is simply this: on our present course we won't be able to afford it.

    To provide for the largest generation of seniors in history while simultaneously investing in education and opportunity for the youth of the twenty-first century, we must reject the prevailing "entitlement ethic" and return to our former "endowment ethic," which generated America's high savings, high growth, and rising living standards in the past. Endowment implies "stewardship" -- the acceptance of responsibility for the future of an institution. But given our current emphasis on individual self-fulfillment, we must, in addition to endowing the future of our nation and its institutions, endow our individual futures and those of our children, because no one else is going to do it for us. What I am talking about is self-endowment.

    "Hope I die before I get old," The Who sang in their classic sixties anthem, "My Generation." That statement, like so many slogans of the Baby Boomers' youth culture, was wishful thinking. The generation that once warned "Don't trust anyone over thirty" is now passing fifty.

    The real question is, Will America grow up before it grows old? Will we make the needed transformation early, intelligently, and humanely, or procrastinate until delay exacts a huge price from those least able to afford it -- and confronts us with an economic and political crisis to which there is no longer a win-win solution?

    Demographics is Destiny

    Within the next fifteen years the huge generation of Baby Boomers, whose parents brought them into the world with such optimism, will begin to retire. As they do, they will expect the munificent array of Entitlements that were guaranteed (again with such optimism) to every retiring American with no anticipation of the ever-growing length of retirement as life expectancy increases or the ever-rising expectations of independence, affluence, health, and comfort of life in retirement. But consider who is expected to pay for this late-in-life consumption: the relatively small "bust" generation in whose productive capacity we have failed to invest. Neither the founders of Social Security sixty years ago nor the founders of Medicare thirty years ago imagined the demographic shape of America that will unfold over the next several decades.

    Ponder the following:

    • With 76 million members, the Baby Boom generation is more than half again as large as the previous generation. To get some idea of how much the number of seniors could grow by the time the youngest Baby Boomers turn seventy, think of the entire population of California and the New England states combined. Or think of it this way: the number of Social Security beneficiaries will at least double by the year 2040.

    • In 1900 only one in twenty-five Americans was over sixty-five. The vast majority of these people were completely self-supporting or supported by their families. By 2040 one out of every four or five Americans will be over sixty-five, and the vast majority will be supported to some degree by government entitlements.

    • In 1960 there were 5.1 taxpaying workers to support each Social Security beneficiary. Today there are 3.3. By 2040 there will be no more than 2.0 -- and perhaps as few as 1.6.

    • The number of "young old" (sixty-five to sixty-nine) will roughly double over the next half century, but the number of "old old" (eighty-five and over) is expected to triple or quadruple -- adding the equivalent of an entire New York City of over-eighty-five-year-olds to the population. Nearly three quarters of those over eighty-five will be single, divorced, or widowed -- the groups most likely to need extensive government assistance.

    • In 1970 children under five outnumbered Americans aged eighty-five and over by twelve to one. By 2040 the number of old old will equal the number of preschool children, according to some forecasts.

    • The extraordinary growth of the old old population will add especially to federal health costs. This is because the average annual medical-care bill rises along a steep curve for older age groups. The ratio of Medicare and Medicaid spending on the old old to spending on the young old is about 2.5 to 1.

    • In 2030 only about 15 percent of the over-sixty-five population will be nonwhite. But about 25 percent of younger Americans will be nonwhite. This will create a potentially explosive situation in which largely white senior Boomers will be increasingly reliant on overtaxed minority workers.

    • In order to provide the same average number of years of retirement benefits in 2030 that were contemplated when Social Security was set up, in the 1930s, the retirement age would have to be raised from sixty-five to seventy-four by 2030. But this projection -- daunting as it is -- assumes that future gains in longevity will slow as average life expectancy approaches the supposed "natural limit" to the human life-span. Many experts now question whether such a limit really exists. Summing up research at the National Institute on Aging, the demographer James Vaupel goes so far as to suggest that we are now on the threshold of a "new paradigm of aging," in which the average life expectancy could reach 100 or more.

