A Look at Our Future:
When Baby Boomers Retire

By the Honorable David M. Walker
Comptroller General of the United States

The Frank M. Engle Lecture
The American College
Bryn Mawr, Pennsylvania
September 28, 2005

In his poem The Road Not Taken, Robert Frost describes coming 
to a crossroads in the woods of New England.  Frost chose the 
road less traveled, a choice that he says made all the difference.  

The poem could be referring to mans ability to choose and 
manage the consequences of those choices.  As we all know, the 
right choice in life often isnt easy or popular, and choosing it 
sometimes requires courage, effort, and persistence.

Today, America is at a similar crossroads.  Things may seem fine 
at the moment, but when we look into the future our fiscal outlook 
isnt pretty.  We know that enormous challenges lie before us.  
With the retirement of the baby boomers and rising health care 
costs, were facing a fiscal challenge unprecedented in American 
history.  This challenge is compounded by current deficit spending 
and relatively low federal revenues as a share of the economy.

Unfortunately, our public officials have done little to prepare us 
for this reality.  Some policymakers are concerned, but so far there 
have been few calls for sacrifice or fundamental reform. Instead, 
the governments continuing lack of fiscal discipline in recent 
years has made our long-term situation much worse.  And yet, our 
demographic tsunami is on the horizon.  It threatens to swamp the 
ship of state if we fail to act.  In addition, unlike most natural 
tsunamis, evacuation isnt an option with our demographic 
challenge.  Tough choices will be required.  

The United States confronts three interrelated deficits.  The first is 
the federal budget deficit, which in 2004 reached a record $412 
billion on a unified basis.  But the truth is that every dime of the 
Social Security and other trust fund surpluses went to government 
operating expenses, so the federal on-budget deficit for the year 
was actually closer to $567 billion, of which less than $100 billion 
related to Iraq, Afghanistan, and incremental homeland security 
costs.  Even more troubling, the federal governments long-term 
liabilities and commitments rose by more than $13 trillion in fiscal 
year 2004 alone to over $43 trillion, largely because of the new 
Medicare prescription drug benefit.   And these numbers dont 
even take into account the fiscal 2005 deficit or the future costs 
associated with Iraq and Hurricane Katrina.

In recent years, weve heard calls to relieve Americans of burdens 
like the so-called death tax, but we need to talk more about the 
very real, very large, and ever increasing birth burden.  Thats 
what I call the average amount of current federal liabilities and 
unfunded commitments that every American, including newborns, 
will at some point have to pay for.  As of September 30, 2004, every 
new birth certificate came with a tab of nearly $150,000, up from 
$72,000 in just four years, and that tab is growing every day.  Its 
no wonder that babies cry!  But the federal budget deficit and our 
growing fiscal imbalance are only the beginning.

The second deficit is our savings deficit.  Put quite simply, too 
many Americans  from individual consumers to elected officials  
are spending today as if theres no tomorrow.  At the same time, 
America has the lowest overall savings rate of any major 
industrialized nation.

The fact is that many Americans are saving next to nothing.  The 
U.S saving rate as a percentage of disposable personal income has 
fallen to 1.4 percent.  By following their governments bad 
example, many Americans are living beyond their means and are 
deeply in debt.  The average American household now carries a 
credit card balance of thousands of dollars.  This trend is 
particularly alarming because personal savings are critical to an 
aging society such as our own.  Those Americans who save more 
will certainly live better in retirement.  Those who save less are 
rolling the dice, and the odds arent in their favor, especially given 
the inevitability of entitlement reform.  

So whos been underwriting Americas recent spending spree?  
The answer is foreign investors.  That brings me to the third 
deficitour overall balance-of-payments deficit.  America is 
spending more than its producing.  In 2004, the U.S. trade deficit 
hit a record $618 billion, up $121 billion from the year before.  
From cars to clothing, America is the worlds largest single market 
for foreign goods.

