PrintMay 21, 2011
Boomer Barons?
A major policy debate is underway involving the burden that baby boomer retirement places on the U.S. economy. Increasingly, this discussion is suggesting that the claims of boomers on Social Security, Medicare, and Medicaid represent an unsustainable entitlement. The solution, according to Obama's deficit reduction committee and others, is to reduce those benefits by raising the retirement age, means testing benefits, and increasing costs and co-payments for beneficiaries.
This conclusion is based on the calculation that boomers are set to withdraw more from Social Security and Medicare than they paid in. This, on the surface, is true. The average boomer couple will have paid in $450,000 by the time they retire; it is estimated that they will eventually withdraw nearly $1,000,000 in return. That sounds like a pretty good deal, but it is not.
If those mandatory lifetime contributions of $450,000 had been retained and invested in a conservative balanced fund yielding 8%, recipients would have accrued $10,552,500. Had the fund earned 10% annually, the retiree would have accrued $26,325,000. These returns sound too good to be true, but they are not unrealistic. During the 50-year period from 1950 to 2000, the S&P 500 Index earned 13.3 percent. Despite the abnormally weak market of the past decade, during which the index averaged 2.82%, its long-term performance before trading costs and expenses would have turned a 1950 investment of $10,000 into nearly $7,000,000, had the funds been invested tax-deferred. Not a bad retirement.
How well has the Social Security Administration done by comparison? The calculation depends on the age at which contributions were made and at which benefits are claimed, but assuming a return of $1,000,000 on $450,000, the 50-year inflation-adjusted return has been approximately 0% (a nominal return of 3%). Remarkably, over a longer period of 83 years from 1928 to 2010, the real return on U.S. Treasury bills was 3.75%. The real return on the U.S. equity market was just under 10%. Thus, it seems that the Social Security Administration has discovered a way to earn a return on investment that is well below that of any major asset class.
These conclusions match those of a 1998 Heritage Foundation study which predicted future returns of between 1.23% and negative for various groups of Social Security contributors. According to their predictions, a 30-year-old couple with modest earnings could expect to contribute $320,000 over their lifetimes. That contribution would earn a return of $450,000 in benefits. (Other income groups would see a negative return.) Had the same couple contributed an equal amount to a balanced stock/equity fund, they might have earned an inflation-adjusted return of $975,000 by the time they entered retirement. A much greater return, however, would have been earned had the couple begun contributions at an earlier age and had the bulk of the funds continued to earn 8% during their several decades of retirement, as one would expect they might in a privatized account.
With the Social Security Trust Fund's real return ranging between negative and 1.23%, baby boomers can hardly be described as retirement barons. But the President Obama's deficit reduction commission headed by Erskine Bowles and Alan Simpson claims that even this measly return is too great. Among other things, the commission recommends that retirement benefits be means tested and that the retirement age be increased. Others including Robert J. Samuelson have been urged that boomers accept less and that "the rich" (presumably, those earning more than $200,000 today, which unless indexed will equal $110,000 in 20 years, when the last of the boomers retire) should receive substantially less. The way to balance the budget, in other words, is to force generations of Americans to contribute to retirement schemes that earn less than nothing.
Never mind. We are told that the burden on younger generations is intolerable. There is just not enough money out there to honor that nominal return of 3% on boomer contributions. That argument is hardly convincing, given the amount of money that Washington manages to squander on wasteful and corrupt programs. But even if it were true, one has to ask, What happened to the earnings that ought to have accrued to the Social Security Trust Fund? Was there no one in Washington who understood that a real, after-inflation return of 0% was unacceptable? Even an investment in long-term government bonds over the past 50 years would have earned an annualized nominal return of 7%.
Are the baby boomers really baby barons, unfairly burdening future generations? The fact is that they are not. Both the boomers and those who are expected to fund boomer retirement with their own ever-larger contributions to Social Security are the victims of government malfeasance. Had government acted in a responsible manner (instead of drawing on boomer retirement contributions for interest-free loans to the general fund), boomer retirement would be a lot more secure.
George W. Bush, it should be recalled, offered a plan of partial privatization back in 2005 that would have gone a long way toward funding future obligations. That plan was ripped by Democrats and by the liberal media, and Bush was forced to withdraw it. A similar plan of partial privatization has been proposed by Rep. Paul Ryan. It too has been withdrawn after coming under unfair attack.
It seems that the left is willing to sacrifice the future of both boomers and of younger generations just to score political points. They would rather perpetuate the status quo than reach an accord that shifts retirement savings into the private sector where those savings would no longer be available for spending unrelated to Social Security. The only "solution" they can suggest is a further reduction in benefits and a major increase in taxes. That is a pathetic response to a mounting crisis for both boomers and subsequent retirees, neither of whom should continue to be shortchanged by Washington.
Jeffrey Folks is the author of many books and articles on American culture.
