The Baby Boomer generation is well-known for being the product of the post-World War II baby boom, and for rejecting and redefining traditional values in many ways. However, did you know that the Baby Boomer generation also represents a “demographic glitch” in a way that is important to all of us?
Allow me to explain.
A Four-Letter Word and the Future of Our Economy
On January 11, 2011, a CPA named David M. Walker appeared on national radio and made a grim prognostication: Based on the current fiscal path, future tax rates will have to double or our country could go bankrupt. He then challenged the national listening audience to come up with a four-letter word that would explain why. The calls came pouring in. “Debt?” came one answer. “Wars?” came another. “Kids?” came the next. After a few more wayward guesses, David Walker finally revealed the answer. “It’s math.”
Who is David Walker, and what does math have to do with the future of our country? For an 11-year period starting in 1998, David Walker served as the Comptroller General of the United States and as the head of the Government Accountability Office. In short, he was the CPA of the USA, and the nation’s chief auditor. Having performed in that capacity during both the Clinton and Bush administrations, he knows more about our country’s fiscal state than perhaps anyone else on the planet. Since his resignation in 2008, Walker has been crisscrossing the country, raising the warning cry, and discussing sensible solutions with anyone who will listen.
The Boomer Glitch
To understand the urgency behind David Walker’s mission, you need look no further than the mathematical realities facing Social Security. The Social Security Act was passed into law in 1935 as the lynchpin of Roosevelt’s “New Deal” with America. When it was first implemented, the math behind it (based on expected birth rates and life expectancies) ensured its financial viability into perpetuity. There were an astounding 42 workers putting money into Social Security for every one person who took money out.
But then, something happened that would change Social Security forever. Soldiers came home from World War II and started having babies – lots of them! More babies equals more workers, which means more contributions to the Social Security program, right? That would be true if the Baby Boomer generation had decided to have as many children as their parents did, but they didn’t. They had 32 million fewer children. And this is where the math catches up with us.
The Baby Boomers unknowingly created a demographic glitch that has a significant impact on all of us. The workers-to-retiree ratio continues to drop, jeopardizing the solvency of Social Security and other entitlement programs. Today, there are no longer 42 people contributing to Social Security for every one person who takes money out of the program. The ratio has fallen to 3 to 1. In another 10 years, it’s going to be closer to 2 to 1.
The Entitlement Program Crisis
As of 2017, the Social Security program cost the government over $945 billion per year or about 23% of the federal budget. And the consequences for the United States couldn’t be more devastating.
The math behind the Social Security problem is emblematic of a much broader crisis facing our nation. Over the years, our elected officials have increasingly made promises, like Social Security benefits, without any thought for how they were going to pay for them. David Walker calls these promises “unfunded obligations.” The greatest of these unfunded obligations is Medicare, which suffers from the same demographic challenges as Social Security. As of 2017, it cost the government over $590 billion per year, and these costs continue to spiral out of control. According to Walker, the fiscal strain of these two programs alone could bankrupt the United States.
A closer look at the numbers explains why Walker is so alarmed – and why the rest of us should be, too. To quantify the actual cost of these unfunded liabilities, the government employs its own unique (and creative) accounting method. Instead of telling us the actual cost of a program, they express the cost as the present value of a future obligation. For example, the government tells us that the cost of Social Security and Medicare is $42 trillion.
What this really means is that we would have to have $42 trillion sitting in an account today, earning Treasury rates, to be able to afford these programs. But the government doesn’t actually have $42 trillion today, and if you look beyond 75 years, the real cost is much greater. All told, some experts put the actual cost over time at much closer to $120 trillion.
But Surely Taxes Could Never Double!
The mathematical reality is that, absent any spending cuts, tax rates would have to double. It might sound crazy if you’re hearing this for the first time, but a study of the history of taxes in the United States lends a bit of perspective.
Over the last 100 years, tax rates in our country have been nothing short of a roller-coaster ride. When the government first began dipping its toe in the waters of income taxation back in 1913, it seemed harmless enough. In fact, the very first federal income tax rate was only 1%. But soon the thrill of income taxation became so addicting that the government got hooked. By the time 1943 rolled around, the highest marginal tax bracket in our country had skyrocketed to 94%. These exorbitant rates were levied on any portion of your income that exceeded $200,000.
By the ’70s, things had improved, but not by much. Americans were still paying an astounding 70% on anything they made above and beyond $200,000.
Fast-forward to today. In 2021, the top marginal rate at which the wealthiest Americans pay taxes is a mere 37%. In truth, taxes today are just about as good as they’ve ever been! The real question is, how long can these low rates last with the huge train of entitlement bearing down upon us?
Why You Need to Act Now to Lessen Your Tax Burden
So many Americans have grown accustomed to investing in tax-deferred accounts such as 401(k)s and IRAs, and now we find ourselves standing on the tracks with a very real train in our sights in the form of higher taxes. Now, given this reality, we have a couple of options. We can pretend like the problem doesn’t exist and simply pull down the window shade. Or, we can implement some proven strategies that can help remove us from the train tracks.
In my practice, I use proven strategies that will help you get off the train tracks and insulate your money from the impact of higher taxes down the road. The only real way to protect yourself from the impact of rising taxes is to adopt a strategy that puts you in the 0% tax bracket in retirement. Why is the 0% tax bracket so powerful? Because of that same four-letter word: math. If you’re at the 0% tax bracket and tax rates double, two times zero is still zero! By implementing these concepts before tax rates rise, you can effectively remove yourself from the train tracks and protect your hard-earned retirement savings from the gathering storm that’s looming on our country’s horizon.
If you’re interested in protecting your hard-earned dollars, schedule a strategy session with us today. At Hanson Wealth Management, our ability to design a comprehensive strategic plan for your successful retirement is rooted in the broad experience and deep understanding gleaned from years of experience working with clients like you. We can’t wait to hear from you!