Repost — How Then Shall We Live: Retirement in the Wake of Generation Greed

There is a commercial on the airwaves right now that I just can’t stand: an investment company provides some quotes from a series of people on the first day of their retirement – the first of an average of 6,000 days, they say. That’s an average of 16.4 years. For most of human history, however, “retirement” has meant a brief period of leisure after a full life of working, generally a period when working was no longer possible. According to the Historical Statistics of the United States, the 1890 the decennial Census found 68.3% of American men age 65 and over to be in the labor force, working or looking for work, even though back then “work” usually meant physical labor. The figure drifted down to 54.0% in 1930, before the passage of Social Security, and may have hit bottom around 1985, when just 16.8% of married men 65 and over were in the labor force. The large-scale entry of married women into the labor force obscures other trends, but the percentage of single women age 65 who were in the labor force fell from 19.7% in 1970 to 9.7% in 1998.

For a fortunate generation or two, some workers were allowed to spend decades in retirement, often having as many non-working years supported by others as they had previously worked. That was possible because younger generations were richer, larger, better educated and more productive, and could easily carry the smaller number of modestly living retirees from prior generations. It was also possible because those older generations had saved for retirement. Today, younger generations of Americans are no larger, no better educated, and lower paid than the retirees they are expected to carry. The generations now in or near retirement have been more affluent during their working years, and expect to live similarly well in retirement, and yet most of them have borrowed rather than saved. Those younger, for the most part, will not get pensions, and may not get much Social Security. But encouraged by Wall Street firms seeking fees, the myth of decades of high consumption leisure lives on. Something that is only really possible at other people’s expense.

Note: another reminder that this was written two years ago for Room Eight.  Not much has changed, except more and more discussion of the oncoming “retirement crisis.”

It’s a math crisis. The retirement that some generations had, and that many public employees continue to have, cannot be had by everyone without a drastically lower standard of living during the working years.  As those in Europe are finding out.  But at least there, everyone is in it together rather than some grabbing at the expense of others.

Let’s look back with one more statistic. Not only did most seniors continue to work a half century or more ago, but those who did not work were often dependent on their children or consigned to poverty. In 1970, during the high point of “youth power,” nearly 25.0% of those age 65 and over were living in poverty, compared with just 14.9% of children. In 2009, in contrast, just 8.9% of those age 65 and over were poor, compared with 20.7% of children.   The decline in old age poverty was due to two factors. The main one is the extension and improvement of federal old age benefits – Medicare, Medicaid, and Social Security. The other was the defined benefit pensions awarded to the best off workers in the period after WWII. Those best off workers started retiring in the late 1960s and early 1970s, creating the “Golden Years” as people have known them. Second homes in Florida. Cruise ship vacations. And decades of work-free living.

But promises of decades of work-free living were vastly more expensive than anyone was prepared to admit. Many companies went bankrupt, causing workers to lose their pensions prompting the passage of the Employee Retirement Income Security Act (ERISA) in 1974. That act forced employers to actually fund their pensions, and to contribute to the Pension Benefit Guarantee Corporation (PBGC), which paid some of the benefits when companies went under. Faced with paying the actual cost of defined benefit pensions, virtually all companies eliminated them. In unionized companies, the unions cut deals to take retirement benefits away from future workers to ensure the benefits of past workers.

Very few private sector workers hired since the early 1980s recession have received defined benefit pensions. Employers at first promised to contribute to 401K plans instead, but with each recession the share of employers actually contributing to their employees’ pensions went down. This was a hidden pay cut, compared with the real cost of a defined benefit pension, of perhaps 20 percent. It was hidden because rather than save 20 percent of their income to make up for it, most workers now under age 55 kept spending instead. Only half of American workers have any retirement savings at all. The average retirement savings account? Around $60,000, I’ve read.

