The ‘silver tsunami’ about to hit America

Who is Kathleen Casey-Kirschling?

Public Enemy Number One or that's the impression you'd get if you listened to parts of the US media over the past week or so. Retired teacher Casey-Kirschling is the first of America's baby-boomers to have applied for her old age pension, heralding the start of what demographers are calling the "silver tsunami" as the first wave of the 78 million Americans born between 1946 and 1964 reach the age of 62, entitling them to monthly retirement benefits from the country's rapidly dwindling social security funds. With the US facing an estimated $50trn in future benefit obligations, some fear we may look back on this as the point when America started to go bankrupt.

How did the country get into this trouble?

Simple demographics as the American population has aged over the past 50 years, there are fewer taxpayers supporting those who have retired. As World War II drew to a close, there were 42 workers paying money into the social security system for each retiree drawing funds out. Today the ratio is down to just three workers per retiree. And in the course of the next 20 years, that ratio will fall to two to one. The problem is that the number of Americans over the age of 65 (currently 37 million) is set to double to nearly 80 million by 2045, while the size of the workforce is set to grow by just 20%.

But the US government should also admit its part in the crisis. Successive administrations have plundered the social security system for their own ends. When Congress passed a deal to raise social security tax to ostensibly solve the impending "boomday" crisis in 1983, the US government spent every penny of the surplus right up until 2001 about $35bn a year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But as one US baby-boomer pointed out to The Times, the system was always flawed. When Social Security was drawn up in 1938, life expectancy was about 58. The system simply wasn't designed for a generation that is now expected on average to live to the ripe old age of 82.

What strain will it put on the system?

"This is the single biggest economic challenge of our era," says Brian Riedl of the conservative Heritage Foundation. About 49% of male and 53% of female baby-boomers are expected to take the option of early retirement drawing a monthly cheque worth 75% of the full payment for up to four years. The current average state pension stands at $1,079 (£500) a month, which won't exactly sustain a decadent lifestyle, but the real elephant in the room is Medicare. "It won't take much sky-diving, bungee jumping and white water rafting before we all require new hips, knees, pacemakers and steel plates in our heads," notes PJ O'Rourke in The Weekly Standard. With health costs escalating, there is no telling how much the baby-boomer medical bill will swell to.

This is a generation that "created a way of life entirely based on drugs", says O'Rourke and you'll see them do it all over again with over-the-counter pharmaceuticals. Except this time, it will be the taxpayer who picks up the bill. By 2013, Medicare will be paying out more than it takes in from payroll taxes. By 2019, it will have run dry.

Will anything be done?

There is a reason why Americans refer to the social security system as the "third rail" of American politics touching it can lead to political death. When you consider that those 78 million baby-boomers account for a third of the American electorate, it's difficult to see how Washington will muster the political will to make the tough changes that are necessary.

Maintaining pension and healthcare benefits at current levels alone would require taxes to increase by 33%-50% by 2030, notes Andrew Ward in the FT. In truth, shortfalls in social security could easily be made up by a modest rise in the retirement age. But addressing the Medicare crisis would require a radical overhaul of the American health system. Who in Washington would bite the bullet there?

Is the US the only country in trouble?

No. Japan and Britain had baby booms of their own after World War II; the average age in Japan is set to jump from 43 to 55 by 2050. With Japanese retirees relying on federal pensions for two-thirds of their retirement income, the country is going to feel the pinch, says Terrie Llody in Japan Today. Fortunately for the young, Japanese parents were savers, with the over-50s holding 80% of the country's $13.1trn in personal assets.

The same can't be said for Britain; think tank Reform says that 18 to 34-year-olds face an effective 49% tax rate as they fund the pension and health care costs of their elders, as well as paying tuition fees. With the number of over-75s in Britain set to grow by 76% to 8.2 million by 2031, they could be paying out for a long time to come.

Where will it all end up?

"In 1967 they were the flower children," says Suzanne Goldenberg in The Guardian, "now it's all about the cheque." Baby-boomers certainly haven't left much for their kids remortgaging their homes to the tune of $8trn and going on a colossal spending spree that has seen consumer debt climb to $11trn. But the baby-boomers are just doing what they do best, says PJ O'Rourke shaping America to their will and making the entire nation conform to their ideals and tastes. That won't be popular with the young professionals facing the prospect of funding their elders' ski trips and summer cruises through their taxes. "America's fate can be summed up in one word," says O'Rourke: "Youthanasia".