HOW TO DEFUSE THE DEMOGRAPHIC TIME BOMB
A concept proposal prepared by Oxford Economics
Our breakthrough study Another Penny Saved showed how optimizing the US savings rate would stimulate economic growth, fuel capital markets, and take pressure off government safety-net programs. Since 2014, the challenges to Americans’ long-term financial security have only grown more acute. Alarmingly, the US personal savings rate stood at 2.9% in November 2017, far below its long-term average of 8.25%.
Meanwhile, despite a recent decline in life expectancies, Americans who reach traditional retirement age are living longer. A 65-year-old today can expect to live to be 85.5, up from 77.8 in 1940, and one in four 65-year-olds will live past 90. How to finance such longevity is a problem that should be preoccupying leaders at the highest levels of government and industry.
Of course, people are not simply living longer. They are also staying at their jobs beyond the traditional retirement age or leaving to launch new businesses. That makes predictions more complicated—and somewhat less dire. Still, based on even conservative assumptions about income, spending, and healthcare costs during retirement, many Americans will run out of money before they die, unless policy-makers find a way to change that inexorable arithmetic.
We propose a research program that explores how various policy approaches could solve the problem of financing longevity. Our economists will determine how the convergence of low savings rates and long lifespans will could affect US GDP growth, investment, foreign borrowing, and future household savings shortfalls. The goal: to help decision-makers assess the economic and societal implications of the savings challenge. We will also develop models for the following four policy scenarios and examine how each would change the outlook for Americans facing a longer retirement:
- Doing nothing; the full Social Security retirement age, Medicare eligibility, and US personal savings rates remain unchanged.
- Significantly raising the eligibility age for full Social Security benefits (e.g., to 73) and Medicare (e.g., to 68).
- Instituting government-funded, privately managed “birthright” retirement accounts (e.g., $1,000 per person that would remain untouched until age 70).
- Instituting tax-advantaged IRA accounts for small businesses, the self-employed, etc. (e.g., the myRA program) to spur savings by those not participating in a 401(k) plan.
To complement the quantitative analysis with real-time context, anecdotal color, and quotes, we will conduct qualitative research, including in-depth, on-the-record expert interviews. The quantitative and qualitative findings will be synthesized in a comprehensive report and other engaging deliverables to spark important conversations among business leaders and policy-makers.