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Pigs, Pythons, and Politics:

How to Survive the Aging of the Baby Boomers

by: Stephen A. Moses
Keynote address presented to: The IBC Long-Term Care Insurance Conference
Chicago, Illinois: March 22, 2000

Introduction and Motivation

In 1983, when I first began timidly to survey the private sector in search of solutions to social problems, it certainly wasn't obvious that the marketplace could do a better job than government.

For example, as a career federal employee working in the Health Care Financing Administration, I was concerned about the skyrocketing costs and plummeting effectiveness of Medicaid and Medicare.

Long-term care especially was a huge, growing, and potentially devastating social and fiscal challenge that was not being met by the public or the private sectors.

Already, America's long-term care service delivery and financing system showed the same characteristics and strains it suffers from today:

Access and quality problems; low reimbursement from and excessive reliance on public funding sources; inadequate private financing and little or no private insurance revenue; heavy nursing home bias and too few home and community-based services.

It seemed to me that if this was the kind of dysfunctional long-term care system government financing was buying us, maybe we ought to see what people would purchase if they had the independence, control, and financial wherewithal to buy their own long-term care.

Given the high cost of long-term care, however, most people would never be able to purchase their own services in the private market without the help of insurance.

That realization sent me out to explore the budding long-term care insurance market in the mid-1980s. What I found was not encouraging.

The products were complicated and expensive. They contained strict benefit triggers that seemed to prevent even reasonable claims. They focused on nursing home care instead of the home-based services seniors preferred.

And most seriously, the products had a terrible reputation. Consumer Reports lambasted long-term care insurance calling it a "bear trap." Most attorneys and financial planners advised against buying the products. A powerful Congressional chairman, keynoting a major long-term care insurance industry conference, as much as called the agents, brokers and carrier executives in the audience a bunch of greedy sleazeballs.

Well, here we are in the year 2000, and boy, have things changed! Even critics of the industry acknowledge that excellent products are readily available. Pool-of-money policies have made red-carpet access to top-quality home care and assisted living easily accessible to most policy-holders. Government bureaucrats and politicians are urging people to buy long-term care insurance to relieve the burden on Medicaid and Medicare. Where once we heard nothing but criticism and ridicule, we now hear tax deductibility, employer-based coverage for federal workers, and, believe it or not, attempted criminalization of the industry's biggest competitor--Medicaid estate planning.

You've come a long way baby! And boy am I glad I left the government 10 years ago to take this ride with you.

Unfortunately, however, our job is not done yet. Long-term care insurance market penetration remains around seven percent of seniors and virtually none of the baby-boomers. We'll talk in the next hour about what has to be done to change that.

For now, I want to lift your eyes a little higher on the public policy horizon. I want to confront your minds with a fuller understanding of the grave challenge our generation faces. And, I hope to fill your hearts with the passion I feel to be a part of the solution.

Let me give you a hint of where I'm headed: if you don't leave this room today with a pretty good idea of how to achieve personal prosperity and professional success, then you weren't listening!

The Global Aging Crisis

Let's talk about the global aging crisis.

Former Commerce Secretary Peter G. Peterson wrote a book called Gray Dawn: How the Coming Age Wave Will Transform America-and the World. It lays out the problem very clearly.

He writes: "There's an iceberg dead ahead. It's called global aging, and it threatens to bankrupt the great powers. As the populations of the world's leading economies age and shrink, we will face unprecedented political, economic, and moral challenges. But we are woefully unprepared. Now is the time to ring the alarm bell."

Here are the facts:

  • Global life expectancy jumped from age 45 to age 65 just since World War II, a greater gain in fifty years than in the previous five thousand.
  • In 30 years, one in four people in the developed world will be 65 years of age or older, up from one in seven today.
  • People over 85, the old-old, who consume three to five times more health-care services per capita than younger people and whose medical bills are usually picked up by the government, are growing fastest. Over the next 50 years, their numbers will increase six-fold while the 65 to 84-year-old group will only triple in size.

