U.S. Business Sees Golden Threads Among the Silver

By James Flanigan

Dec. 6, 1998 12 AM PT

While politicians and pension experts deliberate at the White House this week on ways to ensure the long-term solvency of Social Security, we should keep in mind that the problem is one of prosperity.

Elders, senior citizens, older persons--whatever one calls people in the 55-and-older age brackets--are living longer and more prosperously than ever before in the United States and in other developed countries.

As long as the Social Security trust fund holds up over the next three decades, older Americans will make for a sizable and growing consumer market.

The purchasing power of the 22.6 million Americans in the 55-to-64 age bracket, about half of whom are retired, is more than $1 trillion, say corporate and university studies based on U.S. Census Bureau data. The annual spending power of the 30 million people in the 65-to-84 age group is $700 billion.

“The net worth of people over 55 is greater on average today than people in the 30-to-40 age brackets, and not only because of homeownership,” reports economist George Moschis, head of the Mature Consumer Studies program at Georgia State University in Atlanta.

And growth of the senior market will take off starting in 2001 when the first baby boomers turn 55.

Businesses catering to older populations notice their relative prosperity. LeRoy Hanneman Jr., president of Del Webb Inc., the Phoenix-based builder of Sun City retirement communities, recalls that when retirees moved to Webb’s early Sun City developments in the 1960s “they would come with their Social Security income and the equity from the family residence they had just sold.”

But today, people buying homes at the 15 Sun City communities nationwide--including a new all weather Sun City development near Chicago--”come with investment portfolios and demands for computer access services and business centers in the community,” Hanneman says.

What accounts for this change? The growth of pension funds, provided by companies large and small throughout U.S. industry, and of retirement savings accounts of many kinds. Pension funds in the aggregate now constitute a roughly $6-trillion mountain of investment in the U.S. economy. And mutual funds, fed by tax-deferred savings plans such as 401(k) accounts, add another $6 trillion.

Payouts from these pension and mutual funds as workers and savers reach their 60s augment Social Security, affording many U.S. workers a richer retirement.

U.S. workers, in short, have saved for retirement in two ways--through the employer pension contributions that were part of their pay and through the work forces’ Social Security taxes. Thus their relatively more prosperous retirements represent a return on real investments.

That is not to deny that 1 in every 6 elderly Americans lives below the poverty line (compared with less than 1 in 7 for the general population). But it’s a simple fact that the situation of U.S. elders today is far better than it was in the past, when the 1930s song “Over the Hills to the Poorhouse” described a grim reality for the aged.

And the success of U.S. pension funds, which were earning average annual returns of 8% even before this decade’s bull markets, points the way for the rest of the world.

Germany, France, Italy and other European countries that do not have pension funds or independent investment accounts are now encouraging them as a way to augment strained government social security systems. Japan, where retirement systems have earned only 1% a year by investing in government bonds, is deregulating its financial system and encouraging its people to invest for higher returns.

Every nation seems to be studying Chile, which for 20 years has relied on solely on private investing to finance retirement.

A certainty in the next few years will be changes in retirement systems, with some temporary reduction in consumer purchasing power in European economies as those countries lower benefits and create new savings plans.

But total privatization of European or Japanese retirement systems, or of U.S. Social Security, is not going to happen. There are too many difficulties, including $9 trillion to $12 trillion that the U.S. economy would have to come up with for both current retirees and the next generation of retirees in the transition, notes economist Gary Burtless of Washington’s Brookings Institution.

Rather, the most powerful global trend will be mixed systems of private and public investments for retirement savings. That promises growth in stock markets worldwide, and more attention to shareholder value among European and Japanese companies.

It also spells a very big financial services business. “That’s why companies such as Merrill Lynch and Citicorp and all the rest are expanding so eagerly in Europe, Asia and Latin America,” says Mark O’Reilly, an economist with the benefits consulting firm Watson Wyatt International.

Insurance companies too, such as American International Group, which recently acquired Los Angeles-based SunAmerica, see expanding markets among the world’s elderly.

Airlines offering senior discounts have long known that older Americans spend more than $30 billion a year on vacation travel.

And business is looking to the advanced age groups as average life expectancies reach into the 80s. Marriott International, the hotel and lodging giant, now has 108 Senior Living Services communities across the U.S.

Marriott is focusing on the 70-plus population, building housing projects in which residents can move gradually from independent to assisted living to full nursing services.

As the American population grows older, U.S. business increasingly is seeing golden threads among the silver.

“It’s a business with tremendous growth prospects,” says a Marriott spokeswoman.

James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.

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Growing Old in Rich Countries

Demographics

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Ratio of Workers, Retirees, workers to Country in millions in millions retirees Britain 27 9 3-1 Canada 14 4 3.5-1 France 25 11 2.3-1 Germany 32 11 2.9-1 Italy 20 21 0.95-1 Japan 70 17 4.1-1 U.S. 147 44 3.3-1

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Tax rate

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Country Employee Employer Total Britain 10.00% 0.00% 10.00% Canada 2.93 2.93 5.85% France 6.55 8.20 14.75% Germany 10.15 10.15 20.30% Italy 8.90 23.80 32.70% Japan 8.68 8.68 17.35% U.S. 6.20 6.20 12.40%

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Retirement age

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Country Men Women Britain 65 60 Canada 65 65 France 60 60 Germany 65 65 Italy 62 57 Japan 60 60 U.S. 65 65

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Researched by TRICIA FORD / Los Angeles Times

Getting Your Money Back

Examples of how long it would take U.S. workers from different generations based on their wages to collect in Social Security benefits the money they contributed in payroll taxes to the retirement portion of the Social Security systems. Excludes payroll taxes for disability and Medicare programs. Wages are as of 1998 and are assumed to rise as fast as inflation.

Year of Birth: 1917 (Retires with full benefits at age 65)

Wages: $20,000

Time: 25 months

Wages: $40,000

Time: 31 months

Wages: $68,400

Time: 33 months

Year of Birth: 1935 (Retires with full benefits at age 65)

Wages: $20,000

Time: 109 months

Wages: $40,000

Time: 136 months