Sobering Solutions for an Aging Population

The National Research Council along with three other groups released a sobering report about aging earlier this fall.

In the coming decades, the ratio of people aged 65+ to people aged 20-64 will rise by 80%. The resulting demographic shift will present the nation with economic challenges, both to absorb the costs and to leverage the benefits of an aging population.

Four practical approaches for preparing resources to support the future are presented.
The report notes the problem is reduced for people who have prepared for this stage of life by starting to save and accumulate assets earlier in their working lives. And Social Security, Medicare, and Medicaid also aid in support.

That said, real solutions will come with a combination of:

åáåÊåÊåÊåÊåÊåÊ Major structural changes to Social Security, Medicare, and Medicaid.

åáåÊåÊåÊåÊåÊåÊ Higher savings rates during working years.

åáåÊåÊåÊåÊåÊåÊ Longer working lives.

Without this, future generations will face a larger increase in taxes and benefit reductions.

Contributing to this population growth are the usual factors:

åáåÊåÊåÊåÊåÊåÊ Steadily Rising Longevity
åáåÊåÊåÊåÊåÊåÊ Shifting Balance of Older and Younger Population Groups
åáåÊåÊåÊåÊåÊåÊ The Impacts of a Changing Global Economy

In the United States, the weak economy that has followed the global financial crisis has ended many working careers prematurely. Meanwhile it also has lowered the value of many other components of household net worth, such as corporate equities and housing stock value, leaving many people ill-prepared to support themselves in retirement.

Four Approaches Suggested

åáåÊåÊåÊ Workers save more (and consume less) in order to prepare better for their retirements.

Research suggests that between one-fifth and two-thirds of the older population have under-saved for retirement. Low and lower-middle-income households accumulate few financial and pension assets for retirement. Social Security, Medicare, and Medicaid are and will be a central part of maintaining their living standards in retirement.

Financial literacy will play an increasingly important role in how well households fare in their retirement years. Households will need to decide how much more to save and how to structure their portfolios during their working years. They will need to decide when it is economically prudent to retire, taking into account personal, macroeconomic, and political uncertainties. There is substantial value in boosting financial literacy to help people prepare for these financial decisions.

åáåÊåÊåÊ Workers pay higher taxes (and thus consume less) in order to finance benefits for older people.

The report notes that longer and healthier lives are a great benefit and suggests that these added years of healthy life cannot all be taken as post-retirement leisure. Working longer, postponing retirement or working longer hours before retirement must be factored in because if all of the added years are taken as leisure, then consumption at all ages must be considerably reduced to pay.

åáåÊåÊåÊ Benefits (and thus consumption) for older people are reduced so as to bring them in line with current tax and saving rates.

About half of the U.S. workforce is covered by an employer- sponsored retirement plan. But the structure of pension plans has changed dramatically over time. Today, employer plans in the corporate sector have mostly converted to defined contribution (DC) pensions‰ÛÓfor example, 401(k) or 403(b) plans. That shifts the burden to individuals who may have difficulty determining whether their saving is adequate for their retirement needs.

åáåÊåÊåÊ People work longer and retire later, raising their earnings and national output.

Raising the average age of retirement is one key alternative to reducing the consumption associated with leisure and enhancing people‰Ûªs ability to stretch their assets over their lifetimes. The average retirement age for men declined substantially in the U.S. throughout most of the 20th century. Although this trend stopped in the early 1990s and then reversed, men still retire at a much younger age than in the past, despite their better health and much longer lives. Women‰Ûªs average age at retirement has moved parallel to men over recent decades.

The report concludes that there is little doubt that there will need to be major changes in the structure of federal programs. The transition to sustainable policies will be smoother and less costly if steps are taken sooner rather than later.åÊ
And the sooner than later lament is what we have tried to preach here. Preparing for aging is a sooner than later act. Whether saving for it or physically preparing for it or emotionally coming to grips with it, it is within each of own abilities and desires to make aging the wonderful thing that it should be not the crisis it is turning out to be for many.