by John Sharbaugh

One of the popular movies released earlier this summer was “The Day After Tomorrow,” which generated both interest and controversy with its theme of dramatic climate change.

While the science behind the movie was subject to debate, those who saw it were treated to some exciting special effects, including a tidal wave ripping through the heart of New York City.

While not as visually thrilling, a real oncoming tidal wave will soon be hitting our country, and it relates to demography rather than climatology. It will produce devastating fiscal and other societal effects unlike any we have previously experienced.

I am speaking of the aging of America, and, for that matter, the rest of the world. Driven by rising life expectancies and lower birth rates, we will move from being a society dominated by the young to one predominantly old. Most of that change will happen in the next few decades as the Baby Boomer generation marches into retirement.

Now, I am sure most people intuitively understand that our population is getting older and that, as a result, it will increase the financial burden for taking care of an aging population. But I don’t think most people really comprehend the magnitude of the problem. I know I didn’t until I read an interesting but disturbing book, “The Coming Generational Storm,” written by Laurence Kotlikoff and Scott Burns. Kotlikoff is a professor of economics at Boston University and Burns is a personal finance columnist for the Dallas Morning News and nationally syndicated by Universal Press.

In their book, the authors detail the startling demographic changes that we will experience, why they are unstoppable, and how they will transform the world. For example, the portion of the population age 65 and over will nearly double in the next 30 years, and the intrinsic cost of supporting retirees will rise 70 percent. The “dependency ratio” in the United States — the ratio of those 65 and older to those 20-to-64 — will rise from 21 percent to 35 percent. These numbers will be even worse in the other industrialized countries of Europe and Japan, and don’t even ask about what will happen in China!

Kotlikoff and Burns criticize the leaders of both our political parties for picking the pockets of our children and future generations to benefit current taxpayers. They also describe how the government’s methods for accounting ignore generational issues and mask the true severity of the problem. In addition, they counter numerous theories that our problems will be solved by, among other things, technological progress, the sale of government assets, a growing economy, immigration, and the elimination of wasteful government spending.

A key problem that their book highlights is that the government’s informal obligations — its promises of retirement income and health care — far overshadow its formal commitments. They note that since these promises are codified in federal law and protected by an active army of AARP members who vote, they are as real as any U.S. Treasury bond.

The government currently has a record “fiscal gap” (the present-value difference between projected expenditures and receipts) of about $51 trillion. This is more than 11 times the official debt. And every day we avoid dealing with this massive fiscal problem is a day that it continues to grow, thanks to our rapidly aging population and the miracle of compound interest. The fiscal gap is now growing at a rate of more than $1 trillion a year.

Kotlikoff and Burns do offer some proposals for trying to solve the problem, including structural reforms for Social Security and Medicare. But they fear that if history is a guide it is not likely that their proposals or any others will be adopted, as they would require immediate and major sacrifice on the part of today’s taxpayers. As it stands now, Baby Boomers can look forward to a life after retirement (if they can retire) that is marked by extremely high taxes, substantially reduced retirement and health benefits, very high rates of inflation, and an ailing economy.

Kotlikoff and Burns say that their motivation in writing their book is to help solve this pending fiscal disaster for their children and to ensure the economic future of the coming generations. They challenge the members of the Baby Boom generation to step up to their responsibilities and take a leadership role in solving this problem now. As a Baby Boomer and a father of two children, their call to action has resonated with me, and I hope it will with others.

The accounting profession’s recent initiative to promote financial literacy is laudable, and I believe it can assist in the reform movement that Kotlikoff and Burns are trying to generate. Part of the profession’s financial literacy effort should include informing the general public about the dramatic changes that will be taking place in our society due to an aging population.

In addition, the profession should move to play a leadership role in educating our public policy makers in Washington and our respective state capitals about the serious effects that these coming demographic changes will have on our Social Security and Medicare systems, and urge them to take action now to help solve this problem.

Who better than CPAs to shine the spotlight of fiscal truth on this situation? Best they shine the light soon, before this tidal wave hits us all.

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