Economics of retiring baby boomers

Factual Questions
1

Hopefully this has a factual answer, if not, to great debates!

Estimates show that as many as 10,000 baby boomers turn 62 per day. This will eventually cause an economic catastrophe for the SSA and Medicare (Medicaid?)

Have these doomsayers taken into account the savings of the boomers? I know it’s not true for every one, but many of these people retiring have IRAs, 401k, 403b, CDs, and money under a mattress.

If each of these 10,000 people spend down their savings at $1,000 per month, that is $10,000,000 per month going into the economy in the form of purchasing food and goods.

My main question is, will retiring boomers cause a meltdown of the SSA?

2

I can only speak for one boomer, maybe two (Mrs. Gap included). Our “retiremtent” as such was houses we owned. The economic crash wiped them out so we don’t anticipate retiring in the usual sense. We will be able to slow down, work part time and collect SS but we actually don’t feel bad about it. I’ve seen too many people, men especially, retire and not live very long post retirement. Honestly, putting the notion of retirement in the traditional sense aside has reinvigorated us. Makes us feel less “old” in a way. Besides, retirement is a relatively new notion and may not be as easy for people as we would wish it to be. Humans are made to work and I think it keeps us vital. If one has interests and acivities outside of their vocation that seems to be enough to satisfy the need to stay active and those folks seem to fare better.
As to our contribution to the economy (and the OP), we will be spending a little and taking a little from SS, so for us, it’s probably a wash.

mind the gap

3

The problem is that in most places around the world, pensions and programs like medicare are funded from that year’s tax income. So when the number of people that get a pension increases relative to the number of people who work and pay taxes, which happens as the baby boomers age out of the working population, because the generations that follow them aren’t as populous, that blows a hole in the funding for all of this.

The government will have to increase taxes to pay for this, which will lead to wage increases for those still working and thus inflation, so the assets and income of the retired baby boomers will inflate away to some degree. Also, at some point the baby boomers start dying and/or moving out of their big houses, which will impact the housing market.

Governments should increase inheritance tax rates, which could end up bringing in a good amount of extra revenue.

4

As Perry Mason would say, “Objection! Assumes facts not in evidence.”

In actuality, a lot of people have saved little or nothing for retirement.

http://www.businessweek.com/articles/2014-01-02/baby-boomers-poorer-in-old-age-than-their-parents

5

I do not know if retiring baby boomers will cause a “meltdown” of the SSA but they will have consequences for Federal Government finances and the political landscape; consequences which will be far reaching if not revolutionary. Taxes and deficits will need to be increased just to pay for ever increasing non discretionary expenditures. Spending on infrastructure, education etc will gradually become squeezed. Politicians will find it increasingly difficult to fund their pet political projects, or steer funding towards their traditional “base” of supporters.

6

The Social Security Trust fund currently runs a slight surplus, and will do so through 2021. If nothing changes the ongoing deficit will deplete the surplus by 2033, according to the Social Security trustees.

What will happen then? Darn good question. I think a lot of the Social Security problems are because while they were running a surplus it was an easy place to get money from, and get money they did. It was designed as a retirement program in 1935, in 1939 benefits for surviving spouses and orphans was added. In 1956 they added disability benefits. Medicare showed up in 1965.

All good programs, but not the original intent, and not properly funded, they (the people passing the laws) looked down the road, saw that the depletion of the surplus would happen after they were gone, and went ahead.

Looks like quite a quandary. I’m sure you’ll hear about means tests before social security benefits are paid, removal of the current cap on earnings that mean that after $108,000 or so wages aren’t subject to social security tax, maybe a way to put social security taxes on unearned income, dividends, interest, hedge fund income and such.

What’s the right move? Beats me, I’m in the same boat as the guys who passed them laws. By 2033 I’ll be looking at the inside of a coffin, you guys are in a world of shit though.

7

The Social Security Trust fund is Treasury bonds. So the only difference is whether we’ll be raising taxes to pay for Social Security or we’ll be raising taxes to pay off the Treasury bonds that we’ll then use to pay for Social Security.

8

I don’t know why that is always shocking to me, as I’m well aware of the crushing debt that people carry without any consideration that at some point the piper has to be paid. I used to be somewhat envious of those driving really nice cars, and who had all the nice toys in the garage, until I realized that most of them were maxed out on their credit lines and would still be paying for those things long after they were in the landfill.

