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Retirement Planning > Retirement Investing

Boom and gloom in retirement politics

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Economists tend to come up with sophisticated theories explaining broad economic trends, but a simple—and often more obvious—explanation is sometimes found in demographics. The experiences that shape a generation have a crucial impact on the kind of economic system that generation will build when it comes to maturity. In particular, demographic shifts underway in American society will largely inform the fortunes of baby boomers, now massively entering their retirement.

The early post-World War II decades were dominated by what is often called “the greatest generation.” That generation bore the imprint of the Depression, in which it grew up, and of the bloodiest war in history, in which it fought. At V-J Day in August 1945, the United States had 12 million men and women in uniform—almost 9 percent of the population at the time and an absolute majority of young men in their late teens and early twenties. Many other men and women worked at armament factories and assisted in the war effort. equalityEquality of Sacrifice

The greatest generation witnessed the power of the federal government as it mobilized the country’s resources. But, far from being scared of the Leviathan, they saw the democratic American government as an undeniable force for good.

World War II was a period when all Americans pulled together, when kids from rich and politically influential families, like the Kennedys and the Bushes, fought side by side with farmhands from Oklahoma and children of immigrants from northern industrial cities. That sense of equality of all Americans translated right after the war into the opening of educational opportunities in the previously class-biased university system to the bright kids from all social classes and, later, into the extension of civil rights to African-Americans, all of this spearheaded and funded by Washington.

Whether or not it was because of the greatest generation’s memories of the 1929 Wall Street crash and the Depression, it should be kept in mind that during that generation’s working years the national debt, which stood at 120 percent of GDP at the end of the war, declined to around one-third of GDP by 1980.

The G.I. generation is now mostly gone, with just 5 million of them remaining. The baby boom generation that followed benefited from the socioeconomic system their parents had created. It was a generation that grew up in prosperous households in which parents held steady, well-paid jobs with fringe benefits. It was the best educated and the most dominant in demographic terms in American history. When baby boomers came of age, the generation born between 1945 and 1964 made up over one-third of the population.

Their impact was seen quickly. Conventional wisdom suggests that they were mainly left-wing rebels in their youth in the 1960s and 1970s, but turned increasingly conservative after 1980. Indeed, there was a shift to lower taxes and deregulation, which allowed the economy to grow rapidly. But it was a strange kind of conservatism, if we take a look at the results—at least very unlike the conservatism of their presumably more liberal parents. While the tax burden remained the same, averaging around 17 percent of GDP since the end of World War II, national debt increased dramatically with baby boom maturity since 1980, and has now surpassed 100 percent of GDP in gross terms.

low savingsLow Savings

Moreover, monetary policy of the past 25 years allowed the government to finance its debt at a progressively lower cost. Plentiful liquidity and extremely low interest rates also boosted domestic consumption and made the extraordinary technological revolution possible. Baby boomers, with their top-notch education, spearheaded this revolution and benefited from the financial rewards it entailed. But low interest rates also stimulated current consumption and discouraged domestic saving. Baby boomers’ overall retirement savings are low. They are likely to be the first generation since Social Security was established in 1935 to have a much poorer retirement than their parents.

The average 401(k) account in households headed by baby boomers is around $147,000, according to Fidelity. We are still looking at no more than $7,000 annually if retirees take out the conventional 4 percent annuity.

One benefit of the system built by the World War II generation is an excellent and generally accessible health care system. Even though until the passage of Obamacare the number of uninsured Americans had been rising, baby boomers were generally able to retain access to doctors. They are, therefore, the healthiest generation of Americans, with the highest life expectancy on record. The technology revolution has spurred medical advances, as well. The good news is that baby boomers will have a longer, more active retirement. The bad news is that a very large number of them will outlive their savings.

Baby boomers will likely have to rely on the largess of government—on Social Security that is, for the most part, a pay-as-you-go system. At one time, there were fears that there will be too few workers to support the huge army of 75 million boomers. Such fears are being allayed as boomers’ numbers decline; their share of the population is now one-quarter and getting lower every year. immigrationImmigrant Impact

While the U.S. birth rate has held steady, the baby bust generation that followed the boomers after 1964 has been beefed up by a new demographic factor, namely immigration. The foreign-born population of the U.S. bottomed in 1970 and has been on the increase ever since. It has gone from 9.6 million to over 40 million currently, accounting for nearly 30 percent of the total increase in population over this time period.

Immigrants now make up 13 percent of Americans. They have beefed up the bust generation, so the decade after 1964 no longer stands out on demographers’ charts.

But the impact of immigration is far greater than the numbers of foreign-born Americans suggest. Immigrants tend to have more kids, keeping U.S. birthrates higher than in most other industrial nations. Immigration has changed the picture of American demographics drastically. Hispanics, who in the mid-1950s accounted for 2 percent of the U.S. population, are now at 17 percent. Their numbers increased by over 50 million. Moreover, at public schools Hispanic children are already at nearly 35 percent and are headed to 40 percent by 2022, says the Department of Education.

Moreover, immigration also includes growing numbers of new arrivals from China, the Indian subcontinent and other parts of Asia, as well as from Africa. The proportion of children of Asian immigrants at universities and graduate and professional schools is rising steadily. They are certain to be an important part of America’s future political and business elites.

Up till now, baby boomers have had a very easy time getting the government to do their bidding. They had the numbers to vote in politicians who protected their interests. As recently as in 2004, in the midst of debates about fiscal austerity, Congress passed the Medicare Part D legislation, which a Republican president signed even though it is adding hundreds of billions to the national debt. baby boomer declineThe end of boomer dominance?

This dominance by boomers may be at an end. Their political heft is no longer what it used to be, given the inflow of immigrants and their kids. Moreover, there is a significant racial divide between the boomers, who are overwhelmingly white with only a smattering of African-Americans, and the largely non-white rest of the nation.

There are the acrimonious, prolonged battles over immigration reform, which generate nothing but resentment in the Hispanic community and will be a formative experience for the new generation of Americans. And then there are the Asian immigrants in whose cultures government-provided pensions are a rarity; in Asia, people use their own savings to live out their final years or rely on their families.

In short, the generations of Americans who come after baby boomers will likely have the numbers and the incomes to support long-living boomers on Social Security, but it is a major question how much collectively they will be willing to do so.


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