    Of course, the United States is not the only country facing an "age wave." Indeed, the age waves in most industrial countries are approaching faster than ours, and -- to judge by official projections -- could have an even worse impact on their countries' economies and public budgets. But these other countries enjoy long-term defenses that we lack. Unlike the United States, most can actually budget their public spending on health care, and so have much greater control over this potentially explosive dimension of senior dependency. Unlike the United States, most generally tax public benefits as they do any other income. And unlike the United States, most have fairly healthy household savings rates (generally well over 10 percent of disposable income, as compared with about five percent here), and so can absorb public-sector deficits much better than we can.

    Most important, unlike the United States, these other countries are unencumbered by the illusion that their people have some sort of inalienable right to live the last third of their adult lives in subsidized leisure. In other countries what government gives can be taken back if doing so is deemed to be in the public's long-term interest. In 1986, when Japan enacted a major reduction in future pension benefits, the Ministry of Health and Welfare issued a concise justification that cited "equity between the generations." Few if any objections were heard. In a statement issued the day he assumed office, Japan's new Prime Minister, Ryutaro Hashimoto, referred to the "imminent arrival of our Aging Society" as a priority imperative. Citing much longer life-spans and a much reduced fertility rate, he told the Diet in his opening speech that Japan would have to "overhaul those social arrangements premised upon a life-span of twoscore and ten to suit our new expected life-span of fourscore." Do we recall any American President ever making such a statement at any point in his term, let alone in the equivalent of an inaugural address?

    Australia has made employee pensions mandatory, increasing coverage from under 40 percent to nearly 90 percent of the work force. Iceland has means-tested its social-insurance system. Germany has enacted, and France, Sweden, Italy, and the United Kingdom are debating, increases in the retirement age. Some of these changes have provoked fierce controversy -- or even widespread protest, as happened in France last winter. But the disagreement is almost always over how best to allocate public resources. No one questions that government has the right to reduce benefits.

    Even many developing countries with populations still much younger than our own are preparing for their demographic future with astonishing resolution. In South Korea the household savings rate runs at about 35 percent; "Working to make a better life for the next generation" is a typical company motto. Account balances in Singapore's Central Provident Fund -- the country's mandatory pension-savings system -- now total nearly three quarters of GDP. In Chile the average worker owns $21,000 worth of assets in the fifteen-year-old national funded retirement system -- a sum about four times the average annual Chilean wage. Argentina, Peru, and Colombia are following Chile's lead and setting up funded systems of their own. Here, nothing has been saved in any national retirement system for any worker to own.

    Unsustainable Promises

    The economist -- and sometime humorist -- Herbert Stein once said, "If something is unsustainable, it tends to stop." Or, as the old adage advises, "If your horse dies, we suggest you dismount."

    We cannot sustain the unsustainable. Nor can we finance the unfinanceable. By 2013, when Baby Boomers will be retiring en masse, the annual surplus of Social Security tax revenues over outlays will turn negative. By 2030, when all the Boomers will have reached sixty-five, Social Security alone will be running an annual cash deficit of $766 billion. If Medicare Hospital Insurance is included, and if both programs continue according to current law, the combined cash deficit that year will be $1.7 trillion. The horse, in other words, will be quite dead. By 2040 the deficit will probably hit $3.2 trillion, and by 2050, $5.7 trillion. Even discounting inflation, the deficit that year for these two senior programs will come to approximately $700 billion -- four times the size of the entire 1996 federal deficit. Long before that time we will have had no choice but to dismount.

    Wall Street has yet to react to these obviously unfinanceable numbers. When will it? Since financial markets try to anticipate events, the reaction will surely come years before the first Boomers start retiring on Social Security, in 2008. How severe will the reaction be? Should the markets conclude that America has lost any chance to deal with this challenge in advance, we will almost certainly see a full-scale economic emergency as interest rates roar into outer space.

