Monday, January 25, 2010

Married for money: the unnatural union of government and business

This week's Economist, a conservative journal from the U.K., looks at "the backlash against big government." Using Scott Brown's win in Massachusetts as their starting point, the lead article ("Stop!") admits that "this newspaper's prejudice is to look for ways to make the state smaller." Their suggestions for the U.K. and the U.S. governments: slim your workforce, cut public-sector pay and pensions, cut back entitlements, and get rid of agricultural departments.

I agree with The Economist's analysis on many points, and I appreciate the article's fairness in acknowledging the major role George W. Bush played in increasing government spending and regulation. I wonder, though, if the popular backlash is against more than just big government. Last week I wrote in a Facebook update:
I understand why many people are afraid of Big Government. What I don't understand is why some of the same people seem unafraid of Big Business, which--if unrestrained--has even greater potential of doing harm.
After reading a long string of comments by my Facebook friends, I'd make just one change to my update: instead of "has even greater potential," I'd write "has equal potential." As Carla Barnhill wrote on my Facebook wall:
Since the two are about to become one, the differences won't matter much.

Government and business aren't supposed to be buddies, and they certainly aren't supposed to get married and set up a comfortable home for executives and lawmakers. And yet that is what has been happening in America and the U.K. for several decades. I suspect that many people who complain about big government--conservatives as well as liberals--are actually upset less about government than about the enormous power structure created when government and business effectively become one.

When the power of business is restrained by the power of government, and the power of government is itself divided into mutually suspicious segments (federal, state, and local; legislative, judicial, and executive), the system may look like a Rube Goldberg machine, but it is limited in the amount of mischief it can do. What happens, though, when business and government join forces--so that corporations, for example, may virtually buy candidates for legislative and executive office?

Made even easier by the Supreme Court's recent largess, influence peddling has been visible throughout the health-care debates. The President let pharmaceutical and insurance companies limit his proposals, and the Senate, by getting rid of the public option, offered insurers a huge gift. In the end, many liberals who initially favored health reform rejected the cozy government-and-business-together plan (see this interesting  interpretation of the Massachusetts election results). Liberal blogger Marcy Wheeler wrote last month, after the Senate eliminated just about every feature of the original bill that would have limited insurers' profits:
It’s one thing to require a citizen to pay taxes–to pay into the commons. It’s another thing to require taxpayers to pay a private corporation, and to have up to 25% of that go to paying for luxuries like private jets and gyms for the company CEOs.

It’s the same kind of deal peasants made under feudalism: some proportion of their labor in exchange for protection (in this case, from bankruptcy from health problems, though the bill doesn’t actually require the private corporations to deliver that much protection). In this case, the federal government becomes an appendage to do collections for the corporations.
Bad, bad, bad--not because government is bad per se (it is morally neutral), but because in allying with business (which is also morally neutral) it risks abdicating its role as protector of life, liberty, and the pursuit of happiness. The solution, though, is not for government to disappear, but for it to return to its original purpose of preserving the common good. The Economist article submits that smaller is not always better: "As the horrors in Haiti demonstrate, countries need a state of a certain size to work at all; and more government can be good." Without government--local, state, and national--we would be unlikely to have adequate national defense, highways, education, justice, or care for those too old, ill, or poor to care for themselves, to name only a few areas where we function better as a community than as individuals.

Sometimes the common good is best served by limiting the government's powers. Sometimes it is best served by limiting the powers of corporations. Occasionally the government and business manage to work together for the good of all; The Economist points to Scandinavian schools and French health care as examples.

It is hard to see how the common good is ever served, however, by marriages between government and business, brokered by lobbyists, for the mutual enrichment of a select group of the already-rich.

Thursday, January 21, 2010

Earth to Washington: baby steps won't help

Democrats, I love you, but please shut up. Stop talking right now about “incremental steps." Good grief, the current health bills in Congress, for all their mind-boggling verbosity, are incremental steps. They do not get at the tangled hairy roots of the problems we're facing.

If incremental steps worked, George W. Bush's Medicare prescription drug benefit would have been a godsend. Instead, the original 2003 cost estimates of around $400 billion over a ten-year period escalated by 2005 to $1.2 trillion, and some analysts now say that real costs are closer to $21.9 trillion. Meanwhile, the plan's doughnut hole leaves many Medicare recipients without necessary medications.