9

My wife and I have become very concerned about this in the past few years. What started out as recreational schadenfreude-ing has turned into a growing sense of horror. It’s becoming obvious that we, the frugal and disciplined, are actually the exception rather than the rule. And we worry that these profligate wastrels could end up pulling us down with them due to their sheer number.

I’ve lost count of formerly wealthy acquaintances who were actually just kiting debt to preserve the “show”. In fact, another one “bit the dust” last month, losing everything (including the house) and retreating to the safety of generous relatives’ basements. My first reaction was maybe they could’ve skipped the new Lexus SUV last year, but what do I know. :rolleyes: We’re slowly discovering that all the wealth we thought we’ve been seeing is false. The relative with the Beemer and the Rolex isn’t a show of prosperity, it’s heavily indebted narcissism. We’re actually trying to preserve the illusion of a full house (with a kid in every bedroom) during certain Christmas visits, lest the ne’er-do-wells starting getting ideas about our empty nest for long term couch surfing.

We’ve spent the last 35 years carefully saving and investing, with the idea of a lengthy and fun retirement and we thought everyone else was doing the same. We’ve wondered for years how they afforded the new houses, European vacations, and hi dollar rolling stock, and it’s becoming obvious. Just for grins, we rummaged thru bankrate and statistic-brain and discovered the following astounding statistic. We have set aside roughly enough for 20 years of frugal retirement. We make about 3 and a half times the median household income. And we have 43 times the median retirement savings. The difference in these two multipliers isn’t us being obsessive, it’s a stark indication of how irresponsible our cohorts are. Not only will the spendthrifts be demanding more and more of the fruits of our discipline and responsible lifestyle (via taxes), they may well doom the economy for our children for some time to come.

If the millennials start rounding up us boomers and putting us in camps, I’ll understand why.

Sigh…

10

Probably not a full meltdown, but it will have a severe effect on the economy. On one hand, the government can lower Social Security payments in some way: lower payouts directly, tweak the various formulas used in their calculation, raise the retirement age, etc. On the other hand, the government can bring in more money for the funds: raise the Social Security tax, remove or raise the income cap beyond which the tax is applied, etc. I don’t see the former as viable, given the intransigence of the elderly and their power as a voting bloc. Removing the cap also seems untenable, as it would effectively add a new 12.4% tax (including employers’ contributions) for people earning well above the ceiling; that doesn’t have a chance of passing Congress for the foreseeable future. Thus we’re left with raising the retirement age or increasing the social security tax (but keeping the cap more or less in place). Both of those have the effect of shortchanging younger, more productive workers to pay for people who didn’t save for retirement and harms those workers’ retirement plans, but that’s probably what’s going to happen.

Actually, there is another possibility: Just inflate our way of the problem. That’s terrible for both active workers and retirees, but it’s the path of least resistance, and so it’s what I see as happening.

You all really did screw us over, I’m afraid. (Not you personally, obviously.) Not to hijack the discussion, but I see the Social Security discussion as similar to health care reform: Nothing can be done about it because your generation already has yours and won’t allow any changes to the system, even if that means wrecking the economy in order to pay for it. (That is a generalization, of course, and shouldn’t be taken overly seriously.)

11

Addressing just this portion of your question, which is a sidebar, I guess:

It’s good that retirees pump money into an economy, yes.

However, there’s also a downside. As baby boomers retire, the workforce shrinks. The number we keep hearing about with SSA is that there will only be 2/3 of the present workforce by (2030?).

So there are more dollars being pumped into the economy, but the number of goods and services will not grow commensurately. More dollars chasing fewer goods = lots of inflation.

On the other hand, it’s great for employment numbers. And the smaller workforce will be producing as much as it possibly can.

12

I see that the cap has increased most years. I didn’t see if that was due to a formula or if some decision has to be made each year. I wonder if the calculations saying the pot will run short in 2033 account for these increases.

13

Think thats bad, check out this article on all the seniors who die with debt.LINK

This includes credit card debt, student loan debt, back taxes, loan debt, etc…

So dont think you will be having that inheritance coming.