    Apologists for the status quo dismiss these numbers as "mere projections." So let me emphasize that the numbers I have used for Social Security and Medicare are official projections, calculated by federal actuaries and economists working for the Social Security and Health Care Financing Administrations. The same experts also calculate an alternate and much worse "high-cost" projection, which has historically proved to be more accurate than the forecasts I have used here. Moreover, the retirement and medical-care needs of the Boomer generation are by no means hypothetical. The Social Security Administration's former chief actuary A. Haeworth Robertson points out that fully 96 percent of senior benefits payable over the next seventy-five years will go to people who are already alive (and therefore countable) today.

    Well, say the skeptics, if we can't borrow trillions of dollars, maybe we can raise taxes a bit and muddle through. But this isn't a viable option either. Let's start with the political fact that both parties in Washington are currently hawking a tax cut, though they disagree about its size. A tax increase is unmentionable. Then consider the magnitude of the tax increases we would need. By 2040 the cost of Social Security as a share of worker payroll is expected to rise from today's 11.5 percent to 17 or 22 percent -- depending on whether you accept the official or the high-cost projection. Add both parts of Medicare, which currently cost the equivalent of 5.3 percent of payroll but are growing so rapidly that they will eventually overtake and surpass Social Security in size, and we're talking about 35 to 55 percent of every worker's paycheck before we even start to pay for the rest of what government does.

    Obviously, tax increases of this size would destroy the economy. More to the point, they would kill the taxpayers. There is also the interesting question of whether American taxpayers could be expected to comply with them. The experience of runaway pension systems in Latin America and Eastern Europe teaches us that when payroll taxes begin even to approach these levels, tax evasion becomes widespread and much of the economy moves into the tax-exempt "gray market." In other words, it may be impossible to fund the future cost of our current benefit promises no matter how willing we are to legislate higher tax rates.

    The senior lobby asserts that whatever the economic consequences, future American workers are duty-bound to fulfill their side of an ill-defined "contract between generations." Yet one group's "earned right" to a benefit is another group's "unearned obligation" to pay a tax. It is to this second group that our children and grandchildren belong. Understandably, they are suspicious of a binding "contract" to which they never agreed. According to a 1994 poll, Americans under thirty-five are much more likely to believe in UFOs than to believe that they'll ever receive Social Security benefits.

    There's an old adage about robbing Peter to pay Paul. In the entitlement shell game we're proposing to rob Peter Jr. to pay Peter Sr. -- even when the Peter Sr. in question may not need the money. In fact, Peter Jr. is already paying plenty. Because so much of Social Security is tax-free (and because retirees no longer pay FICA taxes), a typical retired couple on Social Security in 1994 with $30,000 in total cash income paid, on average, only $790 in federal taxes. Meanwhile, their son and daughter-in-law, struggling to raise a child on the same income, had a total federal tax burden of $7,035, if you include both the FICA tax they paid and that paid by their employers. No other industrial nation tilts its tax system away from the elderly -- or tilts its benefits system toward the elderly -- as much as the United States does.

    The present system's true believers dress up Social Security and Medicare in the reassuring rhetoric of "insurance" and "pensions" and claim that beneficiaries are only getting back what they paid in. They're wrong. The majority of today's beneficiaries are getting back far more than they ever paid in FICA contributions: given an average life expectancy, the average one-earner couple retiring today will get about $123,000 more out of Social Security than the average earner and his or her employers ever paid into it, plus interest. Omit the employer's contribution and calculate only the payback on the personal taxes paid by the employee, and the windfall rises to $173,000. With Medicare thrown in it rises to nearly $310,000, much of that tax-free. These are not "earned benefits" but unearned windfalls that our children will have to pay for and certainly will never enjoy themselves.

    Moreover, since FICA contributions have never been saved by the federal government, the point is moot: regardless of what a worker paid in, the federal trust funds now possess on that worker's behalf nothing but claims on future taxpayers. The term "trust fund" may suggest a vault in which one's Social Security taxes are stacked up, to be paid out later. But the Social Security "trust fund" is the ultimate fiscal oxymoron. Its "assets," which we are told will keep the system "solvent" until 2030, consist of nothing more than Treasury IOUs -- claims against future generations. When it comes time to redeem these claims and the interest they have accumulated, where will the Treasury find the cash? Either by borrowing from the public or by raising taxes. Either way, absent any policy change future taxpayers will have to pay again for today's Social Security "surplus."

