Silver FOX News

Silver FOX
January 08, 2024

In Today’s Newsletter:

FOXY FACT: Social Security's annual report reveals a grim prediction for 2024. There is a possibility that funds may not be sufficient to meet necessary requirements unless Congress takes immediate action. If not addressed, this could lead to only 80% coverage of benefits through annual tax revenue by 2034. Congress is also considering measures to counter this, including increasing the full retirement age to 69. If approved, this change would be implemented over eight years starting in 2026 and would mainly affect those aged 59 or younger. Currently, the full retirement age for Baby Boomers stands at 66 and is expected to rise gradually due to depleting funds.

CAN WE SAVE OUR BABY BOOMERS?

9 minute read

My sister's son got her and her husband into jigsaw puzzles during the pandemic. They have been devout puzzlers ever since. They are currently working on one that has no picture to guide them, so in a sense, they are puzzling in the blind. This article reminds me of this particular puzzle. With all the pieces spread apart, you have no idea what you're looking at. Then you finally have enough pieces for the border, and before long, color patterns are identifiable, then the whole picture. Only my article didn't piece together a beautiful portrait of anything. Quite the opposite, what emerged was a sad nightmare for a generation I have always loved and respected. The details are so sordid that I've devoted the entire newsletter to what I discovered.

Here's what's happening to our Baby Boomers (born roughly between 1946 and 1964).

The Crumbling Three-Legged Stool

Boomers were taught they could rely on three financial resources for their golden years: personal savings, Social Security, and private pensions – a three-legged stool. Yet, this stool is starting to get shaky.

1. Personal Savings: A Precarious Lifeline

After dedicating 46 years of your life to work, the expectation is that you'll have enough savings to draw from during your retirement years. The unfortunate truth, however, is the majority of Baby Boomers are not adequately prepared for retirement. Statistics show a staggering 45% of Boomers have no retirement savings. Even among those who have saved, 28% have less than $100K, which may seem substantial. Still, considering the average yearly cost of living is $52K, it becomes evident these savings won’t last long. In fact, we are already witnessing the consequences. Boomers are the fastest-growing age group experiencing homelessness. Records show the number of homeless adults over 50 doubled between 1990 and 2003. Over 12K Americans will turn 65 every single day in 2024, which is why the number of 65+-year-old homeless adults is expected to TRIPLE by 2030!

What about the other two legs?

2. Social Security: A Trust Fund in Crisis?

During the Great Depression, jobs vanished, businesses crumbled, people starved, and food rations became the norm. One of the groups hit the hardest was seniors who, despite working hard for 46 years, found themselves living in poverty. In response to this crisis, President Roosevelt implemented the Social Security program in 1935 as a form of security for retirees. This initiative was not without its cost. It operated on a pay-as-you-go system, where the current workforce contributed a portion of its earnings in exchange for a monthly pension in old age. The results were impressive, with the poverty rate among senior citizens plummeting from 35% in 1959 to a mere 11% by 1995. Fast forward to today, and it's estimated a staggering 90% of retired Americans rely on Social Security as their primary source of financial support. This is about to change.

During the 1980s, the administration of Presidents Reagan, Bush, and Clinton made the controversial decision to draw ("rob") funds from the Social Security Fund, redirecting the money towards military expenses and other governmental initiatives. In exchange, they left behind IOUs, committing to reimburse the borrowed trillions later – but that never happened! The Fund has struggled to sustain itself in recent years, consistently spending more than it earns. This was initially offset by contributions from the Baby Boomer generation, which supported the needs of the preceding Silent generation. However, now that the Boomers have reached retirement age, the number of working individuals contributing to the Fund has dramatically decreased.

This is why it's now projected the Social Security Fund will run out by 2034, meaning all new benefits will come from current payroll taxes. Still, taxes would only cover 80% of their promised full benefits because of the smaller workforce. Considering the ravaging effects of inflation, a 20% pay cut is darn right disastrous! Many also falsely believe 2034 is a guaranteed date, but it's not! It's only an optimistic projection. It doesn't consider the possibility of future economic downturns, something America is now facing. Want proof? Since 2019, the disparity between what Social Security has pledged and what it can deliver has grown significantly, surpassing $10 trillion – over 40%! Translation: plan on the Fund running out before 2034. What happens next if this is the number one financial resource for over 90% (over 68.8 million) of Boomers?

Suppose this second leg is eventually reduced or gone altogether. What about the third leg of financial security Boomers are relying on?

3. Pensions: A Fading Legacy

Before the 1980s, pensions were the go-to retirement plan for most people. Companies would set aside money, invest it for their employees, and guarantee payouts after retirement. It was an era where loyalty to a company meant something, and the longer you worked there, the more you received in your retirement payout. Then came Ted Benna [founder of the 401(k)], who thought pensions were too costly and risky for companies. Enter the 401(k) plan, a much worse retirement option in every single way, where individuals had to set aside money, pick their own investments, and face consequences if they didn't. Companies loved this shift, as it meant less work and risk for them, leading to a decline in pensions and a rise in 401(k) plans. The timing was opportune with stock market booms in the 1980s and 1990s, convincing many that managing their 401(k) was a savvy switch. However, this shift had unintended consequences when inexperienced investors faced the challenges of market volatility.

