http://www.theatlantic.com/atlantic/issues/96may/aging/aging.htm

To provide for the largest generation of seniors in history while simultaneously investing in education and opportunity for the youth of the twenty-first century, we must reject the prevailing "entitlement ethic" and return to our former "endowment ethic," which generated America's high savings, high growth, and rising living standards in the past. Endowment implies "stewardship"--the acceptance of responsibility for the future of an institution.

Unlike the United States, most generally tax public benefits as they do any other income. And unlike the United States, most have fairly healthy household savings rates (generally well over 10 percent of disposable income, as compared with about five percent here), and so can absorb public-sector deficits much better than we can.

Even many developing countries with populations still much younger than our own are preparing for their demographic future with astonishing resolution. In South Korea the household savings rate runs at about 35 percent; "Working to make a better life for the next generation" is a typical company motto. Account balances in Singapore's Central Provident Fund--the country's mandatory pension-savings system--now total nearly three quarters of GDP. In Chile the average worker owns $21,000 worth of assets in the fifteen-year-old national funded retirement system--a sum about four times the average annual Chilean wage. Argentina, Peru, and Colombia are following Chile's lead and setting up funded systems of their own. Here, nothing has been saved in any national retirement system for any worker to own.

Conventional economic theory suggests that this ambitious goal requires a shift of six to eight percent of GDP from consumption to savings, giving us a long-term savings and investment rate of about 10 percent of GDP. But where will these extra savings--an average of at least $4,500 per U.S. household annually--come from? About a third can be financed by balancing the federal budget and keeping it balanced. The rest will have to come from greater private saving.

But thrift is precisely what we've forgotten. From an average of 8.1 percent of GDP in the 1960s, the net national savings rate dipped to 7.2 percent in the 1970s and then plunged to 3.9 percent in the 1980s and to 2.3 percent thus far in the 1990s. Net domestic investment has fallen in tandem, from 7.3 percent of GDP in the 1960s to 3.5 percent in the 1990s--a decline that would have been much steeper if we had not switched from investing abroad to borrowing abroad.

In 1992, according to the Federal Reserve Board, 43 percent of U.S. families spent more than their income; only 30 percent accumulated assets for long-term saving. In 1993, according to a Merrill Lynch analysis of Census Bureau data, half of all families had less than $1,000 in net financial assets--a figure that had not risen over the previous decade, even in nominal dollars. Among adults in their late fifties, the age at which workers are staring directly at retirement, median savings are still shy of $10,000. Even optimists admit that a bleak future awaits the approximately one third of all Boomers who are expected neither to accumulate financial assets nor to receive a private pension.

Modified Tuesday, November 17, 2009