Overseas money has been pouring into the United States.  Many of 
these funds are coming from Asia, where U.S. treasury securities 
have been prized because of their safety.  Thanks to the high 
savings rate in China, Japan, and elsewhere, its relatively cheap 
for Americans to borrow.  But theres a catch, and its a big one.  
Increasingly, were mortgaging our collective future, and some of 
our leading foreign lenders may not share our long-term economic, 
foreign policy, and national security interests.  Imagine what 
would happen to the stock and bond markets if these foreign 
investors suddenly lost confidence in U.S. securities and decided 
not to buy or, worse yet, started to sell off their holdings.

From Rome and Babylon to the great powers of Europe, most 
civilizations have declined over time.  Some nations are destroyed 
by wars, while others fall to disease and natural disasters.  Today, 
the greatest threat to Americas future is our own unwillingness to 
make difficult but necessary policy choices, especially those that 
would help to restore fiscal responsibility.  Unlike the nations of 
the past, we have the benefit of demographic projections and 
other sophisticated data whose meaning is clear and compelling.  
Unlike the nations of the past, its fully within our power to make 
choices today that will help to ensure a better tomorrow.  The key 
question is, will we?

This afternoon, Im going to talk about where we are, where were 
headed, and the steps that can and must be taken to avoid a long-
term decline in Americas position in the world and our standard 
of living here at home.  Im going to set the stage by discussing in 
more detail our nations large and growing long-term fiscal 
imbalance.  Im then going to spend some time talking about two 
issues that will become increasingly important as the baby 
boomers retire.  Those two issues are retirement income security 
and health care.  Finally, Im going to outline several specific steps 
that need to be taken, and taken soon, to secure Americas 
continuing role as a superpower and to ensure an improved quality 
of life for our children and grandchildren. 

Facing Financial Facts

Historically, Americans have shrugged off warnings about 
impending deficit and debt problems.  Today, many people are in 
denial about the seriousness of our situation.  After all, interest 
rates are low and inflation is modest.  This false sense of security 
is reinforced by the governments financial statements and official 
budget projections, which fail to provide a full or fair view of our 
nations current financial condition and long-term fiscal outlook.  
As the federal official who signs the audit report on the U.S. 
governments financial statement, Im here to tell you that 
Americas financial condition is worse than advertised.  

In the past, particularly in the decades since World War II, 
America has been the worlds engine of economic growth.  We still 
are, but our long-term fiscal gap is so great now that theres no 
way we can simply grow our way out of the problem.  

While the current deficit numbers are big and bad, Im even more 
concerned about the decades of structural deficits that lie ahead.  
What do I mean by structural deficits?  A structural deficit isnt 
caused by temporary economic cycles or one-time emergencies. 
Instead, a structural deficit is driven year after year by powerful 
underlying factors that affect both the spending and the revenue 
sides of the budget.  As I mentioned earlier, these factors include 
known demographic trends, such as an aging population, longer 
life spans, and lower birth rates.  Another key factor is the rising 
cost of health care.  We also dont have enough revenue to pay our 
current bills or deliver on our future promises.

Obviously, one of the most important drivers of our structural 
deficits will be the cost to care for the aging baby boomers.  The 
problem is that fewer and fewer working-age Americans will be 
around to support more and more retirees.  

This trend is having and will continue to have a profound impact 
on government spending.  The government now faces enormous 
expenses from its many liabilities and unfunded commitments.  
These include things like unfunded promises for Social Security 
and Medicare, military and civilian retirement benefits, and 
potential costly bailouts of government-sponsored entities like the 
Pension Benefit Guaranty Corporation.  As I mentioned earlier, as 
of September 30, 2004, these items totaled over $43 trillion, up $13 
trillion in one year alone, and that amount is growing daily.

Even with the recent run-up in housing prices, the combined net 
worth of every American, including Microsoft founder Bill Gates, 
stock market investor Warren Buffett, and other billionaires, is 
only about $48 trillion.  That means that every American would 
have to give up around 90 percent of his or her net worth just to 
cover the governments current liabilities and unfunded promises 
for future spending.

Clearly, a crunch is coming, and eventually every federal 
department will feel its impact.  Long-range budget simulations 
from my agency, the U.S. Government Accountability Office 
(GAO), show that, without meaningful changes, increasingly 
drastic actions on spending and taxes will be required to balance 
the budget.  By 2040, if nothing is done, federal revenues may be 
barely adequate to pay interest on the national debt.