Take Steve Sholo and Dan Robertson, for example, public school teachers who, inspired by the 401(k) trend, saw their retirement nest egg double by 1996, reaching $1.5 million by 1999. Yet, when the dot-com bubble burst in the early 2000s, their fortune plummeted to $500K. Many, on the brink of retirement, were forced back to work. The pitfalls of the 401(k) plan don't end there. Economist Robert Hilton Smith, a regular 401(k) contributor, discovered hidden fees eroding his account. The 2-3% fees seem small but add up significantly over time, potentially costing over $155K over the years. Despite paying these fees, actively managed 401(k)s funds often fail to outperform the market. In fact, about 51% of such funds fall short. As thousands turn 65 daily in 2024, their 401(k) plans are taking a hit. Fidelity reports a 23% average balance drop in Q3 of 2023, which may drop more as the stock market's future remains highly unpredictable.

Even this third leg, Boomers rely on, is showing cracks. How will a severe recession impact pension funds?

How Living Longer and Shifting Demographics Impact the Overall Picture

Americans are enjoying longer lives, thanks to improved working conditions and healthcare innovations, with life expectancy doubling since the late 1890s. While this is fantastic news for extended time with our elders, it comes with a financial twist. Retirement now demands more funds than initially foreseen by our government and economy. Enter the concept of the old age dependency ratio, a measure indicating the number of individuals older than 65 per 100 people of working age. As this ratio is predicted to hit 50% in the US by 2075, there's a growing burden on the workforce and economy.

With rising expenses, there's talk of potential tax hikes and pressure to raise the retirement age for future generations (see this week's Foxy Fact). The struggle to afford basics like housing, education, childcare, and food pushes many Americans to their limits. As younger generations hesitate to have kids due to economic strains, our social and economic structures face challenges resembling a Ponzi scheme – needing a larger next generation to sustain itself. The question is, can our current model adapt to these changing demographics?

How Rising Healthcare Kills Retirement for Multiple Generations

There's one inevitable cost that skyrockets: healthcare. A 2017 study found that a healthy 65-year-old couple will need $275K to cover medical expenses in retirement. Facing the stark reality that 70% of Boomers will require some form of long-term care, the financial strain becomes palpable. Nursing home costs average between $7,988 and $8,034 per month. Where will the funds come from? Savings are insufficient, Social Security is under threat, and 401(k) plans are faltering. While Medicare seems like an option, it doesn't cover long-term care. Medicaid, designed for low-income Americans, poses its own challenges, as many middle-class Boomers find themselves in the awkward position of being too rich for Medicaid but too poor to afford necessary care. Even if they secure long-term care, accessing nursing homes is increasingly difficult due to staffing shortages and closures, with over 1,000 nursing homes shutting down since 2015, and more closures on the way. Then, in 2023, construction slowed, causing a shortage of available assisted living facilities. What happens to those with no money, no family and no place to go?

As Boomers grapple with the impending healthcare crisis, their children are trying to step up and fill the gap. However, most of the burden is falling on millennials, who face their own economic struggles with housing affordability, stagnant wages, and mounting debt. The caregiving responsibility becomes a battle between financial survival and familial duty. It's costing those over 50 stepping into unpaid caregiving roles a staggering average loss of over $300K in income and benefits. An amount that goes beyond just money. The emotional toll of caregiving and the difficult decisions millennials face in balancing their own futures create a challenging outlook. How family, money, and getting older are connected shows a delicate balance of duties across generations. It reveals weaknesses and raises a crucial question: Can our society adjust to ensure both those who care for others and those who are cared for stay well?

Take Aways

I wish the Boomer puzzle I pieced together so blindly didn't look as ugly as it does, but it may explain why we're hearing so much about Universal Basic Income and Central Bank Digital Currencies these days. But, honestly, I hope it doesn't come to that – millions more totally dependent on the government doesn't sound great. Ideally, we'd strengthen Social Security and healthcare, but it's a tough ask with the current historical debt our country is carrying. Maybe more financial education could help, but time's running out. Companies bringing back pensions or supporting retirements in new ways would be fantastic but highly doubtful. If no one acts, we, the people, might be the solution to this growing problem. In fact, I believe we already are (read Trending below). Spread the word about this crisis because it affects all of us, and please look out for struggling seniors.

Sources:

1. Just How Many Baby Boomers Are There?

2. How Much Will You Spend in Retirement?

3. Homelessness Among Older Adults: An Emerging Crisis

4. The Aging of America: Will the Baby Boom be Ready for Retirement?

5. Budget Basics: How Does Social Security Work?

6. Social Security Trust Finds Depletion Date Moves One Year Earlier to 2034 treasury Says

7. Brenton Smith: We Don’t Have 10 Years to think About Our Social Security Insolvency Problem

8. Late Bloomer Millionaires

9. How 401(k) Accounts Killed Pensions to Become One of the Most Popular Retirement Plans for U.S. Workers

10. NEW REPORT: Hidden, Excessive 401(k) Fees Cost Retirees $155,000

11. Fidelity Q3 2023 Retirement Analysis

12. Life Expectancy More Than Doubles in Past Century

13. Expect to Spend More on Healthcare in Retirement — Even if You’re Well

14. Nursing Home Costs

15. Nursing Homes Face Imminent Closure Without Financial Support from Congress

16. Why Might 400 Nursing Homes Close This Year?

17. ‘Profound’ Financial, Workforce Challenges Persist for Senior Living Providers as 2024 Begins

18. Number of Years and Percentage of Adult Life Spent Caring for an Older Adult

TRENDING