May 8, 2018

What Does the Baby Boom Mean for Your Future?

One of the more frustrating aspects of the political climate in 2018 is that no one seems to be comfortable discussing the elephant in the room: Americans are living longer and having fewer babies. As a result, the commitment the United States has made to healthcare and retirement benefits for baby boomers is likely to lead to substantially higher taxes and/or significant cuts to entitlement programs in the United States over the next few decades.

Consider: In 1950, right around the start of the baby boom, only 8% of the population in the U.S. was over age 65. One hundred years later, in 2050, around 21% of the U.S. population will be over 65. Why the dramatic shift? In the early 1950s, the average American woman had over 2.75 children in her lifetime and by the end of the baby boom in 1964, that number had grown to 3.17. But by 1980, that number had plunged to 1.82, and it has hovered around 2 ever since.

The net result of such a drop in the fertility rate is that most demographic charts about the baby boomers have resembled a python eating a rabbit – where you can easily spot the meal as it passes through the snake. The baby boom brought with it massive investments at every stage, including: building elementary schools to accommodate such a large cohort at the beginning of their lives, building homes for boomers to raise their children in, and building massive medical facilities and systems to help boomers live long, productive lives in retirement.

The baby boom’s effect on entitlement spending is pretty scary as we look at it now. The result of the lower fertility rates that followed the boom is that fewer people are paying taxes into the system at the exact time when there is a dramatic increase in the number of retirees. One place to track this impact is to monitor the Social Security Ratio – the ratio of workers paying in to Social Security compared to retirees drawing from it. In the 1950s, that ratio was 5:1. Today it is 3:1, and it will be 2:1 by 2040.

In fiscal year 2019 (October 2018 – September 2019), Social Security outlays will be the largest item in the federal budget, a line item worth over $1 trillion (out of a $4.4 trillion budget). The 2019 budget contains another trillion dollar in spending on Medicare and Medicaid. Medicare draws some funding from payroll taxes but is largely dependent on funding from the federal government’s general fund. Medicare is supported entirely by the general fund each year. There is currently a Social Security trust fund that covers promised benefits when they exceed Social Security tax collected, but the last dollars from that trust fund will likely be paid out in 2040. After that time, Social Security projects they will be able to cover about 75% of their commitments.

In closing: over 50 cents on every dollar in the federal budget currently goes to Social Security, Medicare, and/or Medicaid. As our population continues to age, the cost of caring for this population will continue to increase. The only ways subsequent (substantially smaller) generations will be able to support this burden is to forfeit more of their income in the form of individual or corporate taxes, or to reduce the benefits delivered to recipients of Social Security, Medicaid, and Medicare. The impact this may have on financial planning is profound: adults retiring in the 2040s and thereafter ought to plan for lower benefits, and savers ought to re-think the general planning guideline that they’ll be in a lower tax bracket once they retire.