A Boomer budget bust?

• Article
• Comments ()
• Click-2-Listen
• Videos

By

With the 2006 elections now thankfully behind us, the new Democratic leadership in Congress needs to pay close attention to an issue bearing down on the body politic like a roaring freight train: the retirement of 79 million Baby Boomers.

The next election, in 2008, will be the first of 10 to take place against the backdrop of millions of Boomers rolling onto the old-age benefit rolls. Say what you will about global warming or Iraq, over the next generation no trend will more directly shape the substance of American politics than the looming self-impoverishment of legions of middle-aged, middle-class voters.

Social Security and Medicare are indelibly etched into the social contract. They provide an essential economic support at a time of life when many are too frail or weary to remain on the job. Yet they also mask the extent to which workers become poorer when they retire.

In 2002, for example, the typical elderly household received 42 percent of its income from Social Security and 23 percent from work. Among the truly retired, Social Security provided more than half of household income.

A recent study by economists Glenn Follette and Louise Sheiner of the Federal Reserve Board found that, in that same year, public health benefits (mostly Medicare) were equal to 29 percent of average elderly cash incomes and a whopping 153 percent of household incomes in the lowest quintile.

In 1935, Franklin Roosevelt's Committee on Economic Security estimated that one-third of Americans over age 65 were living in poverty. Today an even greater share would be destitute were it not for Social Security and Medicare.

To make matters worse, tomorrow's elderly are likely to be even needier than today's. Rising health costs and longer life spans are relentlessly pushing up the share of lifetime income that we spend in retirement. Yet savings rates have fallen to historic lows.

Fewer half of Americans aged 45-54 have individual retirement accounts or 401(k) savings plans. In 2002, the median balances in these two types of accounts were $13,000 and $20,000 respectively -- hardly enough to finance a retirement that will last an average 21 years. As recently as 2004, one-third of Baby Boomers had no financial assets.

This would be bad enough if the ratio of taxpayers to retirees remained at current levels.

But there will be no such luck. During 1990-2005, the elderly population grew more slowly than the working age population. Between 2005 and 2030, the number of retirees will grow 10 times faster than the labor force. These trends portend nothing less than an era of generational disinheritance. If we are to pay promised benefits to dependent Baby Boom elders -- and heaven help the government that denies them -- tax rates would need to soar to unprecedented heights and then be raised again and again, literally, for at least a generation. Of course possible tax-resistance may possibly lead to benefit cuts. But a likelier outcome is an explosion of public borrowing that burdens the future with exorbitant interest costs. Either way, America's tradition of rising expectations is in serious jeopardy.

Some Democrats might be inclined to view the coming tide of income redistribution with equanimity. After all, when the last Boomer retires, taxes on the affluent will have risen considerably. America's income distribution arguably will be more equal.

But life is never that simple. Of projected new spending on the aged, $3 in every $4 will be in the Medicare and Medicaid programs. While this spending is certain to crowd out other social priorities like education, it won't enable old folks to put more or better food on their tables. Most will pay the invoices of the world's best-compensated health professionals.

In the meantime -- before too many Boomers retire, thereby rendering themselves too needy to share in the adjustment costs -- we had better engage our children in a serious dialogue on the future of the generational contract.

It is fair to say most young people have no idea that, 25 years hence, their tax rates may need to be half again higher than ours; or that, on top of paying higher taxes and higher health insurance premiums, they will have to save more in order to shoulder a larger share of their own retirement costs; or that, even if they do so, the economic burdens on their own children may be higher still.

The average Boomer is just 51. There is still time to avert a train wreck, provided we get serious leadership for a change. By facing this historic challenge together, Democrats can confirm the wisdom of the electorate that gave them their congressional majorities, and the administration can prove the duck is not lame.

Richard Fairbanks, a counselor at the Center for Strategic and International Studies, and Paul S. Hewitt are respectively the Chairman and Executive Director of Americans for Generational Equity.