James MacDougald, President of The Free Enterprise Nation, comments on the looming retirement of 76 million Americans
The year 2011 will mark the year that the first
wave of the 76 million “baby-boomers”, born between 1946 and 1964, will reach
age 65 and become entitled to Medicare and Social Security benefits. It will
also be the beginning of a decade or more of calamitous events: Federal and
state governments in huge financial trouble and unable to pay promised benefits
occurring at the same time that boomers find themselves with little else in the
way of retirement assets other than those promised to them by their government.
Social Security and Medicare are profound
examples of “the law of unintended consequences.” The Social Security Act was
passed in 1935 during the Great Depression to protect America’s oldest citizens.
Over 50% of those who had lived to be 65 or older were considered impoverished
at the time. Life expectancy was 61 years, and very few were expected to
receive benefits, since benefits were only paid to those who had worked and the
benefits did not begin until age 65. (Ironically, the first recipient of Social
Security benefits began collecting her $22.54 a month check at age 65, and
lived to be 100 years old).
Social Security was set up as a transfer payment
system that took from the employed and gave it to the “old and helpless.” In
the ensuing 75 years, Social Security was “improved” to provide additional
monthly benefits for spouses and for the disabled. By 2010, more than 10
million Americans below the age of 65 were receiving Social Security benefits.
Since the first cost of living adjustment was granted in 1950, monthly benefits
have continually increased. Meanwhile, life expectancy has also increased since
1935 from 60 to 80, resulting in 20 more YEARS of benefits that the “New Deal”
proponents did not plan to provide.
Then, in 1965, under President Johnson’s “Great
Society” program, Medicare became law. It was also a transfer payment system,
taking from workers to provide health insurance to people over age 65. Life
expectancy was 70 at that time. Unlike Social Security, which had a fixed and
predictable monthly payment, Medicare took on an obligation to “pay the bills,”
whatever they might be. And, like Social Security, Medicare was later expanded
to offer coverage to those under age 65 with specified illnesses, like chronic
Of course no one knew back in 1965 that the
"baby boom" had even existed, and that it had ended a few years
earlier. About 76 million “boomers” would eventually be covered under both
Social Security and Medicare when they began reaching the age of 65 in 2011. In
addition, spouses, dependents and the disabled had been added to the collective
Medicare and Social Security entitlement pools.
In the early 1980s it was recognized that our
population had grown at a much slower rate after 1961. Life expectancy was
continuing to increase, and it became apparent that the population bulge,
consisting of boomers, would create enormous financial problems in the future
when this massive group began becoming entitled to both Medicare and Social
Security benefits with a smaller workforce available to pay the bills.
The federal government recognized that beginning
in about 2011 the transfer payment system wouldn't work. There would be too
many recipients of benefits and not enough workers to take money from to pay
for it. To avoid the financial catastrophe that loomed ahead, in 1983 the
government substantially increased employer and employee contribution
requirements to (at least partially) pre-fund for 2011 and thereafter.
Planning ahead for an event that would occur 28
years in the future was a commendable and far-sighted act by our elected
officials. “Baby-boomers,” who made up the majority of our workforce, were
subsequently “taxed twice,” with matching contributions from employers. One
portion of their tax was to pay for those on Social Security who had already
retired, the second portion was to pre-fund a part of their own retirement
Congress took this excess tax revenue and put it
in a “trust fund” to pay future benefits. But the trust fund they established
was an enormous shell game because the money was treated as general revenues…a
huge windfall to the federal government. It enabled President Clinton to
announce at a State of the Union address, that the deficit was "exactly
zero." Even today, people are still congratulating Presidents Clinton and
George H.W. Bush for having balanced budgets and reducing national debt. But
Congress had accomplished that feat by taking and spending all of the “excess
revenue” that was coming in from payroll taxes for Social Security, and there
was a lot of it to spend! From 1983 to 2008, the federal government took $2.5
trillion more than required to pay current Medicare and Social Security
recipients, and they "bought Treasuries" with it. In other words,
they spent it all.
Now the problem is upon us, the first boomers
reach age 65 in just a few months…the vanguard of 75 million who will reach 65
in the next 15 years, and there is virtually no money available to pay them
their promised benefits. There is no painless way out of the financial
nightmare that we must all face. Life expectancy is now 80+ years, not the 65
that was envisioned when Social Security passed, and not the 70 that was true
in 1965 when Medicare was implemented, and life expectancy continues to
The budget in 2011 for Social Security and
Medicare is $1.22 trillion ($730 billion for Social Security and $491 billion
for Medicare). That amount is more than all of the federal income taxes paid by
all of the workers in America last year. Of that $1.2 trillion total, about
$990 billion is for those age 65 or over and the balance is for about 10
million people who are entitled to either Social Security or Medicare, or both,
but are have not reached the age of 65. Looking at only the age 65 + group, we
have a budgeted expense next year of about $23,000 for each retiree.