    If the Social Security and Medicare balance sheets were evaluated according to private-sector accounting standards, both would be declared disastrously insolvent. How disastrously? Consider that the federal government has already promised to today's adults $8.3 trillion in future Social Security benefits beyond the value of the taxes they have paid to date -- a figure more than 250 times as great as the much-decried "unfunded liabilities" of all private-sector pension plans in America! If federal law required Congress to fund Social Security the way private pensions must be funded, the annual federal deficit would instantly rise by some $675 billion. Add in our lavish and unfunded federal-employee pensions and the deficit would rise by $800 billion. Add in Medicare and it would rise by more than $1 trillion. If private-sector executives ran their pension systems this way, they would be thrown in jail for wholesale violation of federal pension-plan regulations.

    Meanwhile, Congress has attempted to ban what policy wonks call "unfunded mandates" -- federal laws that impose costs on the states without providing funding for them. That's fine -- but worrying about such mandates while ignoring Social Security and Medicare is like mistaking Woody Allen for Arnold Schwarzenegger. Social Security and Medicare are the mother of all unfunded mandates.

    It's time to face up to the fact that trust-fund accounting is a hoax, that Social Security is in fact a pay-as-you-go system. Payroll taxes go directly to today's beneficiaries; benefits come directly from today's workers. Since FICA is a tax, and tax revenues are fungible, any annual surplus of FICA taxes over benefits is used to cover other government spending. A trust-fund ledger for such transfers is a waste of time. Does it really help anyone to know that Social Security is a bit richer and the Treasury is a bit poorer? Given the apparent congressional appetite for constitutional amendments, why not consider one banning government trust funds?

    As Federal Reserve Chairman Alan Greenspan has summed it up, the only bottom line that really counts is government's total borrowing balance with the public -- otherwise known as the annual consolidated budget deficit or budget surplus. Transferring IOUs from the right pocket to the left pocket does nothing to bridge Social Security's and Medicare's enormous funding shortfall.

    Along with this melancholy list of fiscal unsustainables we should consider some troubling moral unsustainables. Social Security was established to protect the elderly from indigence late in life -- to prevent a "poverty-ridden old age,"in the words of Franklin D. Roosevelt. If we allow it to go bankrupt by paying benefits to middle-class and affluent Americans, many of whom can live well enough without these benefits, what will happen to those who really need them? Among Social Security recipients whose incomes are under $20,000, Social Security accounts for more than half of the total. In spite of this sobering dependence, many political leaders imply by their inaction that it's fine to wait until trillion-dollar deficits have devastated our economy, and then slash benefits at the last minute. By doing so we would then deprive Americans at all income levels of the chance to plan for their futures* Millions of lower-income beneficiaries would be stranded in what might be called a demographic Depression, as the safety net that Social Security was enacted to provide suddenly vanished. Future historians may record that Social Security's "defenders" were the ones who most wanted to exempt the program from a balanced-budget amendment and thus from gradual and timely reform.

    Paul Tsongas likes to say, "It's not enough for our children to love us. We should want them to respect us." When our children look into the Social Security trust fund and find nothing there but IOUs with their own names listed as payers, they will surely wonder how we could have treated them so shabbily.

    The Inescapable Bottom Line

    Aging America Notwithstanding its strengths, real and imagined, the U.S. economy since the early 1970s has failed at what matters most: raising productivity. Why should the average American care about such a seemingly abstract concept? Because working longer hours -- or putting everyone's spouse (or child) to work -- is not the way to raise living standards. A higher standard of living means producing more while working the same or a lesser number of hours -- in other words, being more productive. Only thus can real (after inflation) hourly compensation and take-home pay rise. The astute economist Paul Krugman once summed it up this way: "Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

    Since the early 1970s real national income per full-time worker (as calculated by the Commerce Department) has grown by approximately 0.4 percent a year. Total worker compensation has grown at about the same meager pace. This rate of growth is so low that a debate rages among economists over whether -- after accounting for inflation and the rising costs of employer-paid health care -- the typical U.S. worker has seen any perceptible wage growth since 1973.