Absent timely and dramatic action, the real-life consequences of 
unchecked deficits are likely to become reality.  If we continue as 
we have, higher interest rates are inevitable.  Its only a matter of 
when and how high.  As government is forced to borrow more and 
more money to finance its debt, less money will be available for 
companies to invest to innovate, improve, and stay competitive.  
Eventually, long-term economic growth will suffer, and along with 
it American jobs, purchasing power, Americas international 
prestige, our overall standard of living, and even our long-term 
national security.  A possible resurgence of inflation only adds to 
that worry.

So, despite what some say, deficits do matterat least from an 
economic perspective.  It also matters how a nation keeps score.  
After all, if our elected representatives dont have timely, 
comprehensive, and reliable information on the governments 
current finances and long-term fiscal outlook, how will they ever 
make the tough choices that will be required to help save our 
collective future?

The only thing scarier than incomplete and inaccurate financial 
projections is the possibility that were seeing them through rose-
colored glasses.

Reinventing Government

Beyond our growing fiscal imbalance, the United States also 
confronts a range of other emerging challenges.   Were seeing 
globalization on many fronts.  Markets, technologies, and 
businesses everywhere are increasingly linked, and geo-political 
borders are becoming less and less significant.  And with todays 
international air travel, infectious diseases can spread from one 
continent to another literally overnight.   This is one reason public 
health experts are so concerned about avian flu.  Obviously, we 
also confront a range of new security threats.

To keep pace with these changes, our government must also 
change.  Its time to ask a series of basic questions about what 
government does and how its does business.  Nothing less than a 
top-to-bottom review of federal activities is needed to determine 
whether they are meeting their objectives and to free up 
resources.  

To help in this effort, GAO recently published an unprecedented 
report that asks a series of basic questions about both mandatory 
and discretionary spending and tax policy.  GAOs report is called 
21st Century Challenges:  Reexamining the Base of the Federal 
Government, and you can find it on our website at www.gao.gov.  
I should stress that while GAO doesnt make policy, decades of 
experience and expertise put GAO in a unique position to pose a 
range of thought-provoking questions for policy makers to 
consider.  These questions address issues ranging from 
entitlement programs and mandatory and discretionary spending 
to tax policy and overall government operations.  They also 
include a range of economic, health, and retirement security 
questions.  Any of these questions would make an excellent 
research topic for any student or faculty member here at The 
American College or any other school.

As I mentioned previously, our fiscal gap is now so great that, 
unlike the past, there is no way we can count on economic growth 
to bail us out.  In the end, policymakers will need to reform 
entitlement programs, restructure the base of federal spending, 
and reexamine all existing tax policies to determine whether they 
remain relevant and appropriate for the 21st century.  GAOs new 
report on tax expenditures, which we released last Friday, 
recommends that policymakers take a hard look at whether the 
costs of specific tax preferences outweigh the benefits. 

My hope is that policymakers and the public will begin to think 
more strategically about where we are; where were headed; and, 
more importantly, what we need to do to get back on a more 
prudent and sustainable path.  But the time to start is now.  
Theres a real payoff for prompt action.  By making tough choices 
sooner rather than later, we can minimize the need for drastic 
measures down the road and we can give everyone time to adjust 
to any changes.  We can make the miracle of compounding work 
for us rather than against us, as it is now.  We can avoid a 
dangerous upward spiral of debt and inflation.  Importantly, we 
can also fulfill our stewardship obligation to our children, 
grandchildren, and future generations of Americans. 

Retirement Security

One of the many areas we need to reexamine and reprioritize is 
retirement security.  Lets talk a little about what happens when 
the baby boomers start to leave the U.S. workforce in large 
numbers.  Just to be clear, when I refer to the baby boomers, Im 
talking about the generation born in the two decades after World 
War II.  Specifically, if you were born between 1946 and 1964, 
youre a baby boomerlike me.   

We know that the boomers are living longer than past generations, 
yet many expect to retire just as early or earlier than their parents 
did.  Obviously, thats going to put huge strains on both our public 
and private retirement systems.  Longer retirements also 
underscore the importance of growing our future workforce.  

