Social Security and My G-g-generation
Social Security and My G-g-generation
Could one generation's refusal to retire be Social Security's saving grace?
Krzysztof Ostaszewski
Ralph Henstock, a retired professor of mathematics of the University of Ulster, and one of the creators of the Henstock-Kurzweil integral, also known as the generalized Riemann integral, passed away peacefully on January 7, 2007. I am a great admirer of the work of Professor Henstock, but this is not the reason why I wanted to tell you about him. He was a mathematician. I know, because I am fairly certain he met the conditions of the definition of a mathematician. A mathematician is defined as a person who is considered to be a mathematician by a mathematician. This is a clear, precise definition by induction, but we need to start the process with someone. That's not difficult: Gauss was a mathematician. Therefore, Riemann was a mathematician. Therefore, Henstock was (almost certainly) a mathematician. But that is still not the reason why I wanted to tell you about Ralph Henstock. The main story is that while Professor Henstock was officially retired, he worked on his mathematical ideas until January 7, 2007. Was he really ever retired?
Pope John Paul II passed away on April 2, 2005. He attended to some Church matters on the day of his death. There have been stories circulated about the Pope claiming that he was considering retirement in 2000, but decided against it. He continued with his work until the day he died.
The first printing of the greatest work of Nicolaus Copernicus, "De Revolutionibus Orbium Coelestium," was delivered to him on May 24, 1543, when he was lying on his deathbed. Copernicus was not retired on May 24, 1543.
The three men I have written about are not in any way involved in the debate about the future of the United States Old Age Survivors and Disability Income social insurance system, known commonly as Social Security. But they may have given us a glimpse into the future of Social Security.
The key issue in the debate on Social Security is the huge projected cost of retirement of the Baby Boom generation, almost 80 million Americans born roughly between 1945 and 1964–post WWII.
My g-g-generation–the generation that hoped to die before they get old. But they did not: it looks more and more that they will not only get old, but very old, before they die. One of the leading financial services companies in the United States advertises now to baby boomers suggesting that they can retire as hippies, just as they have lived. I find the advertisement utterly distasteful, but they must have done their focus group research, so there must be a lot of hippies still out there to whom the advertisements appeal. It seems that the boomers plan to remain teenagers as long as pharmaceutically possible.
Lack of Savings
On January 31, 2007, the United States Department of Commerce, Bureau of Economic Analysis, has published the latest calculation of the savings rate in the United States. You can see the graph of the savings rate in the United States for the current decade at http://bea.gov/briefrm/saving.htm. The rate has been negative since the second quarter of 2005. Personal savings as a percentage of disposable personal income was a negative 1.2 percent in December 2006, compared with a negative 1.0 percent in November 2006. For the whole year 2006, the savings rate stood at negative 1.0 percent. While one could argue that the savings rate calculation is seriously flawed by not accounting for increases in values of unsold capital assets and real estate, it is quite clear that the boomers are not saving for retirement–at least not for any form of early retirement. One could say that the boomers are just plain stupid and will end up living in poverty in the late years of their lives. If not all, then many of them. I consider this argument to be an angry shortcut that probably does not pay attention to everything that is happening. Or one could argue that this is caused by the tax cuts, which prevented the government from saving the money for the people, so that the government can provide them with benefits in the future.
The government, however, is now firmly in the hands of baby boomers. This is probably why the government is not saving, either. Not that I would like it to save, that's not my point. My point is that boomers are still American in their relationship with the government. And, as I like to explain to my foreign students (being a dadgum foreigner myself), the United States is unlike the rest of the world, and the rest of the world is unlike the rest of the world, and both sides are typically completely unaware of the phenomenon. And as a dadgum foreigner, I might add that contrary to the anti-American stereotype, it is the non-Americans who are audaciously arrogant about this situation. As in the Cole Porter song, "They Were All Out Of Step But Jim." Baby boomers and Americans in general may talk a lot about not trusting their government. But if that were true, they could not talk that way. People who do not trust their government keep quiet and try to leave their country. I know, I grew up under communism. Look around the world and spot the countries where the people are quiet, the government is loud and people are trying to leave. That's what I am talking about.
