Government inaction

By Deanne Gage | April 25, 2007 | Last updated on April 25, 2007
3 min read

Advisors’ warnings about the baby boomer retirement crisis may be falling on deaf ears — but not for much longer. Only after a slew of boomers start to retire in the next few years will governments recognize the effect on publicly funded services and productivity, says Alan Greenspan, the former chairman of the Federal Reserve. Call it the effect of procrastination.

“We have to recognize that what we are about to go through is indeed unique in world history,” Greenspan told attendees of the Million Dollar Roundtable Boomertirement Conference in New York. “The notion of people retiring and people living some semblance of life is a relatively new phenomenon. We’ve coped and succeeded in handling [retirement] up to this point. But now . . . a large chunk of the workforce is going to move from a state of contributing to becoming recipients. I don’t think we are ready for this.”

He notes the concept of retirement is only 100 years old at best. For example, there was no such thing as retirement for a serf who toiled away in the 15th century; he would be at his job until his death. And the baby boomers’ parents and grandparents didn’t have to worry as much about retirement savings because they received defined benefit pensions and higher interest rates from guaranteed investments. Besides, in many cases, the grandparents (and later, their spouses) collected on those pensions for only three to five years before they died. Compare that to the expected 30-year retirement for today’s boomers.

Yet, U.S. governments continue to promise more than they can deliver, especially on expectations for Social Security, Medicare and even pensions, Greenspan said. He believes political leaders require a wakeup call. “I don’t think a government should be in that position. It’s fundamentally immoral. We did well with pay-as-you-go systems but [that worked when] there was always a larger amount of people paying into the system,” he explained. “When a larger proportion of the workforce like the boomers retires, it’s just so huge. We don’t fully understand what must be done.”

It’s a dire enough situation that Greenspan predicts future U.S. Medicare will exist only for lower-income groups, while higher-earning classes will be forced to pay 100% for private services unless “something gives.”

Also of concern is the fact that more boomers are retiring earlier, causing an even greater strain on the government’s public services. Greenspan would like the 77 million U.S. boomers to retire in more structured phases to ease the burden on the system.

Ultimately, boomers need to take more personal responsibility for their retirement. Greenspan said individuals should take stock of their lifestyle and what it costs to fund and maintain that lifestyle. Maintenance isn’t a magic bullet solution. Some may take their chances with the stock market for a few years and hope that no downturns occur during that period, but Greenspan calls this thinking “like playing Russian roulette with your retirement.”

Having said that, he believes boomers who stick with equities — and all the angst and stress that comes with unpredictable markets — will achieve greater rates of return over the long run. “You definitely have to have the stomach, and not everyone does,” he said. “But those who have the capability . . . will get rewarded with a premium.”

Annuities that provide a guaranteed income stream for a person’s lifetime could also be a solution for boomers, but Greenspan notes that overall costs must be factored into the equation. “Lifetime annuities remove all uncertainty, but there’s a cost because somebody has to invest to create a fixed flow of income to convert the volatile flow.”

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Deanne Gage