In the Long Run...

While the short-term outlook for the US economy is bleak enough, there are some forces at work that may disquiet the long-term prospects as well. The first and most of these forces is the impending demographic transition as the leading edge of the Baby Boomers started receiving Social Security benefits in 2008. The second factor is closely related to the first -- life expectancy is expected to increase in the foreseeable future. Reluctantly, it must be added, there is a countervailing factor that may limit projected increases. Due to the unstable geopolitical situation, the US has a nontrivial exposure to mass mortality risk owing to potential large scale acts of terrorism. Third, the risk of funding the retirement of US workers continues to shift from corporations and governments back to the individual. A manifestation of this risk shifting is the movement away from defined-benefit pension plans towards defined-contribution plans and 401Ks. While I applaud the increase in personal responsibility concerning one's own affairs, I believe that the average American is inadequately prepared to fund a retirement expected to last 13.54 years for men and 16.2 years for women. Moreover, there will be a significant portion of the population facing this dilemma. In 2008, those sixty-five or older comprise 12% of the US population. By 2030, the same cohort is projected to comprise 19%. The current patterns of consumption and savings rates are inconsistent with the underlying reality. Fourth and finally is of those defined-benefit pension plans that remain, a majority are underfunded. These circumstances bring to my mind an oft-quoted statement of the British economist John Maynard Keynes, "In the long run, we're all dead." In the 21st century, this should be revised to "In the long run, we're still alive... and broke."