What kind of financial security can you expect in the future? The answer to that question may depend on when you were born. The generation currently entering retirement will do much better as a group than the baby boom generation following it.
A major reason is demographics. The baby boom was preceded, and more importantly, succeeded by consecutive years of fewer births. Thirty-five percent more Americans were born during the baby boom than during the previous nineteen years. And 12 percent more were born than during the subsequent nineteen years. This nineteen-year blip in fertility has created more than just an oddity in social statistics. It has clouded the financial future of baby boomers. The elderly are supported, especially during the waning years of their old age, by members of the younger generation. The baby boom was immediately followed by a baby bust, or what many commentators have labeled a “birth dearth.” This disproportionate ratio between baby boomers and baby busters raises questions about the boom generation’s future and suggests it will face an impending crisis of financial security.
Concern arises from both economic and demographic realities. The harsh economic reality in the 1990s is the federal deficit which mushroomed during the 1980s. Aggravating this economic situation are also such issues as trade deficits, increased taxes, higher oil prices, and an inevitable downturn in the economy.
A survey released by the International Association of Financial Planning found that “the long term psyche of the American public is depressed,” with significant majorities fearing a resurgence of high inflation and worrying about the chances for a deep recession. But the more important issue is not economics but how demographics affect economics. The sheer size of the boom generation has had a negative impact on its members. Paul Hewitt of the Retirement Policy Institute put it this way:
The baby boom as a generation has been its own worst enemy. Whenever we wanted anything the price went up, and when we sold the price went down. So we got less for our labor and paid more for our houses. When we want to sell those houses the price will go down, and when we want medical care in old age, prices will go up.
Boomers in general, and leading-edge boomers in particular, find themselves part of what has become called “the triple-squeeze generation.” The more than 25 percent of Americans between the ages of 35 and 44 are finding their own retirement being squeezed out by the college costs of their children and the long-term health care costs of their aging parents. Sixty-six percent of baby boomers surveyed by the International Association of Financial Planning said “providing long-term care fora parent would affect their ability to save for their children’s education” and would no doubt also affect their ability to save for their own retirement.
Commentators have also referred to these people as the “sandwich generation” because they are sandwiched between an older generation dependent upon them for elder care and a younger generation dependent upon them for housing and education. Surely this is one generation that needs to take a hard look at its financial future. The economic and demographic realities may seem dismal, but they will be much worse if we fail to apply biblical principles to our finances. The key to financial security for most Americans has been the three-legged stool of savings, pensions, and Social Security. Unfortunately, economic termites threaten the strength of that stool.
The first leg on the retirement stool is savings. The boomers are justly concerned about the savings (or more to the point, the lack of savings) they have put away so far for their retirement. A survey of leading-edge boomers found that six out of ten expressed great concern about being able to meet all of their financial responsibilities, and 62 percent fear that they will outlive their retirement savings.
But they aren’t the only ones concerned. A survey by the American Academy of Actuaries echoed boomers’ fears. Seventy-two percent of pension-fund actuaries polled predict that half the baby boom won’t have the wherewithal to retire at age 65.
How much have baby boomers saved so far? Well, not very much if a recent survey is any indication. When a group of 35- to 49-year- olds were asked if they could come up with three thousand dollars in a few days without borrowing or using a credit card, 49 percent said they could and 49 percent said they couldn’t. Not surprisingly a smaller percentage (only 29 percent) of the 18- to 24-year-olds had the three thousand dollars.
The inability of so many boomers to come up with the sum of three thousand dollars illustrates two things. First, it shows how little (if anything) they have in savings or investments. Second, it demonstrates how much many of them are in debt. The first leg of the three-legged stool is in awful shape because, for many in the boom generation, savings are decreasing while debt is increasing. The reasons for boomer debt are fairly simple. First, the boomers had great expectations for themselves and were often willing to go deeply in debt in order to finance the lifestyle they had chosen for themselves. Second, they had the misfortune of entering the consumer world at the time when wages were stagnant and when most of the goods and services they craved were hit by inflation. This further fueled consumer borrowing, which became both a cause and a consequence of their downward mobility.