    We can no longer ignore what economists from Adam Smith to Karl Marx to Alfred Marshall to John Maynard Keynes to Paul Samuelson have insisted is the bottom line: sustained productivity growth requires investment, and no country can sustain high rates of investment without saving. These economists all understood that productivity growth depends on many underlying conditions, such as technological innovation and efficient markets, but they all agreed that capital accumulation is essential to productivity growth -- and is, moreover, the one condition over which society can exercise direct control. Few experts disagree, especially when "capital" is defined, as many economists define it, to include such intangible collective investments as infrastructure, research, education, and training. Yet we now face public budgets strained to the breaking point by the costs of demographic aging, which will crowd out all forms of capital accumulation -- private and public, material and human. Without fundamental policy reform a graying America cannot be a saving America.

    But thrift is precisely what we've forgotten. From an average of 8.1 percent of GDP in the 1960s, the net national savings rate dipped to 7.2 percent in the 1970s and then plunged to 3.9 percent in the 1980s and to 2.3 percent thus far in the 1990s. Net domestic investment has fallen in tandem, from 7.3 percent of GDP in the 1960s to 3.5 percent in the 1990s -- a decline that would have been much steeper if we had not switched from investing abroad to borrowing abroad.

    Our structural deficits drain our already shallow pool of private savings -- and hence crowd out private investment. To the extent that we try to control these deficits by reducing "discretionary" federal spending (a category that includes most future-oriented programs), they also crowd out public investment. Out of every nondefense dollar the federal government now spends, only about five cents builds tangible things that remain after the fiscal year is over. Recently a General Accounting Office study suggested that we must invest $112 billion to bring the infrastructure of schools back to acceptable levels. But where can we find such a sum when entitlements and interest on old debts crowd out everything else?

    Long before the Boomers reach retirement age, we're preparing to cut everything from Head Start and school lunches to rapid transit and space shuttles in order to pay the rising cost of senior entitlements. Despite the radical rhetoric in Washington, the recent budget plans I have seen don't reverse but accelerate our current fiscal trajectory. Each of them proposes to slash appropriated domestic spending in real dollars while only gently restraining the growth in senior entitlements. Even in Congress's plan senior benefits in 2002 would consume still another record share of the budget -- nearly 50 percent of noninterest outlays, up from 40 percent today and just 17 percent in 1965. This is in a benign demographic period, when the relatively small Depression generation (born before VJ Day) is still retiring and the relatively large Boomer generation (born after 1945) is still working and paying taxes. And remember: this is the Republican plan, widely attacked as a "declaration of war" on America's seniors.

    To break out of this slow-growth, low-investment cycle we must set a higher productivity goal and then dedicate the resources required to meet it. A sensible objective would be to increase the rate of growth in real per-worker national income by a percentage point, from the post-1973 average of 0.4 to about 1.5 percent a year. Even this substantial increase would not equal American growth rates of the 1950s and 1960s, or match Japan's record during the 1970s and 1980s. But it would come close to returning U.S. productivity growth to its average rate over the past century -- and it would bring growth close to the rates of most of our European competitors. If we raise productivity to 1.5 percent, twenty years from now national income per worker would be nearly $10,000 higher in today's dollars, and federal revenues (at the same tax rates) would be nearly $400 billion higher, than will be the case if we continue on our current course.

    Conventional economic theory suggests that this ambitious goal requires a shift of six to eight percent of GDP from consumption to savings, giving us a long-term savings and investment rate of about 10 percent of GDP. But where will these extra savings -- an average of at least $4,500 per U.S. household annually -- come from? About a third can be financed by balancing the federal budget and keeping it balanced. The rest will have to come from greater private saving.

    America's Savings Gap

    Thus we come to what we Americans as individuals can and must do for ourselves and the nation -- ichthyology from the standpoint of the fish. There are four main sources of income for those over the age of sixty-five: continued employment, government benefits, private pension income, and accumulated personal savings. As we shall see, the adequacy of each of these sources is uncertain.

