There is a Category 5 Baby Boomer Retirement financial hurricane on the horizon with barely Category 3 financial preparation on the part of individuals and the government to deal with this oncoming disaster.
And if you think New Orleans looked bad, just wait until the Baby Boom Generation starts aging into retirement, with hands outstretched, expecting to live on Social Security checks and government-financed long-term care in nursing homes.
Every single day, 8,000 Baby Boomers turn 60. Very few have saved anywhere near an adequate amount for retirement, much less the overwhelming costs of medical and custodial care in their old age. The federal government has made Social Security promises that total $10.4 trillion, according to the program trustees. Medicare dwarfs the Social Security system, with $61.6 trillion in promised benefits.
In fact, by 2040, 67 cents of every dollar the federal government collects will be needed to pay for current promises to boomer retirees. And that statistic doesn't include the $16 trillion estimated unfunded liability of the new Medicare Part D drug benefit for seniors. And if you think our children will accept increased taxes just as they're paying for their own children's college tuition, you're as deluded as those New Orleans residents who depended on the government to protect them.
What happens when the Baby Boomers begin selling their stocks and other assets to fund their retirement?
Wharton School professor Jeremy J. Siegel concludes that boomers, and retirees across the industrialized world, are in for a rough ride over the next half-century unlike anything other generations have encountered over the past 200 years. The value of their accumulated assets---not just their stocks but also their bonds, their homes and even the government bonds that back up their Social Security and Medicare---could plunge by up to 50% over the boomer generation's remaining life span. Why? Not enough buyers among smaller succeeding generations. "That's the horrible scenario, not where we are now but where we could be if we don't let foreigners buy our assets," says Siegel.
For this solution to work, foreigners, as individuals and as companies, might have to buy a majority of Western countries' entire corporate sectors, Siegel says. Let retiring boomers in the U.S., Europe, and Japan sell their assets to the Chinese and Indians, whose younger populations and soaring economies will make them net buyers for decades.
If boomers don't sell to foreigners, their living standards will fall, he says. Alternatively, the U.S. could raise taxes on workers: Boomers would have to tax their children more to pay for Social Security and Medicare. Or boomers could work a log longer. Retirement might be delayed a decade or so, to past 70, instead of today's average of 60.
Sources: Chicago Sun-Times, May 29, 2006 and BusinessWeek, June 5, 2006