Monday, April 30, 2012
The Millennial Perspective
By David N. Bass from the May 2012 issue
Social Security won't be there for today's twentysomethings. Yet their piggy banks—and 401(k)s—remain empty.
Former U.S. Senator Alan Simpson described them as "the greediest generation." He was referring to elderly voters keenly opposed to reforms needed to keep Social Security solvent. In typical flamboyant style, the Wyoming Republican also compared the entitlement program to a milk cow "with 310 million tits." Now there is a word picture.
With an estimated 10,000 new baby boomers qualifying for Social Security each day, the milk will soon run out. In the coming years, my generation, the Millennials (born from the 1980s through the mid-1990s), will bankroll a retirement scheme for our elders that we ourselves will never participate in, at least not in the same way. A steadily declining birthrate fed by abortion on demand, a swiftly graying population, an extended average life span, and unsustainable national spending have created a perfect storm for Social Security and set the stage for a titanic generational war.
The armies are equally strong in population. Millennials—also known as Generation Y or echo boomers—are roughly equivalent in number to boomers (born in the post-war years of 1946 to 1964). boomers have paid into Social Security throughout their working careers and feel entitled to the promised benefits. But we Millennials also feel entitled to keep the fruits of our labor and are hesitant to pay into a system that likely won't be around when it's our turn to retire.
Although equal in number, the two generations are far from equal in political power. Millennials are just now entering the political and financial world, while boomers command the top echelons of society. Millennials might determine what's trendy in music and fashion, but boomers pull the strings of power. (Their clout is shared with some members of Generation X, born from the mid-1960s through the 1970s, and the Silent Generation, born during the Roaring Twenties through the Great Depression and World War II.)
As a result, the will to implement meaningful reform of Social Security has been absent. Those who have retired, or are nearing retirement, don't want to see their benefits affected. The end result of inaction is clear: The Social Security Trust Fund will go bankrupt by 2037. Accordingly, Millennials will pay into a system for decades but see no benefits (at worst) or reduced benefits (at best).
The generational fleecing isn't confined to Millennials. Generation X, composed of those currently in their 30s and 40s, will see drastically diminished benefits as well. Thomas Firey, managing editor of the Cato Institute's publication Regulation, made the point in an article published more than a decade ago. While young people now have 12.4 percent of our earnings commandeered by Social Security, boomers who entered the workforce in the late 1960s paid only 6.5 percent of their earnings to the entitlement. Even later, when the payroll tax was raised, Firey estimated that boomers paid around 10 percent during the latter half of their working careers.
"That's the boomers' bargain: They've paid less of their earnings into Social Security than we Gen-X/Yers, yet they'll receive more in benefits than we will and we'll pick up the tab," Firey wrote. "And when we retire, there will be no money saved in Social Security to pay for our retirement, unless we pull the same scam on our children that the boomers are pulling on us."
Given that reality, it's a political wonder that Texas Governor Rick Perry was roundly criticized for calling Social Security a Ponzi scheme. Particularly for young people, that's precisely what it is.
The result for my generation is an even worse financial picture than many have predicted. Millennials' mentality of instant gratification, combined with a poor job market, means that we aren't saving for retirement. Yet we won't have two key retirement benefits—Social Security and pensions—that are available to older generations. In addition, the dearth of jobs means we are losing key earning and saving years that could go a long way toward alleviating the retirement debacle.
The news isn't all gloom and despair. Millennials don't have their collective heads in the sand on Social Security's insolvency. A recent Pew Research Center report found that 72 percent of Millennials don't expect Social Security to be their main source of retirement income, and 42 percent don't think they will get income from the entitlement at all. That's why Generation Y is far more willing to support an overhaul. The same Pew survey found that an overwhelming number of Millennials, 86 percent, support reforms that would allow them to invest their Social Security contributions in a private retirement account.
A clear indicator of their mistrust in government is that young people would rather invest their money in the up-and-down stock market than rely on the government to keep the funds safe and untouched until their golden years. Millennials support choice in Social Security, even as many boomers and members of the Silent Generation consistently resist it. As Generation Y gains more political clout in the coming decades, desire for more substantial reform will accompany it.