Pharmaceutical companies, however, have made out like bandits: after persuading Congress to put no caps on drug prices, they began systematically raising prices on the most popular drugs. According to a 2008 study conducted by AARP, who initially supported the legislation, the average price of the most widely used drugs on the market between 2002 and 2007 increased 50.4%, compared to an overall inflation rate of 19%. In 2008 and 2009 brand-name drug prices increased by another nearly 20%. This week "the nonpartisan General Accountability Office said it found 'extraordinary price increases' for 321 brand-name drugs, with prices jumping by 100 percent to 499 percent - and in a few cases by more than 1,000 percent" since the year 2000. Apparently many pharmaceutical companies are raising prices yet again in anticipation of some sort of health-care reform.

As long as that reform is incremental, Big Pharma is unlikely to charge U.S. consumers what the rest of the world pays. As long as reform is incremental, insurance companies will continue to stay profitable by denying coverage or making it unaffordable to those who need it most. As long as reform is incremental, unnecessary but expensive procedures will proliferate in the suburbs, while the rural poor will have to travel great distances for medical care and the urban poor will die in crowded emergency rooms.

If we are going to provide basic, affordable health care for all--and even if all we aspire to do is to retain excellent, affordable health care for the affluent--we have to start from scratch. Congress must quit bickering and start studying what works (and what doesn't) work in other developed countries, all of whom have universal health care at much lower cost than ours (click here for further info about the graph). According to T.R. Reid in The Healing of America, Taiwan's government did this in the late 80s and early 90s. Switzerland's did it in the mid 90s. Both countries found ways of completely reinventing their health-care systems, ways that suited each country's particular needs.

We can do it too. Someday we will have to do it. Here's hoping we will decide to do it before ill-managed health care topples us into another Great Depression.

Wednesday, January 20, 2010

Health care magic

 While talking with George Stephanopolous on Good Morning America this morning, Republican National Committee chair Michael Steele neatly summarized the prevailing American attitude:

"Remember, 82% of the American people like their health-care plan. 
They just want us to address their costs."

Mr Steele got it in one. We want what we have. We want it to cost less. And, as other commentators this morning pointed out, we certainly don't want to raise taxes to pay for it. (Scroll down to see previous posts about magical thinking.)

But in spite of wanting to pay less for health care, an increasing number of us are strenuously opposed to any of the approaches used by other developed countries who actually do spend less per capita--generally between 40 and 60% less--and yet have health outcomes that equal or surpass our own.
  • We don't want to keep insurers' prices low by launching a competing public option, even though the Veterans Administration and Medicare are public programs with a lot of satisfied customers.
  • We don't want to require insurers to cover basic health care with not-for-profit policies, even though insurers' administrative costs have risen from less than 5% to nearly 20% since 1995.
  • We don't want to require everyone to have health-care insurance, even though only a broad pool can keep prices low for the insured.
  • We don't want to put caps on prescription drug costs or allow medications to be imported from other countries, even though U.S. drugs often cost several times more than the same drugs bought elsewhere.
  • We don't want to put caps on physicians' fees, even though our doctors--particularly the increasing percentage of specialists--are by far the best-paid physicians in the world. Nor do we want to discuss two huge expenses that all doctors face and that must be reduced if we expect them to charge reasonable fees: the high cost of a U.S. medical education and the expenses associated with the ever-lurking threat of malpractice suits.
  • And we certainly do not want any experts reviewing the literature and concluding that certain tests aren't necessary (mammograms!), or that some end-of-life care is wasteful (death panels!), or that a highly advertised designer drug is actually no more effective than a cheap generic. We want top-of-the-line medical care, as seen on TV, even when it is not medically necessary or even advisable.
The insurance, pharmaceutical, medical, and financial industries are simply delighted that a majority of Americans are now unwilling to do what it takes in order to have a fair, compassionate, and reasonably priced health-care system.

We like the health-care we currently have, even though our insurance premiums and copayments increase every year as our coverage decreases and our claims are denied. We don't want to change our system in any way. Except, of course, to make it better. And cheaper. Without actually changing anything.

