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Many boomers facing a retirement bust

By Albert B. Crenshaw
The Washington Post

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There has certainly been no shortage of alarms sounded about the financial status of future American retirees, especially the giant baby-boom generation, which begins turning 65 in 2011.

But a big new study has put some numbers on the shortfall — and they are grim.

In the aggregate, retirees in this country in 2030 will be at least $45 billion short of the income they need to cover basic living expenses plus expenses associated with nursing-home or even home health care.

From 2020 to 2030, the aggregate deficit will be at least $400 billion, according to the study done by the Employee Benefit Research Institute in Washington, in collaboration with the Milbank Memorial Fund, a New York foundation.

Those numbers may not seem very meaningful to individuals, who can, and apparently do, say, "It won't happen to me."

But they should make policymakers' hair stand on end, especially at the state level.

They are what government in some form will have to come up with unless there is some breakthrough in medical costs or a substantial change in savings behavior by younger people.

If those things don't happen, government will have to find the money or, as Milbank Memorial Fund President Daniel Fox said, "tolerate more human suffering."

How that can be managed isn't clear. Already, some state treasuries are being eaten up by the cost of Medicaid, the state-federal medical-insurance program for low-income people.

An aging population will drive costs higher. While the elderly constitute 9 percent of Medicaid enrollees, they account for 27 percent of the program's spending, according to Diane Rowland of the Kaiser Family Foundation.

Worst off, the study found, will be people unmarried at retirement, particularly women. Many factors are involved, especially women's lower lifetime earnings and longer life expectancies.

The brightest spot in the report is its conclusion that a great many younger people could significantly increase their chances of having enough money for basic expenses throughout retirement by boosting savings by 5 percent of their pay.

That wouldn't work for most older people or for the lowest-income people of any age, but it does suggest the possibility exists of avoiding the worst the future might hold.

Unfortunately, experience so far indicates such a savings increase is unlikely to happen without major behavioral or policy changes.

Against that background, the federal government is racking up deficits that may make it very difficult to rescue states or penniless retirees. The Bush administration's proposals for various tax-free savings accounts could also undermine the willingness of employers, especially small ones, to offer even 401(k) plans, leaving more people to their own devices for retirement. But there are policy changes that could help.

• Former Treasury benefits tax counsel J. Mark Iwry said at a forum on the report that tax credits, rather than tax deductions, would make retirement saving more attractive because deductions are of little value to those in low- and zero-tax brackets.

• Improvements in marketing of long-term-care insurance are of great interest to the states because such coverage could take a lot of the pressure off Medicaid. Four states (Washington is not one of them) have deals that allow people who buy a certain amount of this insurance to qualify for Medicaid without being destitute if they outlive their private policies. But other states have been barred by federal law since 1993 from adopting such arrangements.

• Making annuities more attractive would also help, because they offer protection against outliving your income — but it's tough to see how it could be done without government intervention.

Copyright © 2003 The Seattle Times Company