September 8, 2004

In ten years, there will be 40 percent more Americans aged 65 and older than there are today.  Unless we substantially alter our immigration policies, active workers will increase less than half that amount.  Ten years after that, those over 65 will have doubled from present levels while those in the work force will have increased only slightly more than a third. 

It does not take an actuarial degree to realize that retirement benefits will be growing far faster than contributions. 

Fed Chairman Alan Greenspan talked about what problems this demographic reality will create for social security and medicare recipients.  Not enough money will be flowing into the till to meet the benefits flowing out unless something changes. 

Greenspan’s solution was to delay the age at which benefits are paid so that the pool of active workers would not shrink so rapidly and the number of retirees would not grow so rapidly.  While not brandishing a precise number, Greenspan certainly would expect something like a 70 year retirement age would do the trick. 

Companies that have not converted benefits to current contributions and their earnings for individuals, such as in 401K plans, face the same actuarial nightmare.  Already, the public corporation created to protect the recipients of private pensions has been dipping into the Treasury.  If several airline plans are turned over to the Pension Benefit Guaranty Corporation, the annual costs to provide even minimal benefits could cost taxpayers tens of billions of dollars.  

Conversely, employees cannot be certain that their 401K returns will be sufficient to maintain their lifestyle in retirement.  In the past five years, the average earnings on these assets have increased less than 5 percent annually.  In present terms, added to the employer and employee contribution, the average 401K holder is accumulating only enough assets to support less than a third of what they are currently spending. 

To further disturb the calculations, medical services require more than three times the percentage of spending for those over 65 than for the younger population.  (To be sure, the vast majority of this spending usually occurs very late in life, when 40 percent of all medical expenditures occur.)  And medical inflation has reverted to its 2.5 to 3 times normal inflation that persisted until service shifting in the early 1990s put a temporary end to that price surge. 

How will we resolve these retirement problems?

One hopeful prospect is the rise in worker productivity.  If we do not have enough workers, maybe those who do work can be “as ten.”  Provide them with the tools and education, and they just might be able to provide enough contributions to meet the needs of their families and their parents as well.  Whether they would be willing remains an issue.  But without production, their will does not matter. 

Indeed, I have been preaching to retirees that they should care about our schools and colleges.  Those currently receiving what knowledge and tools we provide will determine how much bread will be on the retiree’s table.  Improving our schools and colleges is a retirement concern. 

We also could open our borders.  When illegal immigrants are added to those lawfully here, population growth remains moderately over 1 percent a year.  Unfortunately, terrorism has diminished the desirability of that option.

We can raise taxes on the workers and further increase the shift in spending from the producers to the retirees.  A subtle shift already has been working here, especially where retirees receive medical support as well as pension support. 

Here we already are facing a catch 22.  The low growth in after tax earnings leads to a demand for low inflation.  To hold down prices, we are increasingly using international workers who do not have the same benefit burdens thrust upon their hourly costs.  If more taxes mean more off shore employment, as the evidence shows that it already does, then we cannot solve the retiree problem by raising unemployment or lowering the earnings of the employed. 

Of course, we could hope that our 401Ks do better in the future.  The past five years may have been an anomaly, just as the 18 percent returns annually from the previous decade also were.  Some improvement over those 5 percent gains should be expected in the next ten years, but not much.

We also could manage our government retirement programs more responsibly.  I don’t mean sending some back to individuals as private accounts, for that will be more symbolic than effective.  (We already need too much of the cash flow provided by current contributors to meet current retiree needs.)

 Instead, we should run the resources as retirement programs with diversified investments.  If we are worried about political influence under government management, and I am, then contract out the management, as most foundations now do. 

And realize that Greenspan really believes that “live long and prosper” means that you should live longer as a contributor and prosper more as a producer so that we can meet the retirement promises that currently are not attainable.


mbar.jpg (9380 bytes)