We believe in magic.

Tuesday, January 19, 2010

Review: The 44 Scotland Street series by Alexander McCall Smith

Mr Neff and I are both devoted fans of Alexander McCall Smith. We go to the Wheaton Public Library's web site and place a hold on each of his new books as soon as we learn its title--often even before the library has written up the purchase order. Last week we discovered we had both reserved The Unbearable Lightness of Scones, so on Friday I checked out two of the library's three brand-new copies. It's been an exciting weekend at the Neffs'.

McCall Smith is best known for his series that begins with The Number One Ladies' Detective Agency featuring Mma Ramotswe, a wise woman of Botswana (volume 11 will publish in the U.S. in April). His Isabel Dalhousie series--Isabel is an ethicist from Edinburgh--now includes six novels (volume 7 is due in September). He has written three small comic novels about German professors, Portuguese Irregular Verbs, The Finer Points of Sausage Dogs, and At the Villa of Reduced Circumstances, with a fourth novel in the works. He has also written a stand-alone novel set in World War II, La's Orchestra Saves the World. The book Mr Neff and I just read is fifth in the Scotland Street series about an assortment of characters ranging from feckless and bewildered to hilariously horrible. And in July McCall Smith begins a new series with Corduroy Mansions.

Of all these delightful books--every one published since 2003--the Scotland Street series may be the most fun.

Written as an ongoing serial novel with daily installments in The Scotsman, the intersecting stories have "numerous plots; characters drift in and out; some matters are unresolved; strange things happen" (from the Preface to Unbearable Lightness). These are books to enjoy after a hard day's work. They require little effort, they make you laugh, and the characters quickly seem like neighbors.

In The Unbearable Lightness of Scones, Irene, the quintessential pushy mother, is distressed to learn that her therapist is leaving town. Angus Lordie, the scruffy artist, must deal with the six puppies inadvertently sired by his gold-toothed dog, Cyril. Big Lou, who owns the coffee shop where everyone gathers, gets involved with a Jacobite pretender. Bruce Andersen of the clove-scented hair gel takes his narcissism to new depths. Domenica, the retired anthropologist, believes her next-door neighbor is a thief and a drug pusher. Stuart, who perpetually misplaces his car, finally stands up to Irene. The Glaswegian gangster, Lard O'Connor, is sent off in style. And those are only some of the stories that will keep you chuckling till well past your bedtime.

The star of Scotland Street is the eternally six-year-old Bertie, an Italian-speaking, saxophone-playing, yoga-practicing prodigy who dreams of becoming a Cub Scout... until he learns that his nemesis, Olive (surely Lucy Van Pelt in a previous incarnation), will be allowed to become one too.

The books in the Scotland Street series should be read in order, so begin with 44 Scotland Street. But do start soon and read fast. Volume 6 is already half written.

Wednesday, January 13, 2010

50 years of inflated expectations: part 2

(Part 1 is here.)

I have no idea how the United States will or can get out of the economic mess we've spent the last 50 years getting ourselves into. As individuals, though, we can take steps to avoid disaster.

1. It's time to stop thinking that rescue is on the way. The government doesn't have the will to do it: our elected representatives are afraid that facing the facts would mean losing elections and losing lobbyists' dollars. The "invisible hand" of the market won't do it: the all-too-visible hand of greed is too busy sending more wealth to the already wealthy. The magic of compounding can't do it: inflation, brokers' fees, cyclical bear markets, and investor panic conspire to keep most of us from getting ahead of inflation.

2. We need to stop thinking that the last 10 years are an exception, and that happy days will soon be here again. There is little reason for optimism in a nation that is, corporately and individually, leveraged way beyond its resources, producing little in the way of hard goods, rapidly aging,and responsible for over half of the entire world's military expenditures.

3. It's important to be realistic: most of us are not going to be able to work forever, and we are probably going to have to provide for a major part of our financial needs in retirement. Use the magic of compounding interest to counteract the dark magic of inflation. Sock away as much money as you can in accounts that are likely to outpace inflation. Every year, save every dollar that the government allows you to save tax free. In 2010, you can put $16,500 in your 401(k) if you're under 50, $22,000 if you're 50 or older. If you can, add a Roth IRA for each adult, employed or not, and save another $5,000 or $6,000 apiece each year.

