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Retiring On The Backs of Young Workers

Generation Y just stepped into the work force, and we’re already thinking about retirement — not our own so much as that of the baby boomers. How can we support a growing multitude of retirees and ourselves at the same time?

Under the current Social Security system, it is not possible. To most members of my generation, the downfall of Social Security is inevitable. We pay taxes, never expecting to see a penny in our old age.

Today, 3.3 workers support each retiree, but by 2031, when all boomers have reached age 65, the dependency ratio will drop to 2.1. Social Security’s cash flow will turn negative in 2017, and the trust fund will be exhausted by 2041. This year, as the boomers begin to cash in, the cracks will widen. Without change, there will be no Social Security for Generation Y.

Any old-age social insurance scheme needs to account for the changes that development brings to the demographic landscape. But Social Security is still based on the United States of the 1930s and has failed to incorporate the advances of the last 70-plus years. Politicians’ solutions only treat the symptoms. They ignore the source of the coming crisis and the bane of the system, demographic change.

The United States is aging, a demographic shift that is more fundamental than a postwar increase in births. It is a byproduct of economic development. Over the last half-century, even as birth rates fell, medical breakthroughs, more accessible health care and better sanitation lengthened life expectancies. Today, there are 36.8 million Americans over age 65. By 2050, there will be 86.7 million, an increase of 147 percent. Meanwhile, the entire population is predicted to increase by only 49 percent.

That shift has the potential to decrease output. When retirement nudges the older generation out of the work force, production falls to the younger generations. Although the working-age population is forecast to grow over the next 40 years in the United States, that growth rate will be slower than in recent years, dropping from 1.2 percent annually to 0.8 percent. All else being equal, reductions in the labor force will cut output, which threatens to slow economic and gross domestic product growth, negatively impacting all segments of the population.

Retirement schemes give retirees access to a portion of the nation’s output, providing income to purchase goods the younger generation produces, which in turn supports the economy. As output decreases, however, there’s a smaller pie to divide and, inevitably, a struggle over how to slice it. Either the retirees win, leading to higher taxes for the workers, or the workers win, and the retirees’ benefits decrease.

To ensure the stability of retirement plans and the economies they rely on, we must maintain output. This requires more capital, higher productivity or a larger work force. Increasing the capital stock and workers’ productivity will require innovation, investment and, most important, time. Investment in capital and productivity is essential to long-term economic growth and deserves attention. But the coming crisis requires immediate action, and that means boosting the labor force.

The most efficient, albeit unpopular, method of adding workers is to raise the retirement age, thereby simultaneously increasing the labor force and decreasing the number of retirees. It eases the pressures of supporting retirees without overtaxing or overworking younger generations. Most important, it addresses changing demographics. But strong forces are opposing that adjustment. 

When the United States instituted its Social Security system, planners chose age 65 because actuarial studies showed it would be sustainable with modest payroll taxation when retirement began at 65. Since then, a sense of entitlement has formed around that retirement age. Boomers have paid into Social Security with the promise that at age 65 (67 for those born after 1960), they would be rewarded with monthly checks.

Retirement age, though, is a mechanism for creating a stable system, not a qualitative point at which retirement is earned. The instability of the current system demands an increase in the retirement age to reflect changes in life expectancy. Data published in 2004 by the Centers for Disease Control show that a person born in 1950 was expected to live 68.2 years, just 3.2 years beyond retirement. Between age 18 and retirement at 65, that person would be part of the work force for roughly 94 percent of his or her adult years. By contrast, the CDC data show that a person born in 2004 could expect to live 77.8 years, retiring at age 67 after working 49 years, or 82 percent of his or her adult years. If the 94 percent standard were applied to the worker born in 2004, the retirement age would have to be raised to 74.

Of course, today’s 65-year-old enjoys a life expectancy well beyond 68.2 years, just as a 65-year-old of 2069 will likely exceed 77.8 years. Life expectancies are a function of economic growth, and as the United States continues to progress, longevity will increase. In 2006, there were 79,681 American centenarians. By 2040, there will be an estimated 580,605 centenarians — who will have collected Social Security payments not for 3.2 years or for 10.8 years, but for 35 years. Clearly, a year in the work force not only buys more retirement than ever before, but also more than was ever anticipated or intended. 

Many mistakenly believe that Social Security is meant to provide for well-earned leisure after a lifetime of work. The intent, however, was to provide a basic level of income for those unable to work because of old age, and to keep the elderly out of poverty. Evaluated in that context, Social Security is missing its target.

The CDC’s National Health Interview Survey shows that “in the mid-1970s, 28 percent of men age 62 reported that their health status was fair or poor. By the mid-1990s the 28 percent standard was not reached until men were about 73.” If 50 is the new 30, could 73 be the new 65? A 2004 study by AARP found that 79 percent of boomers plan to work in some capacity during retirement. Those just beginning to receive Social Security benefits are unlikely to be unemployable because of their age or health. Kathleen Casey-Kirschling, the first boomer whose first check will arrive this month, would likely take offense if I called her elderly or said she was too old to do meaningful work.

To return to the original intentions of the Social Security system, we should raise the retirement age to a point at which workers can no longer earn incomes. Unfortunately for younger generations, the baby boomers form a large voting bloc that clings to its pending retirement. The boomers’ political power overwhelms that of my generation. Politicians’ financial patches will win the vote, and maybe the system will be solvent for a few more years. But unless Social Security accounts for the realities of the modern world, it will break, and my generation will be left to pick up the pieces.

If you enjoyed this article, be sure to check out Palisades Hudson’s book, Looking Ahead: Life, Family, Wealth and Business After 55, now available in paperback and as an e-book.

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