There were no ERISA provisions to force state and local governments to fully fund their pensions. They were free to cut political deals with public employee unions to increase benefits, and reduce taxpayer contributions at the same time, when the stock market was up, with those making the deals expecting to cash in before the bills came due. In older cities the cost of pensions led to the destruction of most public services in the 1970s. Instead of going bankrupt and taking away the pensions, most older cities eliminated public services and increased taxes instead, leading to urban degradation then. And perhaps to general degradation across the country now and in the future.

You may hear, for example, that public school budgets are being cut. What is actually happening is that a rising share of public school spending is being sucked into the past. Meanwhile, companies that continued to offer defined benefit pensions continue to go bankrupt. As a result PBGC is bankrupt itself, and the federal government is borrowing money to pay pensions even as a debate raises about cutting Social Security benefits for the younger generations who generally have nothing else coming to them.

That’s just part of a larger pattern. Rather than sacrifice and save to ensure old age benefits for younger generations, the federal government cut taxes and increased benefits for older generations. The period when the entire Baby Boom generation was in the labor force should have been the time of fiscal plenty in this country, but that bounty has already been spent. And now that era is over. What are the proposals by those age 55 and over, who now dominate politics? They aren’t calling for “shared sacrifice.” They are calling for those 55 and over to get everything they promised themselves but were unwilling to pay for, while those 54 and younger suffer all necessary reductions in federal old age benefits. The same generations who were also denied defined benefit pensions in the private sector. The same generations with lower inflation-adjusted incomes.

If you don’t just want to make my word for it, two excellent overviews of the situation have come out in the past week. First, over at The Economist, an essayist notes that globally the generations in or near retirement have promised themselves retirements they have been unwilling to pay for, and they are sacrificing their children’s future instead.

“The problem with pensions is that they are easy to promise but hard to fund. Politicians have in the past offered fat benefits and low retirement ages to voters. Bosses have offered similar goodies to workers. Without proper accounting, the full cost of those promises does not become clear for decades, by which time the politicians and bosses are long gone. Now the bill is coming due.”

If there is one thing I hear politicians, pundits and public employee union heads say over and over again that really make me mad it is this: there is no crisis because pension funds have plenty of money to pay existing beneficiaries. To pay the older people who are already retired. For those entering old age later “the fiscal burden on overstretched governments,” according to The Economist, “suggests that some subtle culling of benefits will occur.” Subtle, because older generations do not want to tell younger generations straight out how much worse off they will be. “As the OECD remarks, ‘today’s retirees are living through what might prove to have been a golden age for pensions and pensioners.’ Tomorrow’s pensioners will not be so lucky.”

The problem is that in the U.S. tomorrow’s pensioners are already increasingly worse off with regard to what they are earning while working, and thus in even less of a position to save than the richer preceding generations who had been unwilling to save themselves. According to a recent blog post, The Center for Retirement Research is shocked to find out that in 2010 the various generations age 54 and younger had much lower median household incomes than prior generations had at the same ages. (I’m shocked anyone is shocked, but that’s another story).

As the post’s first chart shows, in 2010 the median household income of those aged 65 to 74, the so-called “silent generation,” was about 20 percent higher adjusted for inflation than the median income in 2000 of those who had been 65 to 74 at that time (who were 75 and over in 2010). In 2010, the median household income of those who were 55 to 64, the first half of the baby boom, was about the same as the median income of those in that age group had been 2000. These two groups, now age 55 to 74, is Generation Greed, the last U.S. generation with incomes that were higher at each point in their lives than those who came before.

And the first generation of Americans whose incomes had been higher at each point in their lives than those who came after, the first to be better off than their children. The 2010 median household income of those age 45 to 54 was about 9.0% lower than the income of the Woodstock Generation had been ten years earlier, when that generation was in the 45 to 54 age group. The age 45 to 54 group is my generation, Generation Apathy, the first to be worse off at each age than those who came before. But it didn’t stop there. Back in 2000, when my generation was age 35 to 44, our median household income was 14.4% higher, when adjusted for inflation, than the 2010 median household income of those who were age 35 to 44 that year, Gen X. And as for Gen Y, now under age 35, their 2010 median household income was 14.1% lower than Gen X had received when Gen X had been under age 35, back in 2000.