4. We've got to start being rigorously honest with ourselves about wants vs needs. This much saving may be impossible, and if you haven't got a ha'penny, then God bless you. But when we're looking for housing, for example, it helps to remember those two- or three-bedroom, one-bath, 1200 square foot houses of 1960. When we're looking for cars, we might remember days when one-car garages were standard and teenagers walked to school. When we're looking for higher education for our kids, we might consider community or state colleges. And on a smaller scale, we might question the wisdom of buying restaurant meals, expensive cable TV subscriptions, gym memberships, fine wines, and other luxuries unknown to our parents and grandparents.

Many years ago in a town far away, we lived two doors down from one of those modest houses. Its owners were a lovely young couple, both professors. When they discovered they were going to have a baby, they decided they needed more space. They sold their little house to another lovely young couple--with four small children. The new owners were very happy with it.

I'm thinking about happiness, space, and things because Mr Neff and I are in our 60s, and when we retire we are probably going to have to downsize even though we've been living frugally and saving maniacally for several decades. This is going to be interesting, since people move into our townhouse neighborhood in order to downsize. But hey--people pay big bucks to live in New York apartments the size of closets. People in other countries get along in smaller quarters. The average home in France is 112.5 square meters (1211 square feet); in Italy, only 81.5 square meters (877 square feet)--and the French and the Italians have a well-deserved reputation for enjoying life.

Which brings me right back to the prescription I gave several days ago: Save like hell, and figure out how to arrange your furniture attractively in a one-bedroom apartment. I think this is realistic. Is it pessimistic? Not necessarily. Money is nice, but it doesn't buy happiness. And if you end up saving more than you need, you can always endow a charitable or educational or cultural institution.

50 years of inflated expectations, part 1

The Sojourners web site has been reposting some of my blog posts including the one just below this one. They retitled it "Do You Believe in (Compounding) Magic?" I've learned that a lot of you--especially those of you who are not yet middle-aged--do. And in a way, so do I.

Over my working life, I have seen investments inflate. I have also seen prices inflate. And even though, on the whole, investments inflated more than prices, I have seen something more ominous: I have seen expectations inflate.

50 Years Ago
Turn the clock back 50 years to 1960. Eisenhower was president. The oldest boomers were turning 14, but the youngest hadn't been born yet. Americans were flocking to suburban tract houses. Shopping malls were in their infancy. The interstate highway system was beginning.

I turned 12 that year. My father, who was president of a small denominational college, earned a yearly salary of about $6000. We had just traded in our 1957 Chevy Bel Air for the 1959 model, with fins. We lived in a house my parents had custom built in 1953 for $14,000. (In 1960 we would sell it for $17,500.) It was almost luxurious: only two bedrooms and one bath, but there were two sinks in the bathroom. In addition, it had a 15x15-ft family room, a covered breezeway between house and garage, a two-car garage, and real redwood siding halfway up the facade. We felt very fortunate.

My family was just slightly more prosperous than average. In 1960 the median income for married-couple families was $5873. The median home price, $11,900. The average new single-family home size, about 1200 square feet. The per capita cost of medical care, $148.

In the 1960s, the average household saved or invested 7% of its income.

According to the U.S. Bureau of Labor Statistics inflation calculator, $1 in 1959 would be worth $7.43 50 years later. Using 7.43 as a multiplier, the median married-couple household income would be $43,535 today; it is actually $69,404. (My father's salary would be $44,580; the current president of the college he worked for earned $119,175 in 2007, according to the school's IRS form.) It appears that we are, on average, 62% richer than we used to be. But our wants have risen and overwhelmed our means.

The median home price should be $88,417; it is actually $172,600. One reason: the average new single-family home size has more than doubled over the last 50 years, from about 1200 to more than 2400 square feet. We think we need that much space even though the average family size has decreased from 3.33  to 2.56 persons since 1960, more family members work or are cared for outside the home, and we eat more meals in restaurants.