    When it comes to our retirement plans, we are a nation in denial. About nine out of ten Boomers say they want to retire at or before age sixty-five (about six out of ten before age sixty). More than two thirds say they will be able to live "where they want" and live "comfortably" throughout their retirement years. A stunning 71 percent expect to maintain in retirement a standard of living the same as or better than what they enjoyed during their working years.

    Yet probe them more deeply about their retirement dreams, and most Boomers admit that they are terrified that neither they nor their government is saving enough. Some two thirds confess that they've never even calculated how much they need to save for their retirement, and an amazing 86 percent acknowledge that "future retirees will face a personal financial crisis 20 years from now." Yet at the same time, they do not expect or even want much from government. Nearly nine out of ten Boomers agree that "the government has made financial promises to [their] generation that it will not be able to keep." For every Boomer who says that government should shoulder the "main responsibility for providing retirement income," five say that individuals should. They will very likely get their wish. From all the numbers we have seen, it is obvious that government retirement benefits (mainly Social Security, Medicare, and Medicaid) are likely to be severely reduced by the time most Boomers retire.

    What could take their place? Thirty years ago experts hoped that private pensions would become a universal supplement to Social Security. Such hopes never panned out. Today less than half of all U.S. private-sector workers are covered by pensions. Overall coverage has been flat since the early 1970s, and in recent years coverage has actually dropped sharply for younger men. This stems from long-term changes in the work force and in the nature of work -- part-time work, working at home, multiple careers. Rates of pension coverage have always been highest for full-time career jobs, unionized jobs, and jobs in government and large corporations -- in short, for jobs that are becoming increasingly scarce. As for Americans lucky enough to have pensions, they will be surprised, if not seriously disappointed, by how little their plans have set aside for them: the typical defined-benefit pension plan for average-earning workers with thirty years of service replaces just one third of pre-retirement earnings -- an amount that is not indexed for inflation.

    Clearly, retiring Boomers will have to rely heavily on the remaining source of retirement income: private savings apart from pensions. But this source may be the most uncertain of all, for it is questionable whether the average American is saving anything on his own: what one household saves in a bank account or a nonpension mutual fund scarcely offsets what another household borrows. Whenever the stock market or housing prices rise, many households may feel that they're saving enough. But our aggregate personal-savings rate, except for pensions, is now barely positive.

    Many have argued that the current bust is attributable to the passage of so many Baby Boomers through the years of household formation, and that saving will turn up again as Boomers reach the traditionally high-saving middle years. But for this explanation to be valid, the personal-savings rate should have bottomed out by the mid-1980s -- and climbed back again. Many Boomers have already entered the traditionally peak saving years. But the savings decline persists, contrary to predictions of a demographic reversal.

    In 1992, according to the Federal Reserve Board, 43 percent of U.S. families spent more than their income; only 30 percent accumulated assets for long-term saving. In 1993, according to a Merrill Lynch analysis of Census Bureau data, half of all families had less than $1,000 in net financial assets -- a figure that had not risen over the previous decade, even in nominal dollars. Among adults in their late fifties, the age at which workers are staring directly at retirement, median savings are still shy of $10,000. Even optimists admit that a bleak future awaits the approximately one third of all Boomers who are expected neither to accumulate financial assets nor to receive a private pension.

    Ironically, the Baby Boom is the best-educated, most sophisticated, most well-traveled generation in our history. This irony provides still another illustration of the depth of our denial.

    B. Douglas Bernheim, of Stanford University, concludes that Boomers on average must triple their current saving if they want to enjoy an undiminished living standard in retirement. And if one assumes a 35 percent reduction in Social Security benefits (which seems more than likely if not inevitable), then Boomers will have to quintuple their saving. A recent study by the Committee for Economic Development, Who Will Pay for Your Retirement? The Looming Crisis, comes to a similarly stark conclusion.

    If it's true that the promise of late-in-life government benefits helped to suppress private savings in the past, maybe the growing expectation of cuts in government benefits will help to boost private savings in the future. Though economic theorists debate the point, people do take government subsidies into account when deciding how much to save. By thirteen to one, households say that they would save more if they knew that future Social Security benefits were going to be cut.