14

Yeah, well consider the laws of SS. I have been informed that my ex-, who never remarried, and to whom I was married 13 yrs. will collect, in addition to his own, an amount equaling 1/2 my benefit. And thus so for ever person ever married at least 10 yrs. and never remarried. The guy in the next office-he was married for 25 years, he and wife had an argument, got divorced, now, some years later, they live together and BOTH collect that extra money. It does not decrease the other’s SS, it’s extra. My sister, living with a guy for 15 years now, will be going after her ex- husband’s SS, so she can get the bump. So I don’t think we’re totally responsible for any melt down, but rather antiquated laws from the times when women could be left w/o a breadwinner in their “golden” years. This drives me crazy.

15

I don’t think you’re considering the fact that making 3.5 times the median household income may well give you 100 times the median household savings income. Wouldn’t you expect someone with twice the median income to be able to save much more than twice the amount of money as someone at the median? If it takes every cent you earn minus a dollar just to stay alive your savings may be a dollar a year. Double your salary, you’ll be able to save much more than two dollars. 3.5 and 43 seem like reasonable multipliers for income and savings to me.

16

Consider the macro-economics of the retirement economy. You smart savers each have hundreds of thousands in savings, split among mutual fund stocks and bonds. (typical hands-off savings plan). People en mass start drawing those down. the capital market shrinks - companies become desperate to borrow money (assuming a healthy economy :smiley: ) So money available for borrowing shrinks, interest rates go up, probably also a road to inflation. Meanwhile, people are trying to (or their fund managers are trying to) unload stocks with fewer buyers, since it’s a glut on the market. Stock prices go down, dragging down boomers’ perceived remaining savings value.

Moral of the story, when you financial advisor says get out of stocks and into bonds (lower risk) as you get closer to retirement, they are probably correct. Of course, this won’t be a tidal wave (we hope). It will be a long-term drag on the market rather than a sudden lump. (I’m thinking, much like the Japanese economy today)

But yes, taxes will have to go up to cover those who are living on dog-food in rooming houses. I also expect to see clawbacks - if you have any other money, the government won’t give you any.

Before we go all schaedenfreude on the old poor, remember that today’s economy is destroying people’s savings and their ability to generate more. I don’t understand the issue with splitting social security, unless someone was married to a person who was exempt from social security (which I understand is an issue in the USA). It doesn’t take a new Lexus every 3 years to go broke. All you have to do is get laid off. Then even normal payments will do you in.

Probably another issue is math illiteracy - nowhere are people actually taught budgeting and basic money math; so if your parents didn’t do it, if you don’t have the initiative to learn on your own - you will never figure out the need to save before it’s too late. Ask the average person, who probably has zero savings, what social security pays. I bet they don’t know. Few people budget wisely, and fewer understand how tight their money can get with one extra payment. The number of people who get deep into debt because the credit cards are there is amazing. THIS IS WHY CORPORATIONS USED TO HAVE REAL PENSION PLANS. People couldn’t plan, but if they gave their life to one employer, that company provided for them in old age.

The house is another interesting issue. The typical family nowadays is large if it has two children. A smaller, cheaper house with two bedrooms, maybe three, will be more valuable in the future - people won’t need the space. Those McMansions will be harder to unload. The perceived value of some houses may never approach what they went for earlier.

Then consider peak oil - it may be a debatable concept, but in the future when the current fracking boom wears off and that oil too is close to used up, oil will cost a lot more, so auto travel will cost a lot more. Houses far off in the suburbs will be less valuable than houses close to downtown (in the gentrified areas, of course). I expect an inversion - the rich will live downtown or close to commuter rail lines, in smaller houses. The poor will live miles out of town, in huge dilapidated old houses they can barely affor to heat (or cool) and spend hours on the bus to get to work.

17

I don’t think there’s going to be a “meltdown”.

There are lots of ways to fix the problem. It’s just a matter of choosing.

We could raise the retirement age, altering the ratio of workers paying in vs. retirees drawing out. We could adjust the formula so rich people get lower benefits instead of higher ones. We could prorate payments each year based on how much was collected the previous year, so the system can’t run a deficit. We could raise the limit on how much of your income is subject to SS tax. We could start collecting SS tax on capital gains.

The idea that we’d let the economy “meltdown” rather than choose one of those many plausible solutions would be crazy. I think the voters will have more sense than that.

18

While the percentage of Boomers who have saved adequately for retirement is small, the total amount they have saved is remarkable. This has distorted the markets. There is far more investment money available than there are reasonable investments. (Remember this the next time someone suggests encouraging investment.)

