Serious Thoughts About Serious Reforms

Baby boomers are that demographic born between 1946 and 1964.  I happen to be a member of that cohort.  We are referred-to as 'boomers' because it was during this period there was a statistical increase in the number of births.  Our parents were busy making babies which resulted in a boom or bulge in the broader, general population.  When I was advising individuals on financial matters I would counsel them to to think of this as the pig moving through the python.  

Why is this on my mind?  First, I'm a retired guy with time on his hands so I think about this from time to time.  Second, there is a minority caucus in congress that would lead you to believe (loudly) that our annual deficit and accumulated debt can be made to be magically solved by reducing discretionary spending in the federal budget.

Nonsense.  The real problem that nobody, Republican or Democrat, wants to talk about is this.

As recently as last year federal spending for Social Security, Medicare, Medicaid, Obamacare and other healthcare programs accounted for 46 percent of all federal spending.  Very likely this year it will tip over the halfway point of 50 percent and be larger than spending for all other priorities.

About 10,000 boomers attain 65 years of age every day.  In 2029 the youngest of the baby boomers will turn 65.  Stated differently, all of us boomers will be age 65 and older.  This has multiple implications.

The growing ranks of retiring boomers is having a direct impact on the number of available workers in the U.S. workforce.  This turnover in the labor force has resulted in a shortage of workers in some occupations and locations; but it also creates opportunities. 

Social Security is primarily funded by payroll taxes assessed on wages.  The share of workers paying taxes has been falling relative to the share of beneficiaries creating an imbalance. This introduces an element of risk.  We all know about this and we should make a plan over the next generation to address it.  Without a plan the problem can escalate to a crisis.  Delaying to plan simply increases the risk and the scale of possible crisis.

Complicating this is only 55% of my boomer cohort has some retirement savings.  Of those who have saved, 42 percent have less than $100,000 set-aside.  Consequently, roughly half of retired boomers will have to rely on Social Security as their principle source of retirement income.  That is scary. 

Furthermore, we are living longer than ever before.  Each generation is exceeding the average life expectancy of the previous. 

When Franklin Roosevelt signed Social Security into law in 1935, the age to qualify for Old-Age, Survivors and Disability Insurance was 65.  In those days the number of poor people was greater and lacked health insurance.  When benefits were first paid in 1940, 46 percent of adult males did not survive to age 65.  For those who did, the average life expectancy was less than 13 years.  For women it was only slightly better.

For a 65 year-old couple nowadays there is a high probability that at least one of them will survive to 90 years of age or beyond.  And while life expectancy has risen the minimum qualifying age for receiving a reduced Social Security benefit has fallen to 62.  The result is a significant percentage of beneficiaries will collect benefits for a third of their adult lives.

Declining birth rates and the absence of a comprehensive immigration policy have contributed to a decline in the ratio of workers to beneficiaries from 5.1 in 1965 to 2.7 today.

Where do we go from here?   

Doing nothing simply increases the probability of a greater crisis.  Continued borrowing to protect the growth of Social Security and Medicare is unsustainable.  Budget voodoo suggesting that cuts solely to the ever-shrinking discretionary portion of the federal budget is equally unsustainable.  Shoring-up the system on the backs of today's working families is unfair.  Threatening another government shutdown is dangerous to our credit rating and fixes nothing.  None of the foregoing is serious.

The last time policymakers took a serious run at this was 1983 when Reagan signed into law major Social Security reforms as a consequence of an urgent benefits crisis.  In the intervening years those reforms have generally held-up.  Nonetheless, any number of demographic and economic factors have contributed to a projected exhaustion of the trust fund in 2033.  

Today we're not facing a funding crisis and reduction of benefits in three short months.  There is a big difference between a few months and a couple of decades.  Yet 1983 does have lessons for us.  One is the importance of a bipartisan deal like the one forged by Speaker Tip O'Neill and President Ronald Reagan along with support by both parties.

An additional lesson is the importance of phasing in change over a generation.  The 1983 reforms included accelerating scheduled payroll tax increases and raising the full retirement age; none of which impacted beneficiaries already on the rolls.  This afforded future beneficiaries decades to plan for retirement.  And the politics of gradual change is more easily accepted than abrupt change.   

What defines middle age and old age continues to change as most Americans are living longer and better than ever before so we must revisit our retirement expectations and the government and private programs that support them.  

We need to revisit the wage cap on contributions as a means to increase revenue.  I am smart enough to know that it is the wealthiest who live the longest and stand to benefit from smart reforms.  We can reduce spending by adjusting the earliest retirement age from 62 and full retirement from 67.  Remember:  The last increase was 40 years ago.  I am mindful that our population demographics are imperfect but far better than countries like China, Russia, Germany and France.  Yet unless we start cranking out more babies there is a very good case for embracing comprehensive immigration reform. The sixth paragraph (above) suggests opportunities.

We should be looking for saving money on those who don't need it and spending money on those who need it the most.  Medicare needs to be reformed for those who choose to work longer and those who might have to retire earlier as a consequence of a job that has exacted a physical toll.

Beneficiaries should be induced to delay retirement by means of crediting higher benefits later in life for increasingly delaying their retirement.

Add to this the hodgepodge of state by state perks granted to us seniors as a consequence of living to age 65.  On balance young families with similar incomes pay a higher tax burden than their parents who are better-off.

Now get off of my damn lawn!

Charts: Heritage Foundation