    Finally there is the prospect of inheritance, that magic cure-all for any generation's retirement worries. In recent years Boomers have been cheered by a spate of upbeat stories about the "$10 trillion inheritance boom" that today's affluent seniors are expected to pass on. These Boomers may not have noticed the bumper stickers one sees in resort areas frequented by seniors: I'M SPENDING MY CHILDREN'S INHERITANCE. But even if the hoped-for hand-off takes place, there's a problem. Because this wealth is highly concentrated among relatively few families (what Donald Trump calls the "Lucky Sperm Club"), bequests may average as much as $90,000 per Boomer but will amount to only about $30,000 for the median Boomer. Muffy and Duffy will do fine, but for most of this generation the typical inheritance will just about cover the costs of settling Dad's estate and pay off a few lingering medical bills.

    Dan Yankelovich, the dean of American opinion surveyors, has wisely said that our collective denial is not due to emotional or moral pathology. Rather, it is a case of "cognitive denial,"by which he means a failure to make connections between how we prefer to see reality and what reality actually is. Clearly, this denial is manifest at the national level and at the personal level.

    Praying for Productivity and Other Good Things

    Are there any favorable trends under way that might moderate these bleak forecasts? Perhaps. But there is less to them than meets the eye. First, consider productivity growth, which determines real wage growth and hence tomorrow's tax base. Those who preach that high tech will bail us out and that we can avoid saving and investing our way back to economic growth tell us not to worry: we're in the midst of a productivity revolution. But we have good reason to worry. For one thing, after the Commerce Department recently updated its methodology, it became clear that the much-touted productivity gains of the 1990s are just about typical of earlier business-cycle recoveries over the past twenty-five years. For another, the Social Security Administration's best estimate of future deficits presupposes a permanent one-third improvement in productivity over our actual historical record since 1973. In other words, productivity growth will have to accelerate simply to ensure that the future isn't worse than the SSA's already unsustainable official projection. It would have to accelerate still more to ensure that things turn out better.

    Well, if the productivity revolution -- at least as it is now unfolding -- won't save us, maybe the new baby "boomlet" will. It's true that current fertility rates, of about 2.0 to 2.1 lifetime births per woman, are a bright spot when compared with the low rates of 1.7 to 1.9 recorded during the "birth dearth" of the 1970s and 1980s. But even if these higher fertility rates turn out to be lasting, they won't have much effect on federal tax revenues until the mid-2020s -- long after fiscal meltdown is scheduled to occur. Even then the positive impact will be small. To stabilize the ratio of retirees to workers, U.S. fertility would have to surge to 3.0 or higher -- in other words, back to the Baby Boom levels of the 1950s and early 1960s, which no one expects. For one thing, the share of American women who say that a family of four or more children is "ideal" has plummeted from nearly 50 percent to about 10 percent since the 1950s. For another, the United States already has one of the highest fertility rates in the developed world. Average fertility in other major industrial countries is now 1.6; in Germany and Italy it is 1.3.

    Well, then, if not babies, what about immigrants? Isn't importing more young workers a viable solution to America's aging? Again, not really. Immigrants, too, eventually grow old -- and thus begin adding to Social Security and Medicare costs. To make a substantial dent in the costs of America's aging, huge and destabilizing waves of immigration would be required. In fact, to cancel out the projected growth in the Social Security payroll-tax rate over the next half century, today's level of net immigration would have to roughly quintuple, to about five million a year, beginning now. The reality, of course, is that America is in no mood to reopen Ellis Island.

    Finally, consider health-care spending. Some point to the recent slowdown in medical-price inflation (as measured by the Consumer Price Index) and conclude that our problem is behind us. Not so. First, what matters is total expenditures on health care, and thus far in the 1990s real federal health-benefit outlays have not slowed at all. Second (and once again), the bleak official projections already assume a dramatic turnaround in recent trends. Over the past quarter century real Medicare spending per beneficiary has increased at the rate of five percent a year -- several times as fast as real per capita income growth. Over no five-year period since 1970 has the growth in spending been less than three percent a year. Yet the Health Care Financing Administration's official projection assumes that the growth in real per-beneficiary Medicare spending will slow to about one percent a year by 2020. This projected cost-containment "triumph" is timed to occur just as aging Baby Boomers begin to increase the demand for every imaginable health-care service.