With a total population of 308+ million, the
U.S. currently has about 130 million employed workers. In order to meet next
year's Medicare and Social Security budget for those over 65, each worker (or
employer/employee unit) must pay $7,600 next year. During the next decade we
are expected to add a net increase of 1.5 million retirees every year to the
Social Security/Medicare rolls, growing from the present 47 million recipients
to at least 63 million.
Even if costs did not go up at all in the next
ten years, the current scenario requires that 130 million workers will support
60+ million retirees at a cost of $23,000 a year each. That will require every
worker, or worker/employee unit, to pay at least $10,000 a year, just to pay
Social Security and Medicare for retired workers. In addition, it will require
another $1,000-$2,000 a year in order to pay for the $250 billion additional
costs of providing Medicare and Social Security to those under the age of 65
who are entitled to these benefits. The numbers quoted here assume that costs
remain the same for the next 10 years…an impossible eventuality. Costs WILL go
Social Security and Medicare are only one part
of the cost of federal government. In 2010, the federal budget total is nearly
$4 trillion, or approximately $1.5 trillion more than all of the taxes it
collects from all sources. In other words, in spite of taking 15% of all pay
that is earned by all citizens of the U.S. for “payroll taxes” (split between
the employer and the employee, or fully-paid by the self-employed), the $1.2
trillion it costs to provide Medicare and Social Security is essentially all
being borrowed from future taxpayers. How long can government keep printing
money to provide benefits it doesn’t have the revenues to pay for?
Taxpayers have another pension burden that is
rarely discussed. In addition to Medicare and Social Security, private sector
taxpayers must also pay for the continued health insurance and pensions for 22
million public sector (government and public education) retirees. Of 89,000
public sector entities, 84% have defined benefit pension plans. These plans are
paid for via property, sales, and state income taxes. Non-federal public sector
pay and health benefits have an estimated annual cost of $1.1 trillion, and
these entities also have an estimated combined $3.3 trillion unfunded liability
for their pensions and retiree health insurance plans. The private sector employers
and employees must pay taxes for these costs, too.
The baby-boomers in the private sector are faced
with nearly insurmountable financial difficulties in the decades ahead. They
have paid for Social Security, twice, but face an uncertain future because the
federal government has never guaranteed that these benefits would be payable.
They have also (unknowingly and involuntarily) paid for unbelievably generous
”early-retirement” pensions for their “public servants,” and are facing more
and more taxation as the funding shortfalls of these plans are exposed.
According to the Employee Benefit Research Institute, the average 401(k)
balance of those over the age of 50 is approximately $140,000, which is
sufficient to provide a monthly annuity at age 65 of approximately $850.00.
Because of the real-estate collapse, many have little or no equity in their
homes. Many also have little or no personal savings.
Federal and local governments have created a
financial perfect storm for private sector baby-boomers. They have no money to
pay Medicare or Social Security for all of these boomers at a time that most
boomers will be totally dependent on these programs.
Many of those who will retire from the public
sector, about 10 million people, have nice pensions, supplemented by taxpayers.
Most public-sector boomers have already retired, since their retirement age is
50 or 55, sometimes even younger. The sad truth is that private sector boomers
are also paying for “Gen X” public sector workers, many of whom have already reached
their own retirement age or will be retiring in the next decade at age 50 or
55, while their private sector counterparts continue to work to try to foot the
While private sector workers paid for their own
meager Social Security benefits twice, and also for 22 million government and
public education retirement plans, most private sector workers have no pensions
at all for themselves. They must make do with Social Security at age 65 or 67,
and Congress is discussing pushing back the retirement age even further, to 68
Social Security benefits of $1,000 or $1,200 a
month are not enough for most people to live on. Millions of boomers will have
to keep working until they drop, if they can find jobs. Currently, the official
unemployment rate for people 55 or older is 7.3%, and 2.2 million people in
this age bracket are looking for employment. Of course, many older workers have
simply stopped looking. How many jobs are available for 65-year-olds?
With a national unemployment rate stagnant at
over 9%, the competition to find work is no small challenge. If 76 million
boomers stay at work because they can’t afford to retire, where will the jobs
for the 15 million currently unemployed, and 2 million new high school and
college graduates who enter the workforce each year, come from?
Elected officials from both parties have kicked
the can down the road in dealing with these issues for decades, knowing that
all of their unfunded entitlement programs were a time bomb that wouldn’t
detonate until 2011. Now that 2011 is upon us, can-kicking won’t work anymore.
It’s time to pay the piper.
Contact: Kathleen Mott
The Free Enterprise Nation
The Free Enterprise Nation is a non-partisan
member based organization representing American employees and businesses in the
private sector. Its President, James MacDougald is author of the newly
released best selling title, UNSUSTAINABLE: How Big Government, Taxes and Debt
are Wrecking America. Mr. MacDougald is a regular guest on many national
news networks including CNBC, FOX News, CNN and MSNBC and was recently
prominently featured in the John Stossel special, The Battle for the