Baby boomers and retirement planning

¶ … retiring baby boomer generation on Gross Domestic Product (GDP), one of the most widely accepted measures of economic growth. Two major components of GDP, consumption and government spending, will be significantly impacted by future government policies regarding retirement benefits, most notably Social Security and Medicare. With both these components in mind, the paper recommends those policies that are most likely to maximize GDP.

The GDP-Related Challenges of Baby Boomers and Retirement

Changing demographics are straining Social Security resources. At the end of World War II, there were 44 workers paying Social Security taxes for every retiree collecting from the program (the first baby boomer collects Social Security, 2007). Now, the ratio is just three workers for every one reitiree and retirees will soon outnumber workers. According to the Council of Economic Advisors chartered with providing objective economic analysis and advice on the development and implementation domestic and international economic policies, Social Security will begin to incur annual operating losses in 2018, when its outlays first exceed its tax revenues (CEA memo on Social Security). To cover the shortfall and to "stay open," Social Security will use up its Trust Fund (or draw down its bank account) from 2018 to 2042. Beginning in 2042, the Social Security Trust Fund will be bankrupt because the resources available to the system (payroll taxes plus income taxes on Social Security benefits), will be insufficient to cover the liabilities of the system (benefits scheduled for retirees, people with disabilities, and other beneficiaries). If nothing is done to add to Social Security resources, benefit payments would have to be reduced by roughly 27%.

Like Social Security, Medicare resources will become strained as aging baby boomers grow in number. A study by the Centers for Medicare and Medicaid Services reveals that Medicare spending is expected to grow to $844 billion in 2017, up from $427 billion in 2007 (Zhang, 2008). The study also shows that there also will be a shift toward the private arm of Medicare, which tends to cost the government more. By 2017, 27.5% of eligible Medicare enrollees are expected to enroll in managed-care plans, compared with 16.4% in 2006.

Often overlooked in overall discussions of retirement benefits is that the aging population will also negatively impact another very important component of GDP, consumption, in the not too distant future. Personal consumption, at 70%, is the largest component of GDP (Facts on policy: Consumer Spending). The aging of the baby boom generation will affect the ability of many retailers to grow and prosper (Retailing 2015: New frontiers). The most rapidly growing age segment in the United States is the 55+ segment. By 2015, leading-edge baby boomers will be approaching age 70, a lifestage when spending on many goods and services such as softgoods and homegoods and consumables begins to decline. In fact, the only category expected to experience an increase in spending will be healthcare.

Possible Solutions

By 2030, if current trends continue Social Security will rise from four percent to six percent of the GDP, and Medicare will go from 3% to 11% (Cohan, 2007). Clearly, policy changes are in order. The Washington Post (Morin and Russakoff, 2005) offers a number of proposed solutions to the Social Security dilemma: charging Social Security taxes on income over $90,000 (currently exempt from taxation); reducing the rate of growth in benefits for wealthy retirees only; increasing the amount employers and workers pay in taxes to Social Security; raising the retirement age; and reducing the rate of growth in benefits for future retirees.

Of these proposals, the least attractive option is to increase the amount employers and workers pay in taxes to Social Security and reducing the rate of growth in benefits for future retirees. Given the declining ratio of workers to reitirees, the level of increases to fix the shortfall would be too burdensome and would negatively impact consumption of workers who aren't retired.

Reducing the rate of growth in benefits for future retirees could work if implemented in an appropriate manner. An outright reduction in benefits would be too punitive on retirees and would further dampen consumption. Instead, the reduction in benefits would need to be accompanied by a new model called consumerism where consumers have greater accountability for the costs of their healthcare decisions. but, dramatically improved transparency in quality and pricing would be necessary for this model to work. In this way, consumers could shop for healthcare services just as they already shop for other goods and services. This would help healthcare services be more subject to the market forces of supply and demand and would help to contain healthcare costs.

However, transparency and changes in consumer behavior in purchasing healthcare services would be gradual. For this reason, consumerism should represent one of several policy changes. Charging Social Security taxes on income over $90,000 and reducing the rate of growth in benefits for wealthy retirees are an economic necessity. The Social Security system was designed for social protection. Wealthy retirees do not need this safety net. Further, increased taxes and a reduction of benefits for the wealthy would not have a large negative impact on their consumption because they have ample discretionary income to maintain their consumption preferences.