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The Population Cliff by Perry A. Novak Demography, the statistical study of living human populations, is one of those detail laden subjects that just doesn’t lend itself to much excitement, but demographic change is about to have a profound impact on the U.S. economy. Here Comes the Baby Boom Population change normally occurs at a glacial pace, unless there is an extreme outside influence. World War II was just such an influence, increasing the U.S. birthrate by more than four million annually in the years following the war. From 1946 through 1964 there were 75 million births which gave rise to the term “baby boom.” When it comes to us boomers, no single group has had quite as profound an impact on the U.S. economy as we have. Boomers, who now range in age from 49 to 67, control over 80 percent of all personal financial assets, and account for more than half of all consumer spending. We are responsible for 80 percent of leisure travel, 77 percent of prescription drugs and 61 percent of overthe-counter drugs. The rise of the baby boom has caused tremendous growth in the U.S. economy, from the housing boom that started in the 1950s, to the creation of suburban living that changed the face of a previously agrarian nation. Unfortunately, the rapid retirement of the baby boom will accelerate some of the country’s most serious financial problems. Most of our large-scale consumptive spending occurs between the ages of 40 and 55, as we build our families and acquire the items we seek to make our lives more comfortable. After that, and especially as we approach retirement, our consumptive spending declines sharply. Consumer spending accounts for roughly 71 percent of U.S. gross domestic product (GDP). That is why the government usually deals with economic crises by trying to encourage consumers to spend. The changing demographics of the U.S. economy mean there will be fewer people in a position to spend us back to a robust economy. The second, more dramatic problem, is really two sides of the same coin. When we retire, we stop paying into programs like Social Security and Medicare and start taking out benefits. The money starts flowing the other way, so the costs of these programs rise dramatically just as their income is falling off sharply. More than 10,000 boomers a day began retiring in 2011 and that cycle will continue for most of the next two decades. More than 36 percent claim they have nothing in retirement savings and 35 percent of those over age 65 are relying entirely on Social Security for their retirement income. An AARP survey found that 40 percent plan to work until they die because they did not plan or save for retirement. Social Security: Past and Present The Social Security program was created in 1937 and began paying regular benefits to retirees, age 65 and older, in 1940. At that time, however, average life expectancy in the United States was just 58 years. If someone actually did live to age 65, their remaining life expectancy was 12.7 years for men and 14.7 years for women. When the program began, it covered workers but not spouses or dependents. It covered roughly 60 percent of the active workforce and provided a benefit equal to 26 percent of pre-retirement income. According to the 1940 census, there were only nine million Americans age 65 or older, and only a small fraction of them received benefits. The program was originally adopted to aid retirement only. It did not include disability payments or Medicare, both of which were added much later. Fast forward to 1990, and the numbers had changed dramatically. The number of Americans age 65 and older had climbed from nine million in 1940 to 34 million, comprising 13 percent of the U.S. population. Life expectancy had climbed as well. An expansion of the original law now covered 96 percent of the workforce versus the original 60 percent and benefits as a percentage of pre-retirement wages had climbed from 26 percent in 1940 to 45 percent in the 1990s. The increased number of retirees, living longer and receiving larger benefits as a percentage of their preretirement wages, has resulted in the payroll tax rate being increased over 500 percent since the program first began. Fully 80 percent of American workers pay more in payroll taxes than they pay in income taxes. That is why the federal government temporarily reduced the employee rate two years ago in an effort to influence consumer spending and jump-start the economy. 28 MARCH 2013
Unfortunately, the rate reduction expired at the end of 2012 and was not extended as part of the Fiscal Cliff Tax Bill. The result is an annual increase in employee payroll tax withholding of roughly $120 billion, which will impact consumer spending and potentially lower U.S. economic growth by roughly one-half of 1 percent in 2013. The View from 2030 Fast forward again, to the year 2030. The number of Americans age 65 and older has more than doubled since 1990, rising from 34 million and 13 percent of the population, to 69 million and 20 percent of the population. Life expectancy, which had been 12.7 years for men and 14.7 years for women in 1940, has risen to 18 years and 21 years respectively. Estimates from the Social Security Trust Fund say that payroll taxes will have to double from their 2013 levels to cover the cost of providing benefits in 2030. Keep in mind, too, that these figures are for Social Security retirement benefits alone. They do not include the explosion in Social Security Disability costs or Medicare. Medicare alone cost $555 billion in 2011, and is expected to see costs rise 75 percent by 2021, according to the Congressional Budget Office (CBO). A Wall Street Journal editorial published in November 2012 found that while the national debt is about $16.4 trillion now, it rises to $87 trillion if we take into account the unfunded Social Security liability – the amount owed over the lifetime of those people who are currently retired and drawing benefits. Turn the clock ahead 20 years, when all of us boomers are retired, and the unfunded Social Security liability rises to $202 trillion, according to a Boston University study. What Does a Trillion Look Like? A trillion is one of those numbers, like light-years, that is often cited, but hard to get a handle on. What does a trillion look like? One trillion pounds is roughly the combined weight of every single person on the planet. If you had a trillion bricks, you could build the 5,500 mile-long Great Wall of China...