Golden years or fool's gold?

Debt: Baby boomers might be cozy with credit, but experts warn it's no way to plan retirement.

August 08, 2004|By Jim Jaffe | Jim Jaffe,SPECIAL TO THE SUN

Experts and workers disagree strongly about whether the next generation of American retirees will have adequate income to live comfortably. The difference in perception is extraordinarily broad.

Those who rely on data focus on an abnormally low savings rate, the decline of defined benefit pension plans that provide lifetime income - plus the ever-scarcer supply of employer-provided health insurance for retirees - and Social Security and Medicare programs that will have great difficulty delivering promised benefits.

Older workers, by contrast, remain optimistically complacent. They observe today's retirees are living well - the lowest incidence of poverty and the highest health insurance coverage rates in the nation - and see no reason why they won't enjoy similar security. They live in homes that are appreciating and improving their net worth. Retirement has become a more flexible concept, a time when people are increasingly likely to work for wages after retiring, especially now that it's easier to do so without slashing their Social Security checks.

More than 40 percent of today's retirees say their current standard of living exceeds their expectations. So it is hardly surprising that workers view retirement as an anticipated golden age, a period of leisure punctuated by travel and visits with grandchildren, though that perspective contrasts starkly with that of the experts who see big trouble ahead.

It will probably be at least a decade before we know who's right. But trying to explain these differing perceptions might provide insight into why Washington has such trouble responding to big problems that voters are indifferent to at best.

Perhaps credit is the answer.

Today's retirement confusion probably began in the 1960s, when those now entering retirement were first joining the work force after being introduced to the concept of debt without guilt. Today's savings rate is less than a third of what it was then.

Their parents typically had harsh memories of the Depression and a resulting commitment to saving. But savings and delayed gratification were not values that those who weathered the Depression taught their children, who grew up during a long period of prosperity and were thus indulged.

Not surprisingly, these baby boomers liked that and grew into self-indulgent adults, many of whom have spent their grown-up lives as borrowers. Why should they abandon a strategy that seems to have worked so well?

Loans and credit cards

Two major innovations of the 1960s ignited the credit boom - the introduction of college loans and credit cards. Beyond fueling an explosive growth in the number of high school students continuing to college, the loans suggested that debt could be a rational investment strategy. Thousands borrowed for tuition payments could grow into millions in lifetime income.

And, as the Great Society became overextended, the government expanded loans while restricting scholarship grants.

Credit cards enabled the creation of lifestyles beyond what could be justified by current earnings. Making large amounts of revolving credit available was a radical act that was largely undetected by the revolutionaries of the 1960s, few of whom would have predicted that Visa would trump Che Guevara.

There was even synergy between these two forms of debt. If college borrowing was an investment that paid off with a prosperous tomorrow, there was logic in thinking that the money to be earned in the future could be used for a trip to Paris to celebrate graduation from college.

That was just the beginning.

Financing auto purchases rather than paying cash became more popular as the car manufacturers created banking subsidiaries. Gradually, the idea of trading in a car that was worth less than the outstanding balance gained public acceptance.

Employers backing away from the traditional defined benefit pension plans followed a pattern like that displayed by individuals who didn't want to deny themselves a portion of today's income to meet tomorrow's needs. Instead, employers contributed money to defined contribution plans and gave workers the responsibility of growing these funds into an amount to finance retirement. Unexpectedly, at least to their pension-dependent parents, many workers embraced this change as they anticipated jumping from job to job and saw themselves as smart investors.

In this context, the home mortgage - and the home equity loan - was transformed from a burden to be liquidated quickly into a gift that kept on giving, a source that could be used to fund a better lifestyle today or investments to finance a better retirement tomorrow. Mortgage burning became a ritual of the past. In 2001, one senior family in four was making mortgage payments, up from one in six in 1989.

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