What is the total cost of all United States retirement promises andexpectations, and what are the implications for the dollar? In thisarticle we are going find a startling answer to that question -approximately $2 million per able to pay household. To get there willinvolve taking five steps:
- Start with the well-publicized figure of $500,000 per household for the present value of government retirement promises;
- Subtract out the below poverty line households
- Subtract out the past retirement age households
- Add in the cost of cashing out pensions, IRAs and Keoghs
- Convert from current dollars to total dollars
When we add those simple steps together, we will find that ouranswer is an impossible sum - if the dollar in the future is worthanything close to a dollar today. Far too many symbols have beenpromised relative to the actual resources that will available - meaningdoom for the dollar. We will close by discussing how throughunderstanding this issue - we can find the means to turn it from majorsocietal problem into potentially lucrative individual opportunitiesfor building wealth on a long-term and tax-advantaged basis.
The Big Picture
The chart below is a rough blueprint for retirement related expensesover the years ahead. Call it the Baby Boom's promises to itself, whichthe Boomer's have done their best to legally obligate their descendentsto pay for in as many ways as possible:
Line (1) begins with a fairly well known figure, from a USA Todayarticle in May of 2007, that showed that the unfunded expenses ofpaying for future government retirement promises was $59 trillion, orabout half a million per household (link below). The $59 trillion isnot the total expected expenses, but the deficit after taking out therevenues our current tax structure is estimated to generate (assumingcurrent economic growth rates continue).
That $59 trillion is shown in the "Current Dollar" column of ourchart, because it is inflation-adjusted, meaning much of the assumedvalue of the dollar has already been destroyed in getting there. Thisis routine for the presentation of future societal costs, as what wewant to get to is "real wealth", that being goods and services, so weadjust out the anticipated inflation. However, our objective in thisarticle is to understand the impact of future promises upon the valueof the dollar, so we don't want to start with a footnoted assumptionthat half the value has already been destroyed. We therefore make arough (and quite conservative) adjustment to bring the total back todollars before inflation. A 3% level of inflation will drop the valueof a dollar in half over a little more than 20 years, so we multiplythe half destroyed dollars by two, and come up with $118 trillion indollar promises, in the "Total Dollar" column. (As discussed below infootnote (1), the chart combines two models with differing terms andother assumptions. Painting with broad strokes and assumptions isappropriate when looking at future retirement obligations, as thedetails can't be known in a number of crucial areas.)
The Boomers are of course counting on much more from the generationsbehind them than just Medicare and Social Security, however, they wanttheir pensions, IRAs and Keoghs cashed out as well. Using somereasonably conservative assumptions, that total comes to about another$44 trillion (or $22 trillion in half destroyed dollar terms). The linkbelow leads to a 50 page report which demonstrates the calculation ofthat $44 trillion total, based on underlying Census Bureau and FederalReserve household statistics:
After adjusting for a bit of double-counting of state & localgovernment pensions, the total dollar amount comes to a whopping $160trillion that future retirees expect the generations behind them topay, with most of that total consisting of legally binding promises.Even when we destroy half the value of the dollar in advance, we arestill looking at a figure of $80 trillion in current dollars. Thosenumbers are so high that are almost impossible to comprehend. Forperspective, we could say $160 trillion is 3 times the size of thetotal global economy, and it represents promises that only about 1% ofthe world's population (US retirees) have made to themselves. Otherthan saying it's fantastically high, it is hard to derive meaning fromfigures like that.
USA Today tried to make these vast numbers moreunderstandable by putting them into per household terms. Take the $59trillion in current dollars, divide it by all 111 million household inthe United States, and you come up with each household needing to payover $500,000, if retirement promises are to be met (not includingprivate pensions and retirement accounts). Remember - this is assumingthat half the value of the dollar has already been destroyed. If youare comparing to the dollars you have in your bank and investmentsaccounts right now - total obligations work out to over $1 million perhousehold (line 14 of the chart).
The government has promised to pay benefits representing a cost of$1 million per household. What has already been promised is obviouslyimpossible if a dollar is worth a dollar. It's also impossible if adollar is worth fifty cents, as in the USA Today projections,for we can't expect the average household to come up with half amillion dollars. To make the impossible into the possible - is going torequire doing a much more effective job of destroying the dollar thanmerely cutting it's value in half, as we will review a bit later. Butbefore that, we're going to have to do a better job of determining whatthe real costs per household are going to be. For, unfortunately, the USA Today number included too many households, and too few expenses - the full picture is much worse.
Per Census Bureau statistics, there are indeed 111 millionhouseholds in the US, but 11 million of them are below the povertyline. They are not able to pay for themselves in full, let alone bearthe tax burdens of cashing out others. So we drop down to 100 millionhouseholds able to pay, as shown in line (7).
Next, the implicit assumption within all households paying forretirement expenses, is that the retirees are paying for their ownexpenses, in some sort of endless circle, where they pay themselves sothey can pay themselves so they can pay themselves. From a currencyperspective, tapping some retirees to pay for promises to less wealthyretirees is quite likely at some point, but when we look at goods andservices, the games end. The retirees need goods and services, thenon-retired will be producing the goods and services, and by 2027 wewill be down to about two people of working age for every one person ofretirement age.
So we adjust down by 33 million in line (9), but that is too much,because the youngest Boomers will still be working after the oldestBoomers have retired and even passed away. So we adjust back forBoomers still below retirement age in lines (10) and (11), and findthat over the next forty years or so, an average of about 21 millionBoomer households will be past retirement age, and not providing thegoods and services they will need to consume in retirement. (Thisadjustment is one of proportion, rather than purely numbers ofhouseholds. Yes, new households will be entering the workplace, yet,there is no getting around the heart of the demographic problem, whichis the steady decline down to two workers for every person ofretirement age over the next twenty years.)
We are now down to about 79 million households that are above thepoverty line, and won't be (on average) over retirement age themselves.When we compare this number of households that will be effectivelypaying to the total government costs - then the total comes to astaggering $1.5 million per household (line 16). Even when we assumethe destruction of the half the dollar to put it in the present valueterms, then adjusting for below poverty line households not payingtheir share, and retiree households not paying for their own benefits,brings the total up to three quarters of a million per household.
Then we need to add in the costs of cashing out all the privatepensions and retirement savings. The dollars to cash out those pensionsand the associated goods and services will need to come to come fromsomewhere - and that somewhere is the productively working rest of theeconomy, which is our 79 million households above the poverty line andbelow the retirement age. This adds another full half million dollarsper household (it will cost you a mere quarter million if youpre-assume that half the value of your dollars have been destroyed). Itis also worth noting that most private pension promises aren't reallyprivate, as the federal government guarantees pension payments throughthe Pension Benefit Guaranty Corporation. This means that from ataxpayer's perspective, the government has effectively issued a standbyguarantee for private pension investment performance.
As shown on line 20, our total is now a staggering $2 million perhousehold, when we include all the retirement expenses, and look onlyat households "able" to pay. A promise that will be impossible tokeep - so long as a dollar in the future is worth anything close to thevalue of a dollar today. Which brings us back to the central flaw inthe USA Today study, a flaw with profound implications for all of ourlong-term investments.
To Be Continued In Part Two
