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.