In Poland under communism, when I grew up, I heard many adults say: "When the communist party says that they will take something from us, we know we can count on them taking it. When the communist party says that they will give us something, we know we can count on them saying that." Baby boomers know that the American government is not, and will never be, like that. When the U.S. government promises to deliver some benefit for its citizens, Americans generally respond by lowering their precautionary savings–because they believe the government's promise. When governments of other countries promise some benefits to its citizens, the citizens generally respond by increasing their savings rate, because they know at the very minimum (in non-tyrannical countries) this means that taxes will be raised because of the new benefit, and, at worst, they know that the great government benefit will be a useful excuse for further expansion of the government's reach into people's lives.
The savings rate in the United States had reached negative levels previously in the second half of the 1990s. That was, just as now, a period of economic expansion, low unemployment and substantial increase in the value of capital assets and real estate. The slump in the savings rate was not as long and as deep as it is now. In fact, the current slump matches only the one reached during the Great Depression. I would venture the hypothesis that Americans have one more reason to trust their government: the Medicare Part D prescription drug benefit. And pharmaceutical benefits are very important for my generation. Because for my generation, 60 is the new 40.
Young at Heart
Nothing can illustrate this better than the genius behind the computer I am using right now: Steve Jobs. I recently watched Steve's presentation on the new Apple product: the iPhone. What I found quite interesting in the presentation was how much Steve's style reminded me of many of my students. I like to tell my students that people under 40 tend to overestimate their brains and underestimate their looks, and after 40 the situation reverses. I ask my students to remember this phenomenon, and compensate for it, especially during interviews: they should always remember they do not look as bad as they think, and are not as smart as they assume. Steve may be over 40 by calendar measures, but if you saw his presentation of the iPhone, you could see he does not act a day over 40, and I do not think he intends to, for a long, long time.
He looks pretty good, too. When my mother saw the video of Steve, she ventured a hypothesis about his age, and I had to give her the facts contradicting her hypothesis. Plus, the iPhone is the most beautiful phone in existence. I just have doubts if it is $500 smart, as Steve claims. In the overall balance of things, it is the business strategy of the product that counts. That's where the brains of those over 40 are really needed. Bill Gates always acted old for his age. This, of course, will not affect my devotion to Apple products, I just have to have great looking toys, and I am not over the new 40.
The second half of the 1990s was also the period when the debate over the future of Social Security was in full force. The oldest baby boomers turned 50 then. It was a good time for them to act over 40, start saving and planning for retirement. They could do this individually or collectively. They did neither. Instead they adopted the approach of the Pirates of Silicon Valley: work 90 hours a week if necessary. For a generation that is still so proud of its hippie heritage, the baby boomers are amazing workaholics. As I see it, the decision about the future of Social Security had to be made between 1995 and 2010. The promises made by the system do not match projected collections of taxes. The best solution would have been to invest the assets more productively by moving them from the state-run sector to the private sector, to increase the rate of return. Another solution would have been to cut the benefits. I find both quite satisfactory, and if taking the benefits away from the poor sounds heartless, then please take from me and anyone who makes more than I–please, just take it.
But the solution adopted by the baby boomers is to do nothing, at least politically. Baby boomers do not particularly like Capitalism, and can't bring themselves to like socialism either. They would desperately like to find the non-existent Third Way, but in general are too busy to bother looking for it. They work longer hours than any generation in history. I would venture the hypothesis that this is the defining characteristic of my generation: all work, under the guise of play. The work could be a rock concert, writing the code for a computer program, or actuarial modeling, but it is work nevertheless, and it is done during work hours, after hours, on weekends, on vacation, on the plane, on the beach, in a coffee shop, here, there and everywhere.
A Few Rebellions
When the idea of universal retirement was first created, retirement was the privilege of the few. In the eighteenth century, aristocrats were retired all of their lives. As Ludwig von Mises pointed out, for a long, long time most economic thinkers assumed that the lifestyle of affluence and leisure was unattainable for all, thus the idea that only the few would have it had to be grudgingly accepted. Von Mises also stressed that such a mindset had to be overcome. The end of the eighteenth century brought a two-fold rebellion against that mindset: the 1776 rebellion (in Scottand) and the 1789 rebellion (in France). While I love and adore the July 4, 1776 rebellion, in this case I view the other 1776 rebellion as more important: the March 9, 1776 publication of "An Inquiry into the Nature and Causes of the Wealth of Nations," the opus magnum of Adam Smith, the book that started the idea that free enterprise system (known popularly as Capitalism, the name coined by its enemies) can provide affluence for everyone. As opposed to the 1789 rebellion idea: that a poor and oppressed citizen can provide affluence to himself/herself by sticking it to the oppressors and taking affluence from them.