The Center for Retirement Research gets two things wrong. First, it claims “the promise of America is progress, but that progress stalled for the youngest generation: U.S. workers under age 45 earned dramatically less than workers who were that same age a decade ago.” That isn’t a lack of progress. That is going backward, faster and faster, generation by generation. People just aren’t willing to call it what it is.

Second, it notes “the sharp decline in real incomes, especially for young adults, occurred in a decade bracketed by the high-tech bubble of early 2000 and the jobless recovery of 2010 from the financial crisis.  Without further analysis, it’s difficult to pinpoint precise explanations for the patterns.” The CRR evidently hadn’t been paying attention earlier, because the same analysis would have revealed the same results going back decades. I’ve read similar reports of similar studies during my entire adulthood. In 1990, my generation was age 25 to 34. Its income was lower, adjusted for inflation, than the previous generation’s income had been in 1980, when they had been age 25 to 34. The trend is starker, and began earlier, if one measures median earnings per worker rather than median household income. Because for a time the effect of falling wages on household income was obscured by an increasing number of workers per household.

But the CRR is right about one thing. The real tough times for the generations now under age 55 will come when they are older. “All but the wealthiest retirees typically experience a big drop in earnings when they leave the workforce; living standards don’t necessarily decline, because retirees pay lower taxes and reduce other expenses.” And get Social Security. But starting a decade from now, that big drop in earnings will start to hit generations who were already worse off to begin with. With old age looming, according to the CRR, “this is not a good trend and a decreasing median income for those in their prime working years is frightening.” Particularly since these less well off generations will also have to pay back the debts those older have foisted upon them for the past 30 years.

Basically, decades of work-free leisure is now limited to those willing and able to use their political power, and control of our public and private institutions, to grab that benefit at the expense of everyone else. Older generations of unionized public employees, who will continue to get paid to do nothing for decades, even as public services are gutted to pay for their benefits. And the executive class, which continues to get paid as if the 1990s stock market bubble was real, even as savers receive little or nothing in investment returns (something that contributes to the harm done by the retroactive enhancement of public employee pensions, because pension fund returns are lower).

Those privileged groups may soon be closed to new entrants.   Public employee unions are doing what closed shop unions do – take more for those cashing in and moving out, and sacrifice future generations of their own members who are nonetheless forced to pay dues. I’d love to see the percentage of public employees in Wisconsin who refused to contribute to their unions, when it was no longer legally required, by age group.

And sooner or later, investors are either going to get executive pay down to a level commensurate with real returns, or stop investing in stocks. Unless the one percent arrange for Social Security to be invested in stocks at inflated stock prices with low dividends, they are eventually going to run out of suckers. No one is going to make the past self-dealers give anything back, but I wouldn’t count on being able to join them.

The excuse generally used for maintaining benefits for those older, regardless of the cost and their collective past unwillingness to pay taxes, and slashing benefits for younger generations, even though they are also less well off in other ways, is that younger generations have “time to adjust.” My past tendency would have been to call for more fairness in, and changes to, public policy. But the near full media silence, in the Generation Greed-run media, on the reality of the situation, the fact that members of that generation control all our public institutions, its enormous capacity for rationalization, and the apathy of those coming after, mean that calling for fairness is probably a waste of time. So how to adjust?

Here is how I saw things 25 to 30 years ago, when I was first married and entering the labor force, and what I have learned since.

First of all, I never expected one year in retirement for each year worked. I fully expected to have to save quite a bit for retirement, and to live modestly in order to do so. And then expected to continue working as long as possible. And, beyond a certain point, I never expected my income to continue to rise. With a big generation ahead of us, I expected what was then described as “plateauing,” a series of lateral moves into different kinds of work instead of being carried along up some kind of organizational ladder.   Ironically, having worked very hard her entire career in one of the few organizations that still offers defined benefit pensions, and for now has the money to pay for them, my spouse is likely to receive such pension. That, and our savings, mean that we probably could “retire” at age 62, if not 55, if we wanted to. So we are better off now than I expected back then.

