The Boomers are Coming, The Boomers are Coming
Demographic Tsunami is at the Gate
By Tony Allison, October 15, 2007
The leading edge of the massive hoard known as the Baby Boomers is finally at the gate, ready to begin collecting Social Security. A recent article profiled the “first Baby Boomer,” Kathleen Casey-Kirschling, born one second after midnight, January 1st, 1946. She will begin to collect Social Security in January 2008, and will be eligible for Medicare in three years. She will also be joined by 3,200,000 other Boomers who will begin drawing Social Security next year. And over the next 20 years, the gates to government-sponsored retirement benefits will be deluged by over 80 million aging Boomers.
Medicare is the major issue
By the year 2030, it is estimated that 84 million people will be drawing Social Security, up from 50 million today. Medicare recipients will skyrocket from 44 million to 79 million. In a mere 23 years, this will leave 2 workers contributing payroll taxes for each retiree. In 1945, there were 42 workers contributing for each retiree. Of course, when Social Security was born in 1935, the assumption was that most people would die before they could start collecting at age 65.
Demographers and economists are concerned that Social Security and Medicare payments will eventually swamp the economy. The conservative number now tossed around is $50 trillion in unfunded future liabilities. This is probably significantly understated, as inflation expectations are understated. The Concord Coalition has forecast cash deficits of $72 trillion for Medicare and Social Security by 2080. There have been projections that Social Security will rise from 4% to 6% of GDP and Medicare will rise from 3% to 11% of GDP in the later part of this century. But of course these are just estimates, based on premises, such as rates of inflation which could change dramatically. It’s safe to say the problem is immense and growing.
The Fiscal Wake-up Tour
David Walker, the nation’s comptroller general, has been leading a “fiscal wake-up tour” the past 2 years, trying to by-pass the usual political quagmire and talk to small groups of citizens and local newspaper editors around the country. Walker also appeared on 60 Minutes earlier this year. His main thrust is that each year action is delayed, the prognosis gets more severe, and the cure more expensive. “It’s the power of compounding” said Walker. “It’s working against us.”
Because the brewing crisis is not yet at our doorstep, the politicians and mainstream media will likely ignore it until it’s inside our houses, maiming and pillaging. Mr. Walker frames the issue in a much longer, historic perspective.
“The Roman Empire lasted 1000 years, but only about half that time as a Republic. The Roman Republic fell for many reasons, but three reasons are worth remembering: declining moral and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.”
It’s fortunate that the comptroller general serves a 15-year term (Walker has served six), because he would likely be shown the door very quickly otherwise. As Walker has stated many times, “the American people are starved for two things; truth and leadership.”
Robert Bixby, executive director of the Concord Coalition, which organized the wake-up tour, recently opened an appearance in New Hampshire by remarking “the first thing I want to do is assure you that none of us is running for president. After you hear what we have to say, you’ll understand why.”
According to the Concord Coalition, federal government spending absorbs 20% of the economy today. The Congressional Budget Office (CBO) has estimated federal spending could rise to 56% of the economy by 2050, far higher than even during World War II.
Many economists assume we will simply grow our way out of this mess, by saving more and helping fund more productive investments to grow the economy. Unfortunately, we are not saving anything, and must fill the gap to fund current needs by borrowing from foreign sources. Of course, this acts as a growing mortgage on future income.
The hard truth is that no plausible level of economic growth would be enough to avoid hard policy choices (currently deferred). The Government Accountability Office (GAO) has estimated that it would require inflation-adjusted average annual growth in the double-digit range every year for 75 years to close the gap through growth alone. Given that real economic growth has averaged 3% the last 30 years, this growth plan has some serious flaws.
Trimming fraud and abuse in government would certainly help, but it hasn’t happened before, and don’t count on it in the future. “Bridges to nowhere” will continue to be built, as long as politicians seek to be reelected.
Higher taxes, lower benefits
The two most plausible scenarios are not pleasant, higher taxes and dramatically reduced benefits. Both seem inevitable at this point. The payroll taxes will have to increase significantly to pay the enormous load of one retiree for every two workers. But other taxes of all variety will seep into the system to keep the wheels from coming off. The most lethal tax will be the most invisible; inflation.
From the Boomer perspective, expect means-testing for both Social Security and Medicare. And expect less benefits as health care costs continue to skyrocket, and service declines under the strain of 80 million participants.
According to the Concord Coalition, “if nothing changes (in current policy) future taxpayers will be forced to pay far higher taxes than we pay today, or they will have to accept much lower spending for all other public purposes, including national defense, homeland security and education, or face rapidly escalating deficits and the resulting negative consequences for the economy and future standards of living. Wishful thinking is not a sound fiscal strategy.” The Concord Coalition stresses that there is no free lunch, and the longer we wait, the more expensive lunch becomes.
Checks will clear, but what will they buy?
Thus, it can be surmised that policy changes are coming, but not just yet. Not until crisis is in the air, and politicians feel the heat. It can also safely be surmised that the government will not suddenly decide to renege on trillions in promised benefits to millions of anxious registered voters. The policy changes will likely be gradual, and presented as benignly as possible, requiring no overt sacrifice by the pubic (except ultimately, quality of life).
The Boomers are coming by the millions each year, and nothing can stop that. The Social Security and Medicare payments will be made (albeit at reduced levels for some). The trillions needed will be there, because dollars can be printed infinitely at will. The checks will clear the Boomers accounts, but one must ask how much each dollar will buy at that point? If current trends continue, the answer is not enough.
Forewarned is Forearmed
Inflation is certainly going to go hand-in-hand with the demographic tsunami that is the Baby Boom generation. However all is not lost. Forewarned is forearmed in the sense that this crisis is a slow-moving freight train moving toward us. Those investors who agree that future inflation is in the offing can mitigate against it by their actions today. The so-called “smart money” has always used inflation to their benefit, by investing in areas that will greatly profit from inflation.
If you happen to be one of the 80 million Boomers, continue to plan for a vigorous, adventurous retirement. But also plan to fund it on your own. The future is never bleak if you plan ahead and gracefully side-step any oncoming freight trains.
Stocks pulled back sharply Monday as news that major U.S. banks will set up a fund to help bail out the credit markets stirred concerns about bad debt and as oil prices surged to $86 per barrel for the first time.
The Dow Jones Industrial Average fell 108.28 to close at 13,984.80. The S&P 500 Index closed down 13.09 to close at 1,548.71. The Nasdaq also closed lower, ending at 2780.05, down 25.63.
The concerns about banking came after Citigroup Inc., the biggest U.S. bank, reported that third-quarter results fell 57 percent. The company said it lost more than $3 billion in mortgage-backed security losses, leveraged debt write-downs and fixed-income trading losses.
Citigroup, along with JPMorgan and Bank of America, announced the creation of a fund used to help revive the asset-backed commercial paper market. The fund will buy assets from structured investment vehicles, also known as SIVs, which buy corporate bonds and subprime mortgage debt. The bailout was orchestrated by the Treasury Department to avoid a fire sale in the market. It seems the subprime issues are far from resolved.
Gold for December delivery gained $8.40 to finish at $762.20 an ounce on the New York Mercantile Exchange, the highest close for a front-month contract in nearly 28 years. The all-time high for a benchmark gold contract on the Nymex was set on January 21st, 1980 at $875.
“As long as we live beyond our means, we are destined to live beneath our means.” ~ Dr. Ron Paul
Wishing you a good evening,
© 2007 Tony Allsion