The end of eighteenth century rebellions had a profound effect on the nineteenth century: the good things about the nineteenth century lied in the ways in which it departed from how things used to be. Universal affluence was the novel idea, and it eventually became a possibility, as the economic growth in the nineteenth century was unmatched by anything that preceded it, or followed it. The unfortunate side effect was the adoption of aristocracy as the model for retirement. Through the creation of social insurance systems of retirement, citizens around the world were told that at a point in their life prescribed by the government, they would become aristocrats and live the life of all leisure, no work.
Working Solution
The crisis of Social Security stems from the fact that the citizens responded to the government call to leisure. According to the Social Security Administration, a whopping 75 percent of retirees are early retirees. But while the previous generations of Americans and non-Americans commonly adopted the non-productive lifestyle of aristocracy, the baby boomers will probably not do so. Already, since the stock market crash of 2000-2002, retirees have started going back to work. Granted, these are not baby boomers yet, but I just can't imagine Steve Jobs in his 70s sitting at home watching reruns of "Friends."
The boomers will not solve the Social Security problem politically, but they will solve it individually–by continuing to work. They are, of course, rebels, so they will work unconventionally, by having their own businesses, going part time, taking occasional work, doing volunteer work, etc. All of this will naturally cure the imbalance between work and leisure. Excessive incentives for leisure that worked for previous generations will not work for my generation, because our work is leisure. American boomers rebelled against the corporate culture of their parents, and instead of working as corporate men and women for 40 hours a week, they prefer to work for 90 hours a week (or maybe just 60 in the case of the lazy ones) for themselves. All of this naturally cures the imbalance. The fiscal aspects of the crisis will be secondary: if the work gets done, the country will go on.
A dear, now departed, friend of mine, Michael Gilbert, a British actuary, once remarked to me: "Why can't we have a society in which everyone pays attention to the needs of their brothers and sisters and works to help them when they need anything?" Michael in his early years was apparently an aspiring socialist, but as he grew older, he found The Market. He was just thinking of the dreams of his youth. But we have, of course, created such a system. It is called Capitalism. The reason why it is hard for its opponents to notice that all business people go around working to meet the needs of their brothers and sisters is the business people want to get paid for their efforts. That of course, makes Capitalism even nicer: it means that our brothers and sisters, whom we take care of, want to reciprocate. Love is all around. All you need is love. As I like to say: "I am not my brother's keeper, I am my brother's brother." That's why I find the idea of a socialist keeper particularly distasteful.
If we find it in our hearts and minds to approach Social Security as a part of a living economic entity, understanding that our brothers and sisters are not just mere aristocrats looking for life of leisure at the expenses of the peons, but human beings whose contributions to the society can make them live longer, happier lives, we will not "reform" the system in the style of the 1789 rebellion. Baby boomers can find work that they like, and the society will need them. Our high schools would benefit greatly from "retired" engineers, actuaries, artists, etc., teaching them some mathematics, physics or history. Our businesses will benefit greatly from those over new 40 helping those under 40 with their permanent overestimation of their smarts.
But even if we adopt this (almost) laissez-faire approach, one threat remains: commercial biological immortality. Who knows, one day Steve Jobs or someone like him may invent it, and Bill Gates or someone like him may find a way to market it.
Dr. Krzysztof M. Ostaszewski, FSA, CFA, MAAA, is actuarial program director and professor of mathematics Illinois State University, Normal, IL.
Quotes:
"It seems that the boomers plan to remain teenagers as long as pharmaceutically possible."
"For a generation that is still so proud of its hippie heritage, the baby boomers are amazing workaholics."
"The boomers will not solve the Social Security problem politically, but they will solve it individually–by continuing to work."