We will not only have more older people, we'll have relatively fewer younger people:

  • Fertility has plummeted worldwide from 5 children per woman 30 years ago to 2.7 today and only 1.6 in the developed countries, well below the replacement rate of 2.
  • 44 percent of the world's population already lives in countries with fertility below the replacement rate

What are the ramifications of these trends?

  • According to Peterson: "Direct cash transfers from the working young to the nonworking old are now the norm throughout the developed world. Unfunded, pay-as-you-go pensions have become the bedrock institution of retirement security throughout the developed world."
  • Here's the problem: The ratio of working taxpayers to nonworking pensioners is 3 to 1 today. By 2030, without reform, it will be 1.5 to 1. In Germany and Italy, it will be 1 to 1. Every working couple will have to support at least one anonymous retiree, and possibly two!
  • Furthermore, in 30 years, over half the adult population of today's developed countries and two-thirds of their voters will be near or beyond today's eligibility age for publicly financed retirement. Who will do the work, pay the taxes, raise the children, and save for the future?
  • The unfunded liabilities for pensions alone are about $35 trillion in the developed countries. Add health care, and that figure doubles.
  • Finally and perhaps scariest, this is all quite inevitable: The elderly of the first half of the new century have already been born. They can be counted-and the retirement benefit systems on which they will depend are already in place.

So, this is the hand the world has been dealt and it's the one we're going to have to play.



Aging In America

Well, how does this crisis in aging demographics affect the United States?

Finally, some good news...

Compared to the other developed countries, our population is aging slower, our birthrate is higher, our immigration is less restrictive, our senior benefits are less generous, and our private pension systems are stronger.

But we have these advantages only on the margin. Our aging crisis is plenty serious:

  • Today, one in five citizens of Florida is over sixty-five, more than in any other state. By 2025, all America will fit that same profile. We'll be a nation of Floridas.
  • 30 years ago, children under five outnumbered Americans aged eighty-five and over by twelve to one. 40 years from now, these groups may be about equal in number, as the old-old increase ten-fold to 14.4 million. Imagine, as many Americans tottering as toddling!
  • Two-thirds of those over 85 will be women, of whom over four-fifths will be single, divorced, or widowed, the groups most likely to need extensive government assistance.

The consequences for our entitlement programs could be staggering. According to Pete Peterson in another book (Will America Grow Up Before It Grows Old?)

  • "By 2030, when all the Boomers will have reached sixty-five, Social Security will be running an annual cash deficit of $766 billion. [Including] Medicare Hospital Insurance the combined cash deficit that year will be $1.7 trillion. As for total unfunded federal benefit liabilities, they are now $17 trillion-or about $170,000 of hidden debt per family."
  • The Kerry-Danforth Commission on Entitlement and Tax Reform concluded that "the benefit outlays for just five programs-Social Security, Medicare, Medicaid, and federal civilian and military pensions-will exceed total federal revenues by the year 2030."
  • Investor's Business Daily reports that policy-makers will have to boost income taxes by 25.3% and payroll taxes by 38.7% or they will have to slash program outlays by 57.4% just to avoid passing this bill on to the next generation.
  • Will the "budget surplus" save us? Maybe, if the politicians don't fritter it away on new spending ideas. But grand plans for extending Medicare to people age 55, the hue and cry for prescription drug benefits, the steady expansions of Medicaid to more and more groups, and the call to give tax credits to caregivers all suggest serious belt-tightening is not in the offing.
  • AARP's recommendations for federal legislation alone would bloat the federal budget by $944 billion per year, an increase of over 50 percent, that could require a permanent annual tax hike of $7,801 per taxpayer.
  • As Ben Franklin told the Constitutional Convention: "There will always be a party for giving more to the rulers, that the rulers may be able in return to give more to them."

No, we're not likely to implement public policy solutions that will actually work any time soon. The entitlement mentality is too strong and the politics of pandering are too successful.

Instead, we will muddle through indefinitely. The social insurance and welfare programs will expand to fill the revenue available for them and contract only when resources are scarce.

And this is where the real danger lies...

Right now, times are great. We are passing through a wonderfully benign demographic period in which a huge cohort of Baby Boom workers is swelling our tax receipts while a relatively small generation retires. 77 million boomers are paying 60 percent of all payroll taxes collected in America.

Before we know it, however, these demographic forces will be thrown abruptly into reverse. The boomers will cease paying into the system and start drawing benefits from it. All other things being equal, our false sense of security will gradually collapse sometime around 2010. By then, it may be too late to prevent disaster.

Therefore, it behooves us to get to know who these Baby Boomers are and what effect they are likely to have on the economy, on public policy and on our private prospects.

The Boomers' Demographic Trajectory:

  • When the GIs returned from WWII, their ladies welcomed them joyously.
  • Between 1946 and 1964, the 77-million-strong baby-boom generation was born.
  • Ever since, the boomers have been moving through American history like a "pig through a python," and some would say like a "bull through a china shop".
  • Today, a baby boomer turns 50 every seven seconds and times are good.
  • In 35 years, the boomers will be turning 85 almost as fast and times may turn bad.
  • What can we learn from the past of this extraordinary generation to help us prepare for the future?
  • The first boomers were born in 1946. Gerber baby food sales doubled between 1948 and 1950; the diaper industry boomed; and Dr. Spock became a household name. This should have been a good hint of what was to come...

Now add 5 or 10 years: sugar-coated cereals, hula hoops, and the Mouseketeers were all the rage in the mid-fifties. The boomers started school, but because no one anticipated this surprising development, the schools were completely inadequate and overwhelmed.

Add 15 or 20 years: The sixties brought us booms in Clearasil, orthodonture, fast food, hot cars, and ultimately drugs, sex and rock and roll. The social unrest of the late 60s came from the rebellion common to all generations in their late teens and early 20's. The difference was the gargantuan size of our generation.

According to Ken Dychtwald in his 1989 best seller Age Wave "America should have learned a potent lesson about the aging of the boomers at that moment, when they arrive at any stage of life, the issues for them at that stage-whether these are driven by financial, interpersonal, or even hormonal forces-will become the dominant social, political, and marketplace themes of the time."

Unfortunately, we did not learn that lesson then and we have not learned it yet.

Add 25 or 30 years: By the late 70s, the boomers were beginning to mature, settle down, and start families and careers. Of course, they overwhelmed the job market and that depressed real wages. Abundant cheap labor impeded business innovation and capital investment. The stock market went nowhere. The boomers had to borrow to buy everything, which caused interest rates and real estate prices to skyrocket. The result was stagflation, recessions, Jimmy Carter's "malaise" and a bunch of best sellers on personal identity, self-esteem, and lifestyle experimentation.

Add 35 or 40 years: By the 1980s, the boomers were catching their economic stride and enduring their mid-life crises. Yuppies reveled in conspicuous consumption and suffered from stress, breakdowns, and divorce. They read the Wall Street Journal, Forbes, and Fortune while Rolling Stone and its ilk either retrenched or folded. The boomers were making real money now, so they didn't need to borrow as much and interest rates declined, inflation abated, and the stock market skyrocketed.

Quite predictable, if we had only thought about it.

Add 45 or 50 years and you bring us close to the present: The 90s found the boomers approaching their peak earnings years and donning their bifocals. Their kids were moving out and their bills and mortgages were being paid off. More money was available for investment and the need to save was clear and present. Money flooded into their IRAs and 401Ks, fostering low inflation, low unemployment, increasing productivity, a thriving economy, and hitherto unimaginable prosperity. On the other hand, middlescence has been no bed of roses for the "sandwich generation." We have to handle ailing parents and boomerang kids while resisting the lure of luxury RVs and premature retirement.

Add 55 or 60 years: Now we're into the first decade of the new millennium. It does not get any better than this. The boomers are in their peak earnings and investment years; their nests are empty and paid off; menopause and mid-life crises are behind them; wisdom and good judgment are hopefully setting in; and the economic boom continues. But if we are smart, and learn from past failures to anticipate the boomers' impact, we will take notice of some warning signs: At age 59.5 in 2006, the first boomers can start withdrawing money from their IRAs and 401Ks. At age 62 in 2008 they can start filing for Social Security. After 25 years of a booming stock market, taking profits and early retirement may look very attractive. How soon will the boomers pull their money out of the market (driving it down), sell their urban real estate (deflating property values), and decamp to the sun belt (leaving the productive economy in the lurch)?

Now add 65 or 70 years: By 2015, the elder boom has converted its growth stocks into fixed income investments; they've downsized their residences; and they're collecting Social Security and relying on Medicare. These social programs are scheduled to go bankrupt or turn negative in cash flow about this time. Many of the Yuppies have turned into Dumpies: destitute, unprepared, mature people. Perhaps we should anticipate another depression, or at least a severe recession around this time.

Now add 75 or 85 years: By 2030, the entire baby boom generation is over age 65 and receiving Social Security and Medicare. They are slowing down; their health is declining; their physical and mental disabilities are increasing. Parkinson's, Alzheimer's, stroke and other chronic illnesses are sending almost a quarter of them to long-term care facilities. The birth dearth generations are struggling to support their aging parents with too few workers, too little capital, burgeoning debt and a struggling economy.

Will this be the end of civilization as we know it or can we learn from the boomer generation's past, anticipate the future, and alter it to our advantage? Or is their another factor in play that may save us in spite of ourselves?

Window of Opportunity

Clearly, we are entering a uniquely advantageous but brief period of our history as America's biggest generation approaches its peak of productivity. We have a "window of opportunity."

I want to introduce three hopeful themes: the idea that we can benefit from the predictability of the baby boom's economic future; the idea of the New Economy; and the idea of a new age of life.

On the theme of predictability, I'm drawing on a best seller by Harry S. Dent called The Roaring 2000s

According to Dent: "We are in the midst of the greatest economic boom and technological revolution in history. And it hasn't occurred yet. It is about to emerge: just as cars, electricity, and phones did in the Roaring Twenties. The Roaring 2000s will come with the aging of the massive baby boom generation into its peak productivity, earning and spending years and the emergence of their radical information revolution into the mainstream of our economy. Tighten your seatbelts and prepare for the greatest boom in history: from 1998 to 2008!"

Dent says Americans reach the peak of their spending and the apex of their impact on the economy at age 46.5 years. Therefore, all you have to do to figure out what the economy will be doing at any given time is plot the baby boom generation on a 46.5 year lag.

For example, adding 46.5 years to 1946 which was the first year of the baby boom brings us to the middle of 1992. Is Bill Clinton lucky, or what? He was elected to the Presidency in the very year that the first boomers reached their peak spending years and he's been riding that wave ever since. That is part of what accounts for the new-found budget surpluses that seemed to come out of nowhere.

Unfortunately, what comes around, goes around. After age 46.5, family spending decreases sharply, which is negative for the economy. Add 46.5 to the last year of the boomer generation (1964) and you get 2010.5. After that, look out, everything may collapse, but in the meantime: let the good times roll!

I'm vastly oversimplifying Dent's argument, but you get the picture. He predicts that the Dow Jones Industrials may reach 35,000 by 2008. I do not endorse this prediction, so don't blame me if the market tanks, but I do encourage you to consider how aging demographics affect our economic destiny and to plan and invest according to your own best lights.

On the theme of the New Economy, consider the following "s-curve" analysis, also from Dent:

New technologies never live up to our expectations in their early stages. They tend to be used in industry before the home; and in personal, non-commercial usage in very limited ways at first. This was true of the telephone, electric lighting, electric motors, and the automobile. Growth and change are curvilinear, not straight-line phenomena.

For example, imagine a big "S." Make it into a graph. Draw a "y" axis west of it and an "x" axis south of it. Now pull the ends of the "S" a little further apart so you have a gradually up-sloping line that suddenly heads steeply north and then just as suddenly levels out to a slightly up-sloping line at the top of the graph.

That's the s-curve and it describes the process of integration of new technology into an economy. Says Dent: "...innovations move very slowly into niche markets and then mushroom into the typically takes the same amount of time for a product to reach 10 percent acceptance as it does to reach 90 percent acceptance." These three phases are innovation, growth, and maturity.

The dominant technologies of the coming century-microelectronics, biotechnology, telecommunications and information technology-are finally moving quickly from the gradual innovation and investment phase into the rapid growth and dispersion phase. This is why we are finally seeing productivity growth over 4% after decades of experimentation and capital investment with little or no visible return.

Now, here's the exciting news according to Dent: "The convergence of key technology trends with the aging of our population will cause the information revolution to accelerate and move mainstream in the next decade. This will create a broad-based productivity revolution, changing how we live and work more than any time in history. Add to this development the economic effect of the peak spending years of the baby-boom generation, occurring at precisely the same time, and we are almost certain to see the greatest boom in history."

The third positive theme I want to introduce is the idea of a new age of life...

We're not driving our "father's Oldsmobile" and we won't be living our mother's or our grandmother's old age.

The whole idea of what it means to grow old is changing and here are a few examples from the news:

  • We're living longer: "the Census estimates there are now nearly 70,000 people age 100 or older, almost double the 1990 total." The WSJ says 20% of us may see the beginning of the 22nd century.
  • We're staying healthier: "Overcoming aching joints and chilly weather, Gerry Bloch [age 81] became the oldest climber to scale the steep face of Yosemite National Park's famed El Capitan-for the second time. Bloch quit skydiving at age 78."
  • We're keeping active: "Stand aside, kids-the old-timers are taking over the Web! The age group with the highest concentration of online buyers is the 50 to 64 segment, at 27%; the fastest-growing segment is 65 and over-just 4% last year, but up to 16% this year."
  • We're concentrating the wealth: "Americans over the age of 55 make up a fifth of the population but control up to three-quarters of the nation's financial assets... They have benefited handsomely from a nearly two-decade-long stock-market boom."
  • We're changing politically: "Older Americans were once among the most loyal of Democratic voters in congressional elections; But the New Deal generation of older Americans is passing-World War II veterans are dying at a rate of more than 1,000 a day…-and their successors are more likely to have Ronald Reagan as a reference point than Franklin Roosevelt."

We are indeed seeing the dawn of a new age.

How To Thrive During The Aging Of The Baby Boom:

Now it is time to cash in! Let's weave all these themes together and see what we get. How can we thrive during the aging of the baby boom?

The gloom and doom scenario associated with the "time-bomb" of aging demographics may occur.

But there is plenty we can do to protect ourselves, our families, our clients and our country against this risk.

I think that the opportunities lying immediately before us more than counterbalance the dangers we face in the future. Let me tell you why...

Nearly all of us are attending this conference because we share one underlying, common belief: individual initiative and the private marketplace have an important role to play in protecting older people against the risks of global aging that I've described today. We can't just rely on the government to take care of us!

Nowadays, survival in a marketplace of turbulent change requires that people and companies confront reality and adapt quickly. Success in the new economy demands reason and individualism. The comfortable corporatism of the 50s is long gone. Computers respond well to logic and analysis, but they punish wishful thinking mercilessly. Capitalism is ascendant in the world.

Just consider some of the new products and procedures developed in the past 50 years: personal computers, the Internet, wireless phones, organ transplants and artificial hearts, in vitro fertilization, space stations, supersonic jetliners, bullet trains, birth control pills, automated factories, TV with hundreds of channels, on-line stock trading, and cloning. These are not the products of central planning or government programs.

Worldwide productivity growth was approximately 1% a year in the 20th century. Knight Kiplinger predicts that it will increase to 3% per year in the 21st century. Why? "Too often [in the twentieth century], human ingenuity was trumped by human folly. The benefits of science and free-market economics were often thwarted by governmental ineptitude, greed and hostility toward neighboring nations. A doubling or tripling of 20th-century growth is not a pie-in-the-sky fantasy. It's eminently doable because the political and economic ideologies that stunted growth through most of [the past] century are discredited and in decline, freeing human creativity and ambition to accomplish remarkable things."

The evidence, based on the Heritage Foundation/Wall Street Journal's Fifth Annual Index of Economic Freedom, is overwhelming: "[T]here is a high correlation between economic freedom and economic growth; the freer an economy, the better off the people-at all income levels. Countries with the freest economies had average annual growth rates of 2.9% from 1980 to 1993; countries with 'mostly free' ratings had average long-term growth rates of just under 1%. By contrast, 'mostly unfree' countries saw their economies contract over the same period by an average of 0.3% a year, and the economies of countries with repressive policies shrank by an average of 1.4% a year."

Things are going especially well here at home. Economist Lawrence Kudlow observes: "According to recent surveys over 40% of the U.S. population, roughly 125 million people, nearly equal to the entire workforce, own stock market shares through brokerage accounts, bank deposit plans, IRAs, mutual funds, Keoghs, 401K plans, variable annuities or other retirement plans. How deliciously ironic. Karl Marx is both dead and wrong. By the end of the 20th century workers came to be the owners of the means of production. So capitalism became stronger and more democratic. It was Marxism that withered away."

The ramifications are staggering. Tech guru and visionary George Gilder says: "In the past year alone, enough new wealth was generated in the stock market to dispose of the entire 75-year Social Security shortfall. The Internet economy at least doubles in value every year, while Internet traffic doubles every 100 days or so. Within 75 years, the emerging technologies of the information age, together with improvements in the necessarily energy-intensive technologies of transport and food production, will make possible wealth beyond today's imagination."

I do not mean to suggest that we should ignore public policy, become politically complacent, and ride the wave of the New Economy mindlessly into inevitable prosperity. I only wish to observe that most of our social problems are self-inflicted. If we just stop doing the stupid things we've been doing like punishing achievement with excessive taxation and rewarding irresponsibility with expansive entitlements, the problems will go away fairly quickly. The sooner we stop, the better. But if it takes a crisis like the retirement of the baby boomers to end the stupidity, then at least perhaps we can expect a fairly rapid economic comeback.

In conclusion, let me fulfill my promise to you of a prescription for personal prosperity and professional success:

Whatever the demographic problems we face, we are entering a new age of aging. We used to think that energy, creativity and intelligence gradually declined with age. That notion came from the perspective of the baby boomers observing their grandparents.

But historically, what has been associated with age is wisdom! When we empower wisdom with health, wealth, longevity, motivation and the certainty that comes from clear economic thinking, we concoct a very powerful recipe for success.

So here's my advice to you:

  • First of all, get or remain healthy. PBS recently did a 3-hour series on aging and longevity research. It turns out that the secret to living a long, productive life is not very complicated: Eat smart, drink moderately, don't smoke, get plenty of exercise and rest; avoid or manage stress. The more of us aging capitalists who are still around after 2030, the better chance America will have of making it through the challenging times.
  • Second, look after your financial health. Study personal financial management, learn about aging demographics, follow the economics and business news, then save diligently, invest wisely, insure fully, and prepare to respond as the large demographic trends we've discussed today emerge and affect the marketplace. In other words, be happy, make money, give generously and have confidence that our ideas will prevail.
  • Third, supercharge your imagination and refuel your optimism by applying the "s-curve" to long-term care insurance. Remember, the s-curve says it takes the same amount of time for new ideas and technologies to penetrate the first 10% of a market as it does for them to spread through the next 80% of a market. We've been struggling for 25 years to create a market for private long-term care insurance. We're at the point in the s-curve where this market can and should explode anytime. We'll talk in the next hour about how to make that happen. In the meantime, savor the excitement and the potential.
  • Finally, take pride in the fact that your destiny matters too. Our grandparents and parents met the supreme challenge of saving the world for democracy in WW-I and WW-II; they struggled through the Depression and somehow scrimped and saved enough to give us a good start and provide for their own well-being.

Now it is time for us to realize the challenge and potential of our gigantic generation. That challenge is to protect the future for ourselves and our posterity by implementing and building on the lessons we have learned during this marvelous time of our peak power and productivity.

So, in a nutshell: get and stay healthy, learn and live long, sell and prosper, save and invest, and insure, insure, insure. You are doing well by doing good. And enjoy the ride. It's going to be a doozie!

Thank you.