The best economic factor working in favor of many baby boomers now entering a reluctant middle age may turn out to be their parents' frugality. The older generation, children of the Depression, received little from their own parents except character and a determination not to be poor. They married early, worked at the same job for years, had children, saved, and are now retiring on what are known as "defined-benefit pensions," which usually enable the recipients to maintain a comfortable life.
In the contrary way of generational change, the boomers turned out differently. They took prosperity for granted and married relatively late, which meant that they saved little while young and will be old before their children's college bills are paid. They change jobs often, divorce with relative frequency (usually not a sound financial strategy), and lack a reliable pension program. Many are suddenly realizing that the most secure feature of their future may be the inheritance they will eventually get from their folks.
There has never before been a generation in which so many could count on cash inheritances, but such bequests are still not a common phenomenon. For those without a benefaction on the horizon, and for the half of all baby-boomer workers without a private pension program, old age could turn out to be grim indeed. Social security by itself, we know, is not going to handle their needs.
People love to blame the boomers for their plight. They were the grasshoppers, their parents the ants. But at least some of what they are facing is not their fault. It's hard to save when 8 percent of your salary goes to social security taxes--16 percent if you count your employer's contribution. That's a "retirement" tax eight times the rate that the boomers' parents paid. Moreover, the families that had children in the period of the baby boom enjoyed an income-tax break in the form of a personal exemption that was worth three and a half times in real money what the same exemption (now $2,000) is worth today.
Raising children in the 90s is more expensive for the boomers than it was for their parents in the postwar years. Housing and education prices are far greater now. We're supposed to be happy to learn that college costs are going up only 8 percent next year, rather than 20 percent as in recent years--but even at 8 percent, they're increasing at nearly double the inflation rate.
When you look at this background, and then look ahead, as Richard Jackson of the Hudson Institute, an Indianapolis-based public-policy research foundation, did in a couple of recent studies, you can't help worrying about retirement prospects for the baby boomers. As a group, they are not well prepared. In a recent speech to businessmen and community activists, Jackson quipped, "The good news is that we're going to live to 100. The bad news is that we are going to have to work until we're 95."
Society, as usual, will continue to reflect the strengths and weaknesses--and the political concerns--of the baby boomers. The aging of the population will affect everyone, and a large elderly population is going to be more or less permanent. Dr. Barbara Bryant, the director of the U.S. Census Bureau, points out that by 2020 the share of the population that is over 65 will have doubled. Moreover, the proportion of people over 85--"the years that put high demand on health- and personal-care needs"--will also have doubled. The result, as Bryant observes, is that "for every 100 persons of labor-force age, there will be 64 other persons to support, 29 of them senior citizens." (Most of the others will be children.) The dependency figures get worse after 2025.
But there won't be any noticeable trauma in the private- or public-pension systems for about two decades. Indeed, we now are entering what Jackson calls "America's Indian summer." For the next 20 years, the labor force will grow more experienced and, presumably, more productive. As boomers wake up to the need to save, the apparent savings shortfall will ease, which in turn will lower interest rates and encourage investments. But around 2010, "the positive impact of middle-aging on the economy could all be thrown into reverse," Jackson warns. Retiring boomers will start to take more out of pension systems than is going in. A larger nonworking population will lower productivity and threaten prosperity. Health-care costs, if they continue their present rise, will take a bigger bite out of the gross national product.
How bad will the squeeze on national resources be? Jackson has developed two scenarios. In one he poses a fairly rosy projection of national productivity increases that will provide an annual per-capita "dividend" for 2025 amounting to $19,450 more in income than what is available now ($26,350 in constant 1982 dollars). Generously assuming no expansion of general government-spending commitments in the coming 35 years, no increase in health-care costs, and no further entitlements for the elderly, more than half of the new GNP from now until 2035 will nonetheless have to be dedicated to the elderly if current standards of living are to be maintained. In other words, less than half of the money added to our economy in the coming three and a half decades will be available for all of society's other needs.
Grim as that "best" scenario might seem, Jackson's "worst" scenario seems more likely. If health-care costs and government spending continue to grow while economic growth remains slow, the per-capita increase in GNP will be only $11,300 and a full two-thirds of it will go to support the elderly.
Some believe, as one participant in Jackson's recent talk suggested, that the baby boomers in old age "will just throw another of their political temper tantrums" and vote themselves the lion's share of the nation's wealth. After all, surveys have shown that young people are typically sympathetic to the economic woes of the elderly and indifferent to the generational nature of their own. Perhaps it will remain so for decades to come, as young working parents continue to struggle under high taxation and half of America's children are raised in poverty.
But satisfying a special-interest group is actually easier when its numbers are relatively few. A numerous group's demands simply cannot be met. Accordingly, resistance to the elderly's demands may rise as their numbers do. Lobbying groups such as the American Association of Retired Persons have already begun to awaken to this possibly changing political reality.
What steps can be taken now, according to Jackson, to prevent an impoverished old age for the baby boom generation?
Consider carefully before adopting proposals to expand entitlement programs, especially those targeted without regard to income.
Phase in a rise in federal retirement ages. It is wonderful that people are living longer, but not so wonderful for the federal treasury.
Introduce means-testing in Medicare.
Allow social security recipients to receive benefits even if they decide to continue to work. Penalizing retirement-age people who want to work was never in an individual's interest, and in a labor-short market it has long ceased to be in society's interest.
Most important, pension programs need to be reviewed and probably reformed.
The proposal for pension reform is the crux of Jackson's research, and the most difficult element in it. The safe-and-steady route of defined-benefit pension programs (under which a retiree receives a fixed pension, regardless of the investment experience of the pension fund) made sense when businesses and government alike wanted to control the age of retirement--which usually meant keeping it at 62 or 65--and when workers wanted the security of a lifelong job and a livable retirement. Now baby boomers change jobs every few years, not only because they are restless and ambitious, but because the economy is changing in ways that make a flexible work force highly desirable. For society and for many individuals, the comfy old bed of defined-benefit pensions has turned out to be a procrustean one.
"Age alone," says Jackson, "is an increasingly imperfect proxy for disability, frailty, desire to work, or individual productivity. Life spans and health spans have lengthened, and employment continues to shift out of industries that place a premium on physical vigor. Yet both social security and traditional private defined-benefit pensions encourage retirement within a narrow band of years, after which work is heavily penalized."
In industries that only have defined-benefits programs, workers who do not work at the same company until retirement contribute, but they receive relatively little in return. Defined-benefit programs accrue slowly in the early years of work and steeply in the years before retirement. Often the small sums that employees with fewer than ten years take with them wind up as nothing more than a family budget injection to ease the cost of a job shift, and never make it into savings or retirement. By contrast, defined-contribution pensions, whose value depends on the market in which they are invested, can be taken from job to job, give better benefits earlier, and can result in higher returns than defined-benefit programs. But they can also result in lower returns for people who lack investment savvy.
This demographic Indian summer will be the time to give portable pensions in America some help, preferably through government incentives to save. Surely it would make long-term economic sense to remove most of the restrictions on IRA and Keogh savings plans so that ordinary Americans can save a larger share of their incomes and earn a tax deduction for doing so. Similar provisions in Japan have helped spur that country's high rate of savings.
What a national investment house calls the "miracle of compound interest" can still ignite the economic growth baby boomers need to retire on and give individuals the means to take advantage of it. But producing that miracle requires an appreciation for delayed gratification, hardly the baby boomer's strength. In collective middle age, perhaps there is still time to learn that virtuous trait and to translate it into collective political action.
Art accompanying story in printed newspaper (not available in this archive): illustration/Gregory Fateev.