“We’re confronted with a really extraordinary event,” said Alan Greenspan. “A very large chunk of our workforce–the baby boomers–will be moving from a state of contributing funds during their working years to being recipients of those funds in retirement. I don’t think we’re ready for this.”
Greenspan, the U.S. Federal Reserve chairman until last year and now president of Greenspan Associates, a Washington, D.C.-based consulting firm, prognosticated on the growing challenge of funding America’s ballooning federal entitlement programs and the choices facing U.S. policy makers and retirees as a keynote speaker at the Million Dollar Round Table’s Boomertirement Industry Summit held here last week.
With respect to Social Security, Greenspan said, the political establishment had foreseen the current cash crunch at least since 1983, when he was a member of the Social Security Commission. Policy makers recognized then that they had “more than a quarter of a century to solve” the problem, yet have made little headway since. He estimated the current shortfall in the Social Security Trust Fund at approximately 2 percentage points of taxable income, adding the gap is “a large number, but not insurmountable.”
Greenspan noted also that funding the retirement program is a more manageable challenge than that of Medicare, which he characterized as “many multiples more difficult” to address. That is, in part, because Social Security’s long-term funding requirements can be accurately projected. The entitlement program offers a defined benefit for a senior population whose size and average life expectancy are rising as expected.
“I suspect that if we had the political will to confront this issue, you could get together a group of technically competent people of both political persuasions and solve it in 20 minutes,” said Greenspan. “I say 20 minutes because the first 15 minutes would be devoted to be pleasantries.”
“[The solution] is no secret,” he added. “We know what the choices are. They’re limited and definable. The only thing missing is the political will to make these choices. But the longer we procrastinate, the longer a rational solution will be in coming.”
Options that politicians will have to consider, Greenspan said, include boosting the retirement age, increasing the Social Security payroll tax, reducing benefits and enacting legislation that encourages pre-retirees to extend their working years, even if in less than a full-time capacity. He noted, too, that many older boomers would like to rotate between periods of work and leisure, but that not enough employers have policies to accommodate them.
Closing Medicare’s much larger projected shortfall will be significantly more difficult, Greenspan said. The entitlement program faces financial pressure not only from the changing composition of the population but also from continually increasing demand for medical services. Also fueling demand are advances in medical technologies and the U.S.’s current system of subsidized third-party payments.
Greenspan said annual increases in worker productivity, which he pegged at 3%, will not be sufficient to keep Medicare and Medicaid, 2 of the federal government’s 3 largest entitlement programs, from garnering an ever larger share of the nation’s output. (Currently accounting for 4.5% of national gross domestic product, the 2 programs are expected to garner 12% by 2030, according to the Congressional Budget Office.)
Absent action by the federal government and the states, the burden of supporting rising medical costs will fall largely on healthcare recipients, Greenspan asserted.
“I foresee a dramatic rise in co-payments,” he said. “The funding of healthcare will depend increasingly on individuals’ own resources.
“I don’t see any alternative to consumers taking on greater responsibility for their financial well-being in retirement,” he added. “It’s no accident that the [financial planning] profession has grown as much as it has.”
The challenge of funding federal entitlement programs, while significant, is still greater in nations that are suffering from slow or negative population growth because of low birth rates, tight immigration controls or other factors, Greenspan said. He pointed, in particular, to Japan, Russia and Italy.
When questioned about the estate tax, Greenspan said advisors should not plan on it disappearing anytime soon. He also expressed optimism that advisors will enjoy greater opportunities to engage in charitable planning, in large measure because of the increasing concentration of incomes and assets worldwide; and the desire of affluent individuals to channel some of their wealth into charities.