Boom and gloom in retirement politics

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. Equality 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 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.