As most of you know, a secure retirement has traditionally 
included several key elements, including Social Security, 
Medicare, private pension and health benefits, and personal 
savings.  But some of these elements may not be as reliable in the 
future as they were in the past.   

For example, take Social Security.  In 1950, and I should point out 
that the system wasnt fully mature then, more than 16 workers 
were paying into the system for every retiree drawing benefits.  
Today, that ratio is a little more than three to one.  By 2040, itll be 
about two to one.  Soon afterward, the Social Security trust funds 
are expected to be exhausted.  At that point, there will only be 
enough revenue from payroll taxes to pay about seventy-four cents 
of every dollar of promised benefits.  

So far, Social Security has been taking in more than its been 
paying out.  Frankly, the Social Security cash surpluses have been 
helping to finance the rest of government.  But we know this is 
coming to end in the not-too-distant future.  The Social Security 
cash surplus will begin to shrink within the next five years and it 
will disappear entirely by 2017.  At that point, the Social Security 
trust fund will have to start redeeming its Treasury securities.  The 
government will be forced to raise taxes, cut other spending, 
increase public borrowing, or some combination of these 
measures to raise the cash needed to pay Social Security benefits.  

Importantly, Social Security isnt our biggest problem.  Medicare is 
in much worse financial shape and is a far more complex and 
controversial challenge.  The governments fiscal exposure to 
health care is a time bomb thats ticking ever more loudly.  
Combine all of them, and the picture is bleak indeed.

Today, federal spending for Social Security, Medicare, and 
Medicaid is about eight percent of the gross domestic product.  By 
2055, it could be 20 percent.  That means that one in five dollars 
out of our entire economy would go to these three federal 
programs.  Ill get back to this issue in a moment, but its clear that 
the boomers, along with their children and grandchildren, have 
good reason to be worried about their promised public retirement 
benefits.

At the same time, were seeing erosion in the benefits offered to 
American workers.  This trend can be traced partly to changes in 
the nations private pension system.  The percentage of workers 
covered by an employer pension remains more or less at 1980 
levels, or about half the workforce.  But the type of benefits being 
offered has changed dramatically.

For years, defined benefit pensions were standard at many U.S. 
companies.  Under this type of pension plan, the employer 
provided a retiree with a stated monthly income for life.  In recent 
decades, the Pension Benefit Guaranty Corporation, or PBGC as 
its commonly known, has insured all or part of these benefits.  But 
the PBGC has gone from a $9.7 billion surplus in 2000 to a $23 
billion deficit as of last year.  Interestingly, the PBGC has suffered 
the same financial reversal as the overall federal government!  In 
addition, the PBGC estimates that the nations single-employer 
plans are now underfunded by more than $450 billion.  The recent 
bankruptcy filings by Delta and Northwest Airlines serve to 
underscore the seriousness of the situation.  I should point out 
that in 2003, GAO added PBGCs single-employer insurance 
program to our high-risk list.

Several basic changes could make a difference in PBGCs long-
term outlook.  For example, we need to strengthen the rules 
applicable to poorly funded plans.  We need to raise and modify 
the PBGCs premiums to better reflect risk.  We also need to limit 
lump sum payments from underfunded plans, provide better 
information on plan funding, and further reform the nations 
bankruptcy laws.

The baby boomers will be the first generation to depend largely on 
uninsured defined contribution plans, which include 401(k) plans.   
Under this type of retirement plan, employers generally match all 
or part of worker contributions up to stated limits.  As a result, its 
increasingly up to the worker to plan, save, and invest for 
retirement.

Growing evidence shows that many workers are falling short in 
accumulating the large sums needed for a comfortable retirement.  
A recent survey by the human resources consulting firm Watson-
Wyatt found that one in four eligible employees isnt participating 
in their 401(k) plan.  And among those workers who did 
participate, not even one in 10 contributed the maximum.  

The funds in the old defined benefit pensions were off limits until 
retirement.  But today, employees can dip into their 401(k) 
balances before retirementand apparently many workers are 
doing just that.  When you also consider the growing problem of 
under-funded defined benefit plans and their troubling 
implications for both PBGC and individual retirees, its becoming 
clear that some baby boomers wont have enough money to last 
them through retirement.