Medical care, if it kept pace with inflation, would now cost $1,100 per person per year. It actually costs over $7,000--but we routinely expect services that, 50 years ago, were the stuff of science fiction. The cost of higher education has also exploded. In the 60s, about 10% of adults in their mid twenties had college degrees. Today the figure is 30%. In-state students at the University of Minnesota in 1960-61 paid tuition fees of $213; this year they pay, not the inflation-adjusted figure of $1,583, but $10,320.

In 2007, the average household did not save. Instead, it spent considerably more than it earned.

So here's our situation. We earn 60% more than our forefathers, but we are in debt; 25% of our houses are worth less than their mortgages; we can't figure out how to finance medical care; and we are almost certain to be unable to provide for the oncoming flood of retirees.

Somehow we have come to think that we should (a) have more than our parents did, (b) never be asked to pay more taxes, (c) have guaranteed pensions, whether from our employers or the government, and (d) have state-of-the-art medical care, whether from our employers or the government. This is not a multiple-choice question: we want it all.

We seem to believe we will pay for the above through (a) taxing the rich, (b) investing in and selling oversized houses, (c) investing small amounts in the stock market when we are young, and (d) letting market forces work their magic. And magic is the operative word.

The solution is both obvious and impossible.

If we as a society adopted 1960 expectations--small houses, one-car-per-family, no-frills medical care, spartan universities--we would have a lot of money left over to spend on things like retirement, repairing our crumbling infrastructure, providing health care for more people, or whatever else we truly valued.

But just try to buy a 1960s-style house. For the fun of it, I went to and looked for a modest house in Wheaton, IL. In this city of about 55,000 people with a median household income of $83,272, there are about a dozen houses for sale for less than $200,000 (by 1960s standards, a mortgage should be no greater than two times family income). Most were built 40 or 50 years ago. Most are described as starter homes, great investments, potential tear-downs, or rehabbers' dreams.

If I wanted a nice little brand-new house, I was in the wrong place. Wheaton's cheapest new construction was a 4-bedroom, 3.5-bath behemoth with 3800 square feet and a price tag of $425,000, because it was about to be foreclosed. If buying in a foreclosing neighborhood strikes you as unwise, your next-best choice would be a 2140 square-foot, 4-bedroom, 2.5 bath house at $435,000.

So, maybe I could move to Winfield or Aurora, where houses are considerably less expensive. But what could I do to bring down my children's college tuition, room, and board--now $25,654 at the
University of Illinois or $49,440 at Wheaton College, which nearly matches Harvard's $50,657? And what could I do about health-care costs, which averaged $16,771 for a family of four in 2009?

Obviously it is impossible to turn the financial clock back to 1960. And if somehow all 305 million Americans agreed to do so, the economic repercussions would be devastating. Once we've bought into a Ponzi scheme, the only way to avoid disaster is to keep it going. But it's looking like we can't do that much longer either.

So should we just rush over the edge of the cliff?
No. Before doing anything drastic or swooning in despair, see part 2.

Thursday, January 7, 2010

Saving for retirement: magic vs reality

Earlier this week, I wrote about the boomers' seriously underfunded retirement savings accounts. My friend Sydney commented (on my Facebook link) that "people living beyond their means and not understanding saving is a huge problem. Not only for the older generation, for which it's too little too late, but the younger generation...who prefer to spend on entertainment, designer labels, and the Starbucks factor rather than saving for homes or putting money away to compound for their retirement."

Sydney is right on, and she and her husband are a very sensible young couple who are making wise decisions for their family and their future. However, she uses one word that worries me: "compound."

What troubles me is that the word "compounding" is often coupled with the word "magic." Google the two words together (or try "compounding" + "miracle"), and you will see what I mean. The idea is that if you reinvest the interest on your initial investment, over time it will grow to dizzying amounts. You can prove this using a simple calculator.

Lots of people believe that this works in the real world as well. They think that if they put a few thousand dollars away every year, especially if they start when they are young, they will eventually have enough for a comfortable retirement. And indeed they might, if they happen to buy in at the beginning of an extended bull market, or if the market consistently expands faster than the rate of inflation, with no serious setbacks.

