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Our Demographic Nightmare (Vol. 89)

Updated: Feb 7, 2023

analyticsbox | Feb 02, 2023


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We Understand it, but Do Nothing to Fix It

The world is aging. Nothing you don’t already know. But do you try to think about what that means to our economy and the systems we have? Give that some thought, and then you would begin to see the issues it brings with it. Last week I mentioned the issues France is having with trying to reform the pension system. In France, the retirement age ranges from 42 to 62, depending on occupation, most at 62. It is fundamentally broken - it just doesn't work anymore. Why? Demographics. With such early retirement ages and an aging population, the number of folks riding in the retirement wagon can no longer be supported by those pulling the wagon. The numbers don’t lie, they are what they are. Why do I care what happens in France? Because we have the exact same problem in the U S, only not as severe, yet. When the Social Security System was started in the 30’s, there were 30+ workers for each retiree, in the 50’s there were 15+ workers for each retiree. The system was working and more funds were going into the Trust Fund than was being paid out, accumulating a nice balance in the fund for future retirees. Fast forward to today. The birth rate is declining and the current life expectancy has increased to over 80, from 65 or so in the 30’s when the system was created. Result: 2.6 workers today for each retiree. Soon this will be 2.1 workers for each retiree. The system is now broken and more is paid out than is taken in, depleting the Trust Fund, which will be exhausted in about 11 years. Under current law, when the Trust Fund is gone, benefits must be cut, the estimate today is for a 26% cut, and it could get worse. If our politicians change the law to continue benefits as now paid, this creates Unfunded Obligations for the government since the income stream will not support the benefits paid. This is officially estimated at 71 trillion dollars for Social Security and Medicare, and I have seen economist projections for substantially more than that. I cannot tell you the exact number, but I can tell you that it cannot work as currently designed. The modest changes in the 80’s moved the regular retirement age slowly from 65 to 67, but left the early retirement at 62. That helped, but is not enough to make our system functional and self-sustaining today. The longer we wait to fix this broken system, the more difficult it will be to fix it. Again, the numbers don’t lie, they are what they are.


BOTTOM LINE

Houston, we have a problem. Our entire Social Security and Medicare system is economically broken. And there is no political will to explain that to the public so we can get public support to reform it so that it works and is self-sustaining.

That is why I am writing this Facts, No Spin email, to wake the public up to the problem and the need to fix it. So what do we need to do? It is complicated beyond my knowledge, but here are a few ideas:

  1. First, do not undercut anyone who is already on these programs. That would be unconscionable, and fundamentally unfair.

  2. Gradually move all retirement ages up to fit the real world demographics of today.

  3. Raise the contributions to the system.

  4. Limit future benefits.

  5. Means test the benefits to wealthy retirees.

  6. Change the system to a private account type system as has been successfully done elsewhere.

I am not supporting any one idea. There are many advantages and disadvantages to be considered and there are many other ideas.

What I am saying is that the public must come to grips with the real world, and support our politicians in practical solutions to fix the problem before it is too late.

LEARN ECONOMICS, THEN VOTE SMART

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