Between 1970 and 1983, the percentage of boomer families paying off consumer debt increased from two-thirds to three-fourths. Of families in debt in 1983, the average amount of debt was nearly five thousand dollars.
Families in debt usually are not saving. If they had any financial resources to save and invest, they would be wise to first retire their high interest consumer debt. In 1984, more than a third of all households headed by a person under thirty-five had no savings whatsoever on deposit with banks and other financial institutions, aside from non-interest-paying checking accounts.
The solution to this problem is simple: Get out of debt and put money into savings and retirement. Now while this may be easy to say, it is difficult for the current generation to do. Baby boomers’ expectations frequently exceed their income, and the changing economic and demographic realities place them in a precarious position. But if this generation wants to have a more secure financial future, it must take appropriate financial measures now.
In the past, there used to be an unwritten agreement between a company and an individual. If you faithfully worked for the company, the company would take care of you in your retirement. But this tacit agreement has broken down for two reasons.
First, many of these companies lack the financial resources to take care of the baby boom generation. Consolidation of some companies and the bankruptcies of many others put pensions in jeopardy. Other companies heavily invested in speculative schemes by thrifts and junk bonds, and their portfolios rest on shaky ground. In other cases, the current financial resources seem adequate but have yet to be tested when the millions of baby boomers begin to retire. Second, many baby boomers have not spent enough time with any one company to earn a significant pension. It was not uncommon for the parents of baby boomers to have worked for a single company for more than twenty years. Baby boomers, on the other hand, change jobs if not career paths with unprecedented frequency.
This apparent restlessness is born from both choice and necessity. Boomers are much less likely to stay in a job that does not enhance personal development and self-expression. Unlike their fathers, who would often remain with a company “for the sake of the family,” the boom generation is much more likely to move on.
Boomers also change jobs out of necessity. They find themselves competing with each other for fewer upper-management positions for a number of reasons. First, companies have thinned their management ranks. Most of this restructuring was done in the 1980s to make companies more efficient. The rest was a natural result of buyouts, takeovers, and consolidation leaving fewer structural layers in upper management and fewer jobs.
Second, boomers crowded into middle-management ranks at the same time restructuring was taking place. The leading-edge boomers in their prime career years are finding themselves on career plateaus and becoming dissatisfied. Many wonder if they will ever make it to the corner office or the executive suite.
Third, there was a boom of business school graduates. The first boomers who graduated with MBAs were often ridiculed by classmates in other academic disciplines. But this initial condemnation gave way to active pursuit, and the number of business graduates quickly proliferated. As supply has outstripped demand, this ambitious group with heightened expectations finds itself frustrated and constantly looking for a job change.
All of these factors have put this generation in a precarious position. By and large, they are not saving and have inadequate pensions to give them a secure financial future. So many are trusting that Social Security will be there for them when they retire. But will it?
The impending Social Security debacle is complex and the subject of whole books. But the basic issue can be illustrated by once again looking at the demographic impact of the boom generation.
When Social Security began in the mid 1930s, the ratio of workers to recipients was ten to one and life expectancy was two years below retirement age. The pay-as-you-go system could work with those kinds of numbers.
But two fundamental demographic changes threaten to send Social Security off a cliff. First is the “senior boom.” Advances in modern medicine have raised life expectancy by 28 years in just this century. Today the median age is already 32 and still climbing. Some demographers see the median age reaching as high as 50 years old. One has to wonder about the stability of Social Security in a country where half of the people qualify for membership in the American Association of Retired Persons.
The second demographic change is the ratio between the baby boom generation and the baby bust generation. The smaller generation following the boom generation will be called upon to support Social Security when boomers retire. The system will face incredible strains through the next few decades as the ratio of workers to Social Security beneficiaries continues to decline.
