The United States of Florida; or, Why we can't give up Social Security and Medicare

Yes, we have to do something about the federal budget. Yes, Social Security and Medicare cost a lot (about 1/3 of total expenses and rising, according to this graph). It's not surprising that politicians want to reform them, or redesign them, or cut them, or even get rid of them. But what exactly would we do without them?

Folks, we can't just say we can't afford them.

In 2010 about 13% of the U.S. population was 65 and older. This year the first Baby Boomers turn 65. By 2029, all Baby Boomers will be over 65, and by 2030 (according to U.S. Census Bureau estimates) over 19% of the population will be 65 or older.

If that doesn't scare you, look at it this way: in only 10 or 12 years, the entire U.S. will have a higher percentage of seniors than Florida has right now (only 17% of the Sunshine State's residents are 65 or older).

Seniors, per se, aren't especially scary, but the likely financial condition of Boomer seniors is truly terrifying.

• As we retire, we'll be taking money out of the financial markets instead of putting it in. That can't be helpful to the national economy.
• Most of us started out working for companies that provided defined-benefit pensions. Since then, most private companies have switched to defined-contribution pensions - 401(k)s. 
• 401(k)s are fine for self-disciplined, well-paid employees when the economy is rapidly growing. However, a 401(k) can be quickly depleted in times of economic recession.
• In any case, for a 401(k) to provide a decent pension, you need to fund it right up to the legal limit from day one of your career until your retirement party. Alas, very few people actually do that. One survey found that people in their 60s have saved an average of only $30,000 for retirement. Only 11% of all workers have saved over $250,000.
• It used to be considered safe to withdraw about 4% of your retirement savings per year (that's really too much to withdraw during a recession, but let's stick with that figure anyway). A person who has saved $250,000, then, can safely take out $10,000 a year - $833 a month - for living expenses. A person who has saved $30,000 can withdraw $100 a month.
• People used to figure that they could make up the difference with the equity in their houses. Right.
• Meanwhile, we're all living longer, which means more of us are getting diseases like Alzheimer's - and health-care costs are soaring. Over the last 10 years, the Consumer Price Index rose 26% while health-care costs rose 48%. 
• "Guess I'll never be able to stop working," say many Boomers. Some will indeed postpone retirement, but many will not be able to postpone it for long. Decreasing stamina and worsening health may make it impossible to continue working full time. And if seniors lose their job for any reason, it will be next to impossible to find another one - especially when the national employment rate is over 9%.
• "If worse comes to worst, we may have to move in with the kids." This solution will work for some. But perhaps 20 to 25 percent of Boomers have no kids, and many Boomer kids are struggling to bring in enough income to avoid foreclosure or to send their own children to college. People with Alzheimer's and many other geriatric diseases require full-time care, and few middle-aged families can afford for one adult to quit working and stay home all day with Mom.

Social Security and Medicare are expensive. Reforming them is a great idea - but not if those reforms mean trading defined benefits for private financing. Privatizing Social Security and Medicare, as our experience with 401(k)s has shown, could mean big rewards for the financial industry. Unfortunately, it could also mean that a high percentage of unemployable seniors would have literally no place to go.