Living the Golden Years Without the Gold

(FORTUNE Magazine) – The image of sullen-faced elderly men and women, their clothing patched and ragged, leaning forward on their canes as they shuffle in a soup line, seems Dickensian--impossibly long ago and far away. We haven't seen it on a significant scale in America for decades. But we could see it again. It all depends on whether Washington lets it happen.

One of America's great social achievements of the past 50 years is the drastic reduction of poverty among the old. The poverty rate among Americans over age 65 was 35% in 1959. Today it's only 10%, and since poverty calculations exclude the value of Medicare and Medicaid, some experts argue that the true rate is even lower.

As you'll read elsewhere in this issue, a barrage of changes threatens to reverse that wonderful 50-year trend. Americans are saving less than ever: Our personal savings rate, around 11% in the 1970s, is less than 1%. About 40% of workers say they are saving nothing for retirement. Compounding the problem, we're also earning historically low returns on the little we've saved. And research shows that most people still assume, foolishly, that they'll earn far more than they can ever realistically expect.

The other traditional sources of retirement income are evaporating. Corporate retiree medical benefits are disappearing across the economy. We have probably passed the critical point where so many companies have canceled (or never offered) retiree medical benefits that few companies can now afford to provide them. Ditto defined-benefit pensions. Social Security benefits, too, must shrink and the eligibility age be moved back, even if no politician will say so. So future retirees will have to wait longer to get less--exactly when they'll be spending more, thanks to longer lifespans and rocketing medical costs.

Put all those factors together and it seems unavoidable that some future retirees--a highly noticeable minority numbering in the millions--will fall into poverty. At least they will unless the federal government rescues them. So will it?

Hard economics says no, yet by any conventional political calculus you'd have to say yes. The simple fact is that old people vote and young people don't, and old people are increasing faster. Politicians rarely bother trying to get nonvoters to vote. Instead they focus on pleasing the groups that vote the most. That's why Congress in 2003 ignored record budget deficits and enacted a massive new federal entitlement for the elderly, the Medicare drug benefit.

The dominance of the elderly in American voting will become even more pronounced as baby-boomers age. A large-scale study forecasts that in 2022, for example, 33% of those who cast ballots will be 65 or older, while just 8% will be under 30. (That's four old voters for every young one; today the ratio is closer to two to one.) The elderly will have effectively captured the government, at least when it comes to issues on which they vote as a bloc.

So here's the conflict, which may be one of the great conflicts in recent U.S. history. Economically it seems inevitable--simply inescapable--that federal benefits to the elderly must be cut. But politically it seems just as inevitable that they must be increased as other sources of retiree income disappear.

How will the conflict be resolved? The alternatives will be so painful that some elderly will probably have to become poor before the government acts. But after that happens--well, the baby-boomers have always gotten what they want. When America sees pictures of seniors in soup lines--or dying because they can't afford the medical treatments that would save their lives--then the boomers' brute political power will acquire an emotional turbocharger that will make it very nearly invincible.

How America will afford the rescue, heaven knows. For the boomers, in life's final phase, it won't be their problem. âñ