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Pennsylvania Investment Observer

An Aging Population

by Judy L. Loy

October 5, 2004

I am sure if you read any publication you are aware of the aging baby boomer population. By 2050, the percentage of people 65 and older to those ages 15-64 is projected to be 38% in the United States. This means increasing costs for Social Security and medical care with less younger citizens available to pay into the system. Fed Chairman, Alan Greenspan, noted the need to control spending programs for the elderly in his House Budget Committee testimony in September. Social Security and Medicare costs are projected to double, as a share of GDP, through 2030. How are we to make the numbers work?

Let's focus on Social Security. In my line work, I see people who are unprepared for a pending retirement and are dependent on the Social Security system for most of their retirement income. Social Security is currently pay-as-you-go, meaning most current Social Security payroll revenue tax (80% in the year 2000) is used to pay current benefits. Because of this, greater life longevity, and the aging population with a lack of younger people to fill the void, Social Security has a substantial long-run deficit as illustrated in the accompanying graph.

There are only four ways to alter the deficit: lower benefits, higher taxes, reduced federal spending on other areas or greater borrowing. This is an early warning. People need to take responsibility for their own retirement benefits. Fewer and fewer companies run defined benefit pensions for their employees and soon sweeping changes need to be made to Social Security. Neither, Kerry or Bush, has made Social Security reform a major issue in their campaign so the future is up in the air. The only guarantee will be that workers need to take control and fund their own retirement so that they are not dependent on a government program. Make it a priority to put money away for you. Start early, start now and don't stop. Maximize any retirement account available to you at work, start an IRA, and open a regular account for saving. When thinking of funding a child's college, consider the fact that there aren't loans for retirement but there are for education expenses. If you are not sure where to start, consult with a financial advisor.

The Social Security problem will need to be handled, the sooner, the better. Preparing people now for decreased benefits will be easier than letting them down later. It also gives people time to prepare.

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