But there is plenty of bad news. Although Generation Y might acknowledge Social Security's insolvency, we aren't doing anything about it from a personal responsibility standpoint. Our spending, saving, and general financial habits are abysmal. For those in my generation fortunate enough to be employed, and fortunate enough to have an employer who offers retirement savings benefits, nearly three-fourths do not take full advantage of the matching programs, according to an Aon Hewitt study from 2010. Worse, Hewitt found that 60 percent of workers in their 20s cashed out their 401(k) accounts, and suffered the resulting penalties, when they changed or lost jobs.
On the spending side of the equation, 42 percent of people under the age of 34 have $5,000 or more in non-mortgage personal debt, according to a study published by Demos, a left-of-center think tank based in New York City. Two-thirds of college students graduate with debt, which averages $24,000. Another characteristic of Generation Y—that we delay marriage—also has financial consequences. Married individuals are healthier, happier, and more financially prosperous and stable than their cohabiting or unmarried counterparts.
The perpetually sluggish job market is doing irreparable harm to Millennials' retirement prospects, too. The fundamental rule of compound interest is simple: Save early, safe often. A Millennial who begins planning in his early 20s must save less over time, and will end up with more in the bank at retirement, than a Millennial who waits until his late 30s. In 2011, an analysis by the online investment firm Scottrade found that 55 percent of Millennials have not started to save for retirement; only 21 percent are actively saving for their golden years.
A contributing factor is that Millennials have one of the worst unemployment rates of any age demographic in the United States. That has led many in my generation to hide in graduate school into their late 20s, erasing important earning years and making it more difficult to save for retirement adequately.
On that note, how much will Millennials need to save? Financial experts peg the figure at $2 million. That's double the $1 million figure typically used to describe how much boomers must have to weather their declining years. For average-to-low income Millennials accustomed to a consumerist, debt-loving society, that figure is a pipe dream. Put another way, if boomers haven't adequately saved for retirement, then Millennials certainly won't.
The reasons are clear: boomers, particularly those in the public sector, have had access to pensions in a way that Millennials will never experience, as the shift continues away from a defined-benefit to a defined-contribution model of savings. Pensions also are increasingly moot because so few workers remain with the same employers throughout their careers. Job-hopping is especially the case for Millennials.
Beyond pensions, boomers could rely on the two other legs of the three-legged stool of retirement planning, Social Security and personal savings. For Millennials, only one leg—personal savings—will be left. And it's doubtful that this "me generation," languishing in an extended adolescence, will have the wherewithal to adequately prepare on its own.
Yet if Millennials could keep and save the money they will pay into Social Security, it would go a long way in erasing the troubled future we face. Understood mathematically, losses that Millennials will experience resulting from Social Security are astounding. Even in a private investment making a sub-par return, Millennials would do far better than by continuing to prop up a Social Security system that either won't exist in the future or will look dramatically different.
What are the implications for the future? As a practical matter, we Millennials need to reorient our thinking on retirement. The idea of quitting work at age 65 and spending our golden ears pursuing leisure activities is one exclusive to the 20th century. FDR's New Deal birthed a widespread application of the concept, based on a desire to get old workers out of the market so that young workers could take their place. Due to poor financial planning and declines in home and investment income resulting from the Great Recession, many boomers will have to work past the traditional age of retirement. Millennials will have to do so in even larger numbers.
Free marketeers should take solace in Millennials' practical view of Social Security's bankruptcy. Although liberal on a host of issues, Generation Y takes a more conservative line on the retirement entitlement. Whether Millennials will fall prey to the fallacy of other generations—kicking the can down the road when it is within our power to enact meaningful change—remains to be seen. But the door is at least open.
In the end, Millennials will discover that Social Security was a good deal for those who got in early. It's a raw deal for those getting in late.
To read another article by David N. Bass, click here.
Posted by Brett at 11:23 PM