But they might discover that, despite decades of disciplined saving, they do not have nearly enough. The magic of compounding goes *poof* if inflation roughly equals the growth of their investments, or if a market "correction" or recession cuts their investments' value in half (even for just a year or two), or if their particular funds do poorly; or if they panic when the market tanks and either stop investing or--worse--withdraw their funds; or, sometimes, if they neglect to panic and stubbornly hold on while the market goes completely south...

In real life, some people experience the magic of compounding, while others lose their shirts. I suspect that most of us pretty much get out whatever we've put in, plus inflation. If we invest fairly conservatively, keeping an age-appropriate ratio of stocks to bonds for safety, our investments will somewhat outpace the rate of inflation in good years, enabling us to survive the bad years when the market tanks but inflation continues. At least that's what seems to be happening to the Neffs.

Example: In the late 90s my employer and I contributed a total of $32,766 to a 403(b). I left that job exactly ten years ago and added nothing more to the account, which was nicely balanced among a bond index fund, a stock index fund, a balanced fund, and a growth fund. Over the decade, it went up and it went down and it went back up. Its value today is $38,212. Does that sound good?

Well, let's look at the inflation rate for 2000 to 2009. What you could buy for $100 ten years ago would cost you $129.85 today. This means that what I could have bought with $32,766 ten years ago would cost me $42,547 today--and my magically compounding account holds $4,335 less than that. In buying power, I have been losing money, despite the market recovery of 2009.

My response? Invest more. We've been saving heavily over the last twenty years, because we know we're soon going to need every penny we can squirrel away. We don't expect any magic of compounding. We don't even expect our savings to keep pace with inflation, though we will be pathetically grateful if they do. We just know that if we don't save it, we won't have it.

How much do you need to save for retirement? Short answer: if you work and save for 45 years and are retired for 15 years, you probably need to put away from 1/6 to 1/3 of your income every month. If you work and save for 40 years and are retired for 20 years, you'll need to save from 1/4 to 1/2. (The lower figure assumes that half of your retirement income will come from Social Security; this may be optimistic.) In other words, what you save is what you will get, more or less.

Young people and even some middle-aged people tend to sigh and say, "I guess I'll never retire." Fine, if your health permits and there are jobs available for octogenarians. Not so fine if your company folds or you get Alzheimers or heart disease or cancer.

When Americans traded guaranteed pensions for 401(k)s, we took an enormous gamble--and most of us lost. When independent-minded folks argue that we should not help people who lack the foresight to help themselves, they may not realize the enormous amount of foresight required to self-fund retirement. (A lot of these independent-minded folks are unaware that they themselves have saved far less than they will need.) People who assume that they are going to go on living in the style to which they have become accustomed are in for a big shock.

The facts are becoming increasingly plain. There is no guaranteed magic of compounding, except on spreadsheets. Few people are saving enough to retire without drastically changing their lifestyle. The government is as overspent as the rest of us and is unlikely to be able to solve the problem. The best retirement plan? Save like hell, and figure out how to arrange your furniture attractively in a one-bedroom apartment. Oh, and you might want to be really nice to your kids.

Tuesday, January 5, 2010

Math for boomers: Have you saved $1 million yet?

In this morning's New York Times, columnist Bob Herbert confesses to "An Uneasy Feeling," apparently his understated way of saying "panic." Herbert lists his concerns: unemployment, worthless mortgages, a decade with no job creation (previous decades since 1940 have all had at least 20% job growth), declining earnings, food insecurity, a health-care plan that is "a bloated, Rube Goldberg legislative mess," not enough money for libraries and teachers, two wars ...

"We're not smart as a nation," Herbert writes. "We don't learn from the past, and we don't plan for the future." I agree, and I am slightly more panicked than Mr Herbert.

Back in 2001, when President George W. Bush was launching a series of tax cuts, I had an uneasy feeling. This president is going to undo our nation's tenuous economic prosperity, I thought. The rising tide that was supposed to float all boats in the 80s had mainly floated the yachts. More of the same could be the ruination of whatever rafts and canoes were still above water.

In 2003, when Mr Bush led us into war on Iraq, my unease moved toward panic. This president has just helped us onto the back of a tiger, I thought. There is no way we will get off unscathed. If we weaken Iraq, Iran will cheerfully fill the gap. War will only increase terrorists' hatred of the West.  We are in deep doo-doo now.