But I only got into the full-time, year-round workforce at age 25, after completing graduate school. After training for 20 years to be useful to other people, why would I want to cease to be useful to other people as soon as possible? Real “retirement” is a few years of leisure after a long period of responsibility. Anything more is “slavery lite,” and de facto slave owning is not my style. It will take an inability to work, or an opportunity to make an enormously valuable contribution without pay, to push me out of the labor force.

More recently I have also come to understand that the drop in income may happen long before actual retirement, and “plateauing” may be a best-case scenario for most workers. After a certain age, energy and productivity tend to slip little by little. Employers do not reduce pay accordingly, because they do not want disgruntled employees. Instead they fire incumbent older workers when times get tight, but are only willing to hire older workers at lower pay or/or in different positions. That is why so many older workers remain unemployed today – their pay expectations are above what anyone is willing to offer. And it is part of the reason that so many workers are being forced to take jobs that pay so much less than they had earned in the past. It isn’t just the recession.

So while I expect to continue working, I also expect that work will eventually become lower paid and/or part time. In the past, employers have been reluctant to offer shorter schedules to older workers who want to keep working. But as labor once again becomes scarce at the lower pay levels that will be offered, which is what I predict for the private economy for a decade from now, employers will be forced to change that attitude. As average incomes continue to descend, American businesses will not be able to charge more to American consumers, so pay will be restrained in turn. But as our past debts cause our dollar to depreciate, Americans will find imports increasingly expensive. We will have to produce more of what we consume, even as more baby boomers drop out of the labor force. The result will be more work at lower wages.

I knew enough 30 years ago to expect to continue working into old age, and having a very modest lifestyle in retirement. Some of my peers understood this, some took action, but others did not understand it, or just did not deal with it. Anyone now 45 and younger has no excuse not to see what is coming and act accordingly. But how?

First of all, if you know that you will be facing a very modest material lifestyle after age 55, and certainly after age 70, does it make sense to upsize your lifestyle now in a way that makes that downturn in income hurt all the more? Does it make sense to become psychologically dependent on a way of life that is likely to be taken away? To me, the answer is “no.” One option is to save more money during your prime earning years. The other option is to earn less.

In the past, many people gave their entire lives over to work, sacrificing their home life and often their integrity, in the hope of collecting a future reward in retirement, when they would actually get to do what they want to do. But what if that reward will never come? What if all the money you invest in stocks is simply appropriated for excess executive pay? Then all that hard work and savings would still yield and empty nest egg. What if, 20 years from now, the federal government will “means test” old age benefits, as both Republicans and Democrats have proposed? Then couples with two 60 hour per week jobs, children raised by nannies and fed on take out meals, will end up being “rich” compared with those who worked less and/or spent more. And then will have their benefits cut, becoming no better off for their troubles.

If you read this far, I strongly recommend reading this New York Times article, “You Saved But They Didn’t So Now What?” The article is from 1996. Don’t say we weren’t warned. We had a party instead of solving the problem when it was solvable.

If you expect to go on working, there is bound to be less willingness to turn work into a hellish ordeal. Thus, rather than earn and either spend or save more money, my wife and I worked part time when our children were young. Would I trade those special days at home for more years in retirement? No. But the point is that the trade may not be available, and the additional years in retirement may not be there even if you kill yourself or sacrifice your integrity in your 30s. All your efforts may just be siphoned off by those who came before.

It’s a marathon, not a sprint, because they’ll promise you a finish line and take it away. Work hard because you want to, doing what you want to do, not in the hopes of spending more and ceasing to work later. And if you can’t do what you want to do at work, spend more time doing what you want to do outside of work now, even if that means earning and spending less. A high consumption lifestyle may not be possible even after they are gone, because of the debts they will leave behind. That ought to inform your choices now.

Update: what you are hearing now, and will hear increasingly more as time goes on, is a desperate assertion that even more public money needs to be shifted to today’s seniors because, well, they have needs! Even though they were the richest generations, on average, in U.S. history.  And what about those coming after? What about their needs? You don’t hear much about that.