    So let's hope -- or pray -- for productivity gains, higher fertility rates, and market-imposed discipline on health-care costs. But let's not forget the rosy scenarios of the 1980s that never came true and the problems we never grew our way out of. Public policy must be based on prudent expectations about the future -- and prudence suggests that on our current trajectory the future may be worse than the bleak official forecasts.

    No matter how clearly Social Security actuaries tell us that financial trouble looms ahead, politicians on both sides of the aisle are convinced that "middle-class" entitlement programs constitute the "third rail" of American politics: "Touch it and you're toast." So denial persists. It would be pleasant to blame this denial on Washington and say that the rest of us know better -- that all we have to do is elect more-principled public servants who will dare to confront these issues. But the problem is interactive -- the politicians and the people have all become gifted deniers.

    Consider this irony: the public enthusiasm for budget balancing and cuts in "wasteful" programs is inversely proportional to the cost of those programs. Ninety-four percent of those polled in one recent survey favored slashing foreign aid, 77 percent wanted to cut public-housing funds, and 75 percent wanted to cut the space program. Yet these programs together make up only about three percent of the federal budget. Meanwhile, only 14 percent of respondents wanted to cut Social Security, and only 22 percent favored cutting Medicare. Yet these two programs together account for a staggering one third of the budget.

    Or consider how we deny the truth about entitlement programs. In justifying every new benefit increase and every refusal to accept slower growth in expenditures for the elderly, the senior lobby talks as if "old" meant "poor." But elderly Americans now have the highest level of per capita household wealth of any age group -- and, counting in-kind income such as health benefits, a lower poverty rate than younger adults. Although old-age benefits were originally intended to be a safety net for the truly needy, today's entitlement system more closely resembles a well-padded hammock for middle- and upper-class retirees. One third of Medicare benefits, nearly two fifths of Social Security benefits, and more than two thirds of federal pension benefits now go to households with incomes above the U.S. median. Back in the early 1960s the typical seventy-year-old consumed about 30 percent less (in dollars) than the typical thirty-year-old; today the typical seventy-year-old consumes nearly 20 percent more.

    It is obvious that this senior affluence is not evenly distributed. Millions of seniors would be destitute without federal benefits. There is also no guarantee that this affluence will continue for future generations of elders, which is why Boomers must prepare for their own retirement now. Households that are not saving enough must confront and act on their retirement-income needs. In a recent study Public Agenda found that only 20 percent of U.S. households are "planners" who deliberately save toward a quantitative goal. The rest -- "strugglers," "impulsives," and "deniers" -- leave their future more or less to fate.

    Younger Americans need to understand how great a change in saving behavior is required, but that this change will hardly be unbearable if they start now. Thanks to compound interest, even small sacrifices count. A recent study published in Fortune magazine found that if a couple at age forty decide to go out to dinner and a movie only twice a month instead of four times, and put the savings into a 401K plan, they will net $169,500 for their retirement at sixty-five. Paying off credit-card bills when they come in instead of incurring finance charges will yield another $121,400.

    But if Boomers don't start providing personally for their retirement, then their golden years will hold nothing like the life of leisure that most of them seem to expect. In The Retirement Myth, Craig Karpel warns that the generation we met in the 1980s as "yuppies" may reappear around 2020 as "dumpies" -- destitute, unprepared mature people wandering the streets with signs reading WILL WORK FOR MEDICINE.

    The online version of this article appears in two parts. Click here to go to part two.

    Illustrations by Nicholas Gaetano
    Copyright © 1996 by The Atlantic Monthly Company. All rights reserved.
    The Atlantic Monthly; May 1996; Will America Grow Up Before It Grows Old?; Volume 277, No. 5; pages 55-86.

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