Hence we have gone thru several bubble-busting cycles in recent years. The first real estate bubble, the tech bubble, the 2nd real estate bubble. Wall Street hypes something as big growth, people rush to invest, it grows and grows and pops.

The financially well-off Boomers could spend their savings in their retirement years. This would help the economy tremendously. We have a consumer oriented economy. The more people spend, the better. (Which is why the health of the low and middle class is so important. They’re the ones who spend the highest share of their wealth.)

But they don’t have to.

E.g., Mrs. FtG and I have built up a good sized nest egg. After being retired a bit and figuring out our expenses and “income”, I came to a realization: We would have to significantly increase our spending just to make a dent in the increase of our savings. Never mind eating into the principle.

In short: The kids are going to inherit a good chunk of money and who knows when they’ll spend it.

This could easily be the case with a lot of Boomers who have savings. Spend only a small part of it and pass on the rest.

Not at all good for the economy. It perpetuates the over-saturation of investment money.

The huge problem with SS has been discussed in other threads, but keep in mind that’s nothing compared to the rapidly increasing costs of Medicare. That is the issue that’s going to cause the biggest government crisis. Telling Granny that the government can’t pay for her quadruple bypass won’t play well.

19

I think boomers need to redefine what retirement means. When my parents retired they went on cruises and bought a new house. They planned on leaving nothing to their kids, and I’m was okay with that, but they actually ramped up their spending after my dad retired.

My dad is now 88 and never figured he would live this long, so he is now running out of money, but he knows that my brother and I will fund him for as long as he lives. No more cruises and he rents instead of owns, but he lives comfortably on the savings that he has left. He will run out of money in 2-3 years.

I remember hearing about the social security ‘problem’ back in high school and I have been seriously saving for retirement since I was about 30. I own real estate and have a million dollars invested in stocks and bonds. Besides working full time I also own a small business that generates $30K a year.

I assumed that there would be no social security by the time I retired, or that it would be significantly scaled back. I should be able to live comfortably on my own money regardless of what happens, assuming the market doesn’t crash and the dollar become worthless.

I realize that most boomers haven’t been able to do what I have done. Any social security payments I end up getting will be gravy, and I may end up just donating that money to charity.

20

Canada has done the opposite - after some soul-searching in the 90’s, they have upped the contributions - where CPP (Canada Pension Plan, like SS) for the max pension used to be about $900 a year, now it’s over $2000. UIC had incredibly generous payouts - 16 weeks employment, a year of 66% unemployment insurance, even if you quit - now you get nothing if you quit. The days of the “UIC Ski Team” on the hills of Lake Louise in the 1970’s are long gone. The premiums are down from $1800 to $800. Supposedly the CPP is going to be solvent for several decades.

I wouldn’t agree the boomers who have saved have saved too much. Rather, the general investing population - not just the boomers, but the 1% and the assorted investment bankers, pension funds, and other savings mechanisms - all are searching desperately for a way to beat the pathetically low market interest rates, which in itself is an indicator of too much money chasing too few opportunities. (and frantic government attempts to kickstart a chronically moribund enconomy) As a result over the last decades we get junk bonds from Wall Street buyout and merger frenzies, Bernie Madoff, internet bubble, and - not real estate but mortgage bundling bubble. The herd rushes in to dump their money into anything that offers more than the nominal 1% interest, willfully blind to the risks.

As for inheritances - my grandfather died at 70 of a heart attack; my father is over 90, my uncles late 80’s. My stepmother is 97, can’t remember a thing but healthy as a horse. My mother made it to 84 with severe medical problems (arthritis, blood pressure and Parkinson’s). These are not even boomers, these are people born around 1920. If this is how boomers are going to survive, then any heir will be in their 60’s or 70’s by the time the parents shuffle off the mortal coil. My parents are running up their HELOC, and it’s a toss-up whether they or the bank will win the race. Alzheimer’s is another serious problem - full time lockup care of confused patients is going to be expensive. (My step-mother is costing $7,000 a month, which is why the HELOC will likely be gone first.)

Waiting until you’re into retirement to see if you get anything from your parents is not a good retirement finance strategy for anyone. After a few years of serious care and almost every boomer can expect their resources to be exhausted. I expect the government will appropriate any assets of people who are in care homes paid for by the government. Watch for the rules to get nastier, nullifying trusts or gifts going further back, and eventually taking all assets, even when there is more money than needed.