Theres no question that defined contribution plans are very 
popular with employers and employees.  These plans do have 
many positive features.  In a world in which the average worker 
will change jobs seven times during a career, portability of 
benefits is a huge advantage.  Unlike many defined benefit plans, 
401(k)s can follow a worker from job to job. 

However, given current trends, many boomers may also need to 
work longer, or work part-time, if they want to maintain their 
standard of living into their 60s, 70s, and beyond.  In the coming 
decades, with the slowing of growth in the U.S. labor market, 
Americas seniors will play a more important role in the 
workforce.  And in a knowledge-based economy such as ours, 
older workers can bring valuable skills and experience to a job. 
Hopefully, fewer workers will retire outright, and more and more 
workers will transition from full-time jobs to part-time work 
before retiring.    

This trend will be particularly important given the inevitability of 
entitlement reform.  Americans can no longer take for granted that 
the Social Security, Medicare, and Medicaid programs will 
continue in their present form.  All of us are going to have to take 
more responsibility for our own financial futures.  Americans will 
need to plan better, save more, and invest wisely for their 
retirement years.  More Americans will also need to make 
provisions for one of the most expensive realities of growing old, 
and thats the need for long-term care.  Financial advisors like the 
ones trained here at The American College can play an important 
role to help ensure that Americans do the right thing for 
themselves and their families.  

Its also time to revisit a number of federal labor and tax policies 
in order to encourage people to work longer.  The benefits from 
this trend are two-fold.  First, the longer people work, the less the 
government is going to have to pay out in Social Security and other 
benefits.  The government will also be taking in more revenue.  
Second, continuing employment will not only put more money in 
the pockets of older Americans but it may also mean a significant 
difference in their quality of life and, according to authoritative 
research, could even lengthen their lives.  

A saying thats equally true for government and for the individual 
is that if you fail to plan, youre likely to fail.  The longer public 
officials and individuals postpone needed planning and necessary 
actions, the worse our options become and the more dramatic and 
potentially disruptive those changes will be.  

As I said before, entitlement reform is essential and inevitable.  We 
need to restructure Social Security and Medicare and put them on 
a sound footing for future generations.  Actually, the problems 
with Social Security arent that difficult to solve.  Meaningful 
reform doesnt require breaking the bank or the back of the 
taxpayer.  With a few thoughtful modifications to the program, we 
can exceed the expectations of every generation of Americans, 
whether theyre retiring in 30 days or 30 years.  Unfortunately, 
were off to a bad start.  Even so, the greatest challenge to 
retirement security isnt Social Security, its the cost of health care.

Health Care 

In recent decades, health care costs have generally outpaced U.S. 
economic growth, and this trend is likely to continue. Rising costs 
have already led to the disappearance of many employer-
sponsored health care plans for retirees.  As recently as 1997, one 
out of five companies provided their retirees with some form of 
subsidized health insurance. By 2002, that number had dropped to 
13 percent and its continuing to fall.  Obviously, more and more 
baby boomers will be turning to Medicare and Medicaid to meet 
their health care needs in retirement.   So how are we going to 
make these programs sustainable over the long run?

If we hope to provide an acceptable level of health care to the 
baby boomers, were going to need to fundamentally rethink how 
we define, deliver, and finance health care in this country.  Thats 
true for both the public and the private sectors.  For example, our 
current system does little to encourage informed discussions and 
decisions about the costs and value of various health care 
services.  Thats particularly important when it comes to cutting-
edge drugs and medical technologies, which can be incredibly 
expensive but only marginally better than other alternatives.  
Were going to need to weigh unlimited individual wants against 
broader societal needs and decide how responsibility for financing 
health care should be divided among employers, individuals, and 
government.  
 
Ultimately, we may need to define a set of basic and essential 
health care services that would be guaranteed to every American.  
Individuals wanting additional coverage might be required to 
allocate resources to pay for it.  Clearly, such a dramatic change 
would require an appropriate transition period.  