Both demographic changes are relevant. Americans are living longer, and ratios between generations are skewed. These two changes are certain to transform the current pay-as-you-go system into nothing more than an elaborate Ponzi scheme by the twenty-first century. The solutions to the Social Security crisis are few and all politically difficult to achieve. Either you have to change the supply of contributions or the demand of the recipients. Increasing the supply of contributors could be achieved by increasing the birth rate (unlikely, and probably too little too late) or allowing more immigration of workers who could contribute to Social Security. The only other way to increase the supply of contributions is to increase FICA payments. But there will have to be an upper limit on how much Americans can be taxed. If benefits stay at their current levels, workers in the year 2040 could find Social Security taking as much as 40 percent of their paychecks.
Decreasing demand would require trimming benefits. Current recipients benefit most from Social Security. A retiree on Social Security today recovers everything he paid into the system in about four years. On the other hand, few boomers will ever get the amount of money they paid into the system. Some politicians have suggested trimming benefits to current recipients. Others suggest applying a means test to wealthy recipients or those who receive other pension income. Neither proposal has much likelihood of passage.
More likely, Congress will be forced to trim future benefits. Congress has already increased the age of retirement and may induce workers to stay on the job until age 70. Another solution would be to provide the biggest tax breaks for workers to fund their own retirement through IRAs or Keoghs.
Obviously the solutions are not popular, but the alternative is a collapse of the Social Security system in the next decade. If something isn’t done, the demographic realities will destroy the system.
Although this generation grew up assuming retirement would be the norm, the changing social and economic conditions we have discussed may force a rethinking of that basic assumption. After all, the idea of retirement historically is of recent origin.
When Social Security was first adopted in 1935, life expectancy was below 63, a full two years under the retirement age. Retirement was for the privileged few who lived long enough to enjoy the meager financial benefits from the system.
Even as late as the 1950s, the contemporary image we have today of retirement communities and the elderly sightseeing in recreational vehicles did not exist. Retirement still did not exist as an institution. Nearly half the men over age 65 were still in the workforce.
Polls taken during the 1950s and early 1960s showed that most Americans desired to work for as long as they could and saw retirement merely for the disabled. Today, however, most Americans look forward to their retirement as a time to travel, pursue personal interests, and generally indulge themselves. Yet the demographic landscape suggests we might have to revise our current images of retirement.
As baby boomers slowly jog towards Golden Pond, they will likely be the largest generation of senior citizens in history, both in absolute size and in relative proportion to the younger generation. By the year 2000, the oldest boomers could be taking early retirement. The number of workers and dependents retired by 2025 could swell to as many as 58 million workers and dependents, more than double the current number of retirees.
These large numbers are certain to precipitate a “retirement crisis” for two reasons. First, people are living longer. We have raised the life expectancy by 28 years. During most of human history, only one in ten lived to the age of 65. Today eight out of every ten Americans zoom past their 65th birthday.
Second, the burden of providing retirement benefits will fall upon the younger, (and more to the point) smaller generation born after the baby boom. Never will so few be required to fund the retirement of so many. When Social Security was adopted in 1935, there were ten workers for every person over age 65. That ratio shrank to six to one in the 1970s.
Today there are about 3.4 working Americans to support each retiree. But by the time the last boomer hits retirement age in 2029, the ratio of workers to retirees will drop to less than two to one. Obviously, baby boomers face much greater uncertainty than their parents did when they entered into the years now seen as the time of retirement.
This next generation may even decide to reject the idea of retirement, choosing instead to enrich themselves with meaningful work all of their lives. Yet such an idyllic vision could quickly be crushed by the harsh reality of failing health. Working until you are 70 or beyond may not be physiologically possible for all people.
No wonder a chorus of Cassandras is predicting financial disaster in the next century. But significant changes can be made now to avert or at least lessen a potential crisis in the future. Wise investment according to biblical principles now is absolutely necessary to prepare for this uncertain future. The future really depends on what this generation does in the 1990s to get ready for the Retirement Century.
© 1993 Probe Ministries.