It didn't take any particular prophetic gift, political understanding, or dislike of Republicans to feel that panic: I have never had the first, am limited in the second, and developed the third only recently (my parents were thoughtful, reasonable Republicans and tried to raise me to be the same; and anyway, I don't see the Democrats doing much better). It just seems obvious that if we spend far more than we actually have, we are going to have unpleasant debts. It seems equally obvious that if we start bombing a part of the world that has hated the West since Rome split from Constantinople, we might end up with a serious public relations problem.

I am mentioning this for one reason only: right now something else seems equally obvious, and people aren't saying enough about it. A whole generation of Americans is plunging into poverty, and most of us don't see it coming.

Baby boomers are retiring. There are somewhere between 70 and 80 million of us in the United States--say, 25% of the population. Many of the oldest boomers have already retired; in 20 years, almost all of us will be getting Social Security checks. If Social Security still exists.

I am concerned about Social Security--thank God Mr Bush did not succeed in privatizing it--but that is only part of the oncoming disaster. I am concerned about Medicare, but that too is only one factor. I am concerned about the effect on the financial markets when a large percentage of people who formerly purchased stocks and bonds start making regular withdrawals from their 401(k)s.

Most of all, I'm concerned about those 401(k)s.

Here is how things used to be:
My parents retired in 1975 when they were both 65. Their household income had been modestly sufficient, right around the national average or perhaps a little less. Their former employers gave each of them a monthly pension--roughly equal to the amount of their Social Security checks--and reimbursed all medical expenses that Medicare didn't cover. In addition, they had saved a little money for retirement, and they had taken out a nursing-home insurance policy.

For 16 years, my parents continued to live modestly but comfortably on their Social Security, pensions, and savings. Then both of them fell ill and required nursing-home care for four years. They died in 1995, after 20 years of retirement. There were still a few thousand dollars in their bank account.

Their story is like the story of most people of their generation, the boomers' parents. We boomers, engaging our powers of magical thinking, seem to believe that's how it's going to be for us too. But, as Mr Herbert writes, "We're not smart ... we don't plan."

Here is how things are now:
Pensions are extinct. Most of us have 401(k)s or 403(b)s, and most of these are seriously underfunded. Some of this is our own fault, for not putting away enough each month. Some of this is due to the market meltdown. Some is due to the flaws inherent in the whole concept.  (Stephen Gandel wrote a fine article in the October 9, 2009, Time called "Why It's Time to Retire the 401[k]"--read it and weep.)

Do the math. In 2008, the median income of a male worker--we'll call him Bob Cratchit--was $46,367. If he gets the current average retiree's Social Security benefit, his check will be $1164 a month, which works out to being about 30% of his pre-retirement income. For a reasonably comfortable retirement, let's say he needs 75% of his pre-retirement income, or $2898 a month. If he follows the prudent recommendation to withdraw no more than 4% of his 401(k) in any year, he will need to start with a total of at least $520,200. And he'll need more if the market tanks again early in his retirement years.

Have your eyes glazed over? Then don't do the math. Just realize that if you hope to withdraw $40,000 a year from your 401(k) when you retire, then you'd better have saved 1 million dollars by then. Alas, as Mr Gandel points out in his Time article, few people have saved anywhere near that amount. "In fact, at the end of 2007, the average 401(k) of a near retiree held just $78,000 — and that was before the market meltdown." That means the average retiree can expect a monthly pension-substitute of $260.

Is there a way out of this mess?
Not if we're going to keep on lowering taxes and raising expenses, demanding state-of-the-art medical care without increasing costs, fighting wars that we are unwilling to fund, believing that we are entitled to have more than our parents' generation did. Not if we continue to believe in magic, not math.

There is probably only one good way out, and it isn't pretty. As Mr Herbert writes, "Shared sacrifice is not part of anyone's program." No doubt for a few years our easily-bought Congress will attempt to keep seniors out of homeless shelters, especially if well-funded lobbies encourage them to do so. But if we Americans, old and young, continue to live beyond our means--both as individuals and as a nation--our financial system will collapse, and shared sacrifice will finally become inevitable.

Hint: study Chinese.