For now, we need to take interim steps to establish uniform 
standards of practice, promote cost-effective care for people with 
chronic illnesses, modify existing cost-sharing arrangements, 
better leverage the governments purchasing power, increase 
transparency on the costs and quality of health care, introduce 
reconsideration triggers to help contain growth in health care 
costs, and rethink the existing tax exclusion for employer-
provided and employer-paid health insurance.  Im convinced that 
in time, our health care crisis can be cured.  But what we need 
now is a sound prescription for progress and a bold first step 
forward.  Ultimate success is essential, nothing less than the fiscal 
future of the country, the global competitiveness of American 
business and the health security of Americans is at stake.

Leading the Way Forward

So where do we go from here?  At the federal level, we must have 
more fiscal discipline and we need to change our current 
accounting and reporting model and budgeting systems to better 
reflect the governments true financial condition and long-term 
fiscal outlook.  In my view, our elected representatives need more 
explicit information on the long-term costs of major spending and 
tax billsbefore they vote on them.  The time has also come to 
reinstate budget controls, such as spending caps and pay-as-you-
go rules that would require any new spending increases or tax 
cuts to be paid for by equivalent tax increases or spending cuts.  
Likewise, we need to establish additional reconsideration triggers 
over mandatory spending.

As I said earlier, America is at a critical crossroads. The choices 
that policymakers make or fail to make in the next 5 to 10 years 
will have profound implications for the future of our country and 
all Americans.  To help us make the right choice, we need more 
leaders with three key attributes.  Those attributes are courage, 
integrity, and the ability to innovate.  We need leaders who have 
the courage to speak the truth, to do the right thing, and to put the 
needs of the next generation ahead of the next election cycle.  We 
need leaders who have the integrity to lead by example, to practice 
what they preach, and who understand the law is the floor of 
acceptable behavior and who live by higher standards.  We need 
leaders who can see new ways to address our many challenges 
and who can help show others the way forward.

Recent history provides two examples of countries whose leaders 
took them down two very different fiscal paths.  Before World War 
II, Argentina was one of the most prosperous nations in Latin 
America.  

Today, due largely to the road not taken, Argentina is an economic 
basket case.  In 2001, Argentina experienced the largest public 
debt default in history.
 
On the other had, theres the example of New Zealand. Like the 
United States, New Zealand has an aging population.  Unlike the 
United States, New Zealand has taken steps to deal with the 
growing burden associated with its pension system and other 
government programs.  New Zealand is a work in progress, but at 
least its leaders have acknowledged their countrys challenges and 
have begun to address them.  

I dont want you to go away thinking that things here at home are 
hopeless.  Thats far from true. America has risen to greater 
challenges in the past.   What we need to do now is to take steps 
that will put us on a path closer to that of New Zealand rather than 
Argentina.  But unlike New Zealand, we shouldnt wait to act until 
were on the brink of a disaster.  After all, the facts about our own 
future are clear and compelling.

We need to overcome our myopia and look past the present to 
consider the future.  We also need to educate ourselves about the 
issues that really matter and hold our government accountable for 
fiscal prudence, enhanced performance, real results, and 
appropriate stewardship.

Leadership is important, but we the people need to be part of the 
solution.  My hope is that when you leave here today, you will 
spread the word among your friends and colleagues and start 
demanding the facts and insisting on action.  If you and I remain 
silent, meaningful change is unlikely.  After all, why should any 
elected official stick his or her neck out on difficult issues that no 
one seems to care about?

In closing, lately, Ive been studying the life of George Washington, 
particularly his two terms as President.  Whats often overlooked 
is that George Washington was a great believer in fiscal discipline.   
In his farewell address in 1796, Washington spoke to the issue of 
public debt.  He urged the new nation to avoid ungenerously 
throwing upon posterity the burden which we ourselves ought to 
bear.  This advice is as sound today as it was over 200 years ago.  
By ignoring George Washingtons words of wisdom and 
postponing difficult policy decisions, our government is, in fact, 
making a choicea choice with unacceptable fiscal and ethical 
consequences.   

We can and must do better than the path of least resistance.   The 
road less traveled wont always be easy, but its a journey that our 
children, grandchildren, and future generations of Americans will 
thank us for taking.  I hope youll join with me in stating the facts, 
speaking the truth, and acting to help save our collective future.

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