Retiree Portfolio Our Retirement Security in Danger

Recently, a report from the General Accounting Office concluded that we must save more personally and as a nation to meet the daunting demographic challenges of the future. Entitlement programs for the elderly also require immediate reform to ensure their future sustainability. Without such actions, the economic security of future generations may be in jeopardy.

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By David Braze (TMF Pixy)
July 2, 2001

If you suffer from insomnia, I have a surefire cure for you. Just turn on your bedside light and begin reading the recently released General Accounting Office (GAO) Report, National Saving: Answers to Key Questions. This 163-page epistle will probably put even the most die-hard economic theorists to sleep inside of 30 minutes, never mind you and me.

Still, the report holds some nuggets of interest, which explains why I've been slogging through it for the past two weeks. It attempts to address a number of national saving issues, not the least of which is our country's frequently cited low personal saving rate, and what that low rate means for many people's future retirement security.

The Motley Fool pays me to know a few things about retirement -- like which side of a king size bed to sleep on. (For those who are interested, my detailed analyses reveal it's the left as you're facing the headboard). Therefore, I felt compelled to see what the GAO had to say on the subject. No, not about which side of the bed I should sleep on when retiring for the night, but how saving rates affect retirement security.

I wasn't surprised much by what I learned. A Cliffs Notes' version could have saved me from the tedious technical jargon and in the end I still would have learned that -- big surprise here -- we, as a nation, must do more to ensure our future security in retirement.

I know, I know. You've heard it all before. And, yes, I've written previous columns that address the very same issue from various perspectives, too. So what's so special about this report that the topic bears repeating?

Nothing really. Except that it comes from the GAO, a highly respected investigative arm of Congress noted for its independent and largely unbiased analyses. That, and the fact the report says in no uncertain terms that the future of Social Security and Medicare, the two largest entitlement programs for the elderly, are unsustainable in the absence of substantial reform coupled with increased savings at either or both the national and personal level.

It's no secret that the personal saving rate in this country has been declining over the past two decades. In fact, the report emphasizes that in recent years the personal saving rate has declined to levels unseen since the Great Depression. In 2000, the personal saving rate actually entered negative territory, which means folks on average were spending more than their available disposable income.

The GAO is careful to note that no one is quite sure why this phenomenon has occurred. It could be that an aging population is, on the aggregate, now consuming rather than adding to savings. Perhaps the simple fact that Social Security and Medicare are available to the elderly has convinced many that saving for these items is unnecessary, and that means they may consume more today. Others might argue that the easy availability of credit coupled with more two-wage-earner families reduces the family's need for precautionary savings. Or maybe expectations of higher future earnings and an increased potential for greater wealth may cause a downturn in personal savings.

Regardless of the reason, the fact remains that the personal saving rate in this country is well below expected norms. Unfortunately, so is our gross national saving rate, a measure of the available resources needed to replace worn-out capital goods and to expand the nation's capital stock. The GAO's report tells us that last year's gross national saving was low by U.S. historical standards, and for the past four decades it has also been lower than that of other industrialized nations.

According to the report, our gross national saving (along with borrowing from abroad) provides us the national resources needed for the investments that boost our national productivity and lead to higher economic growth and future living standards. GAO projections indicate that simply maintaining the 2000 gross national saving rate "would fall short of the rise in living standards enjoyed by prior generations whose income generally doubled every 35 years." In other words, unless we reduce current consumption to save more as a nation, we will condemn future generations to a lower standard of living than that we now enjoy.

All in all, the report makes for some mighty pessimistic reading. In concluding remarks, the GAO rightly emphasizes that each current generation is the financial steward for future generations. Thus, the nation's long-term economic future depends on the choices made today regarding current consumption and saving. In that context, the report urges the nation to save more now while we have the "healthy economy (and) sufficient resources to meet current needs while still building our capacity for the future. National savings builds future dividends -- but we need to begin soon to permit compounding to work for us."

The report ends by pointing out that increased saving is not enough, though. We have a growing population of those over age 65 who must be supported by a declining worker pool that finances various national entitlement programs. Consequently, we must also make a concerted effort to reform Social Security and Medicare. Otherwise both programs will be an unsustainable drain on national and personal saving. In the absence of reform, future workers would face higher taxes to support these programs, and the nation would have to spend more as well. Both personal and national saving would decline further, leading to an inevitable decline in the nation's future economic growth and living standards.

I don't have the magic answer to this conundrum. In truth, I doubt anyone has. But I do hope as a nation we can work on solving the problem. As individuals, we can do our part by consuming less and saving more. If anyone you know needs help in starting on the latter, a good source for beginners may be found at our Short-Term Savings Center.

Nationally, we can take immediate action to reform the Social Security system. Immediately thereafter we must work on Medicare, arguably the more serious problem by many accounts. The sooner we implement the needed changes to these two entitlement programs, the sooner workers can adjust to and plan for those changes as they prepare for their retirements.

Entitlement reforms and increased saving rates are tall orders for the country. I sure hope we're up to the tasks involved in making both a reality. Otherwise, I shudder to think of the economy my grandkids will inherit.

As always, post your comments on the Retired Fools or the Retirement Investing boards.

Best to all... Pixy

Dave Braze has saved all his life, and he encourages others to do the same. Because you know The Motley Fool is all about investors writing for investors, you also know that investing really is nothing more than a sophisticated way of saving. Therefore, do your part for your country's future: Invest.