Burdensome Boomers

by David Van Der Klauw. February 21, 2005

I would like to give a simple example to illustrate some problems with the US social security system.

(Although I live in Australia, I find the US social security funding issue to be interesting because Australia will have the same problem funding boomer retirement, but our problem is less clear because our pensions are paid out of general government revenue.)

The basic problem is that so many boomers are about to retire and live so long that it will be difficult to support them in the way that has worked up until now.

Let me use a simple example to describe three separate problems that the US social security system has:

Imagine that a working man, with a family to support, wants to do a year-long training course which will take his weekends and one week day. His family cannot afford to lose a day's pay and also pay for the training course, so he devises this plan:
For one year before his training he will work an extra day on Saturday and put his pay of $100 per day into a special box. After one year of saving he will commence his training course and draw down the funds from his box. He expects to have enough in savings to support his family during his training period.

Our example situation is very simple. There is a period of more work than usual combined with saving, followed by a period of less work than usual combined with spending. This situation is analogous to the baby boomers retirement. Whilst the boomers work there are more workers than usual and a capacity for a surplus of savings, and when the boomers retire there are more retirees than usual and a deficit (spending). Just like the man in our example, the boomers could and should prepare for the later situation by saving in a suitable savings vehicle. In our example, a suitable savings vehicle is a box which holds money. In the US social security system the savings vehicle chosen is the trust fund.

Problem Number 1 - Not enough
The first problem our man might have is if his period of training turns out to be more expensive or last longer than he planned for. If so the man will run out of money.

The US could have the same problem if the boomers' retirement lasts longer or is more expensive than was saved-up for.

Problem Number 2 - It's gone
The second problem our man might have is the security of his cash box. Imagine if toward the end of the first year, the man discovers his box has rats living in it and all the money is gone, assumed eaten. This man will face a problem the moment he commences training. At that time he will be short $100 a week because his saved money has been eaten by rats.

Some say that the social security trust fund is empty. Even if enough money was paid in by the boomers, if it is already gone, then when the boomers retire, there will be nothing there to fund them.

Problem Number 3 - Already dependent
There is a third problem the man can have which is a more subtle problem. Imagine if turns out that the money in the box has not been taken by rats but by the man's own family. Perhaps the man's son has been taking the $100 and using it on addictive drugs or his wife has been spending the money on essential household items. In this case he has double the problem! He has a $200 per week problem. He is short $100, which he needs for training and was expecting to take from the box, AND he is short a further $100 which is now needed on an ongoing basis to support the spending habit his family has developed unbeknownst to him. To solve this, the man must both wean his family off their spending and somehow replace the lost money.

Apparently the US government has been spending the social security surplus (on government programs) rather than allowing it to accumulate. The boomers have put savings into a trust fund expecting to become dependant on those funds in their retirement years when they stop working. But unbeknownst to them they have already become dependant on the trust fund through the mechanism of their government - which has developed a spending habit that matches their current temporary savings ability. This is a double problem because when the boomers retire they will have to do without both their accumulated savings (which are gone) and they will have to do without the government programs that their savings previously funded. To solve this problem requires the government to be weaned off its spending habit and to somehow replace the lost money. A big ask.

Problem Number 4 - Can't eat bonds
A fourth problem (which my example does not show) is the suitability of the savings vehicle itself. Whilst any one person can put money in a box and later spend it, it is not possible for all people to do this at the same time. When they all go to spend the money simultaneously there will be no one to exchange resources for that money. If an outsized generation such as the boomers wants to retire without being a burden on the next generation then they must save and invest in appropriate vehicles. Buying government debt from a reliable, large and young foreign country would work, but saving via government debt of their own country will not work because government debt can only be honored by taxing the next generation. Therefore saving primarily in your own government's debt does not lessen the burden on the next generation.

In conclusion, I have tried to use a simple example to demonstrate some points about the boomers' retirement funding. The boomers can retire and not be a burden on the next generation if:

They paid in or saved enough to fund their own retirement
The money is still be there - not lost in a dud investment or taken by thieves.
They are not already dependent on the savings in an ongoing way before they retire. E.g. not living in it or reliant on government programs that spend it.
The savings are not overwhelmingly in bonds of their own govt.

Do the US or Australian boomers meet these requirements? I doubt it.

Contact Information

David Van Der Klauw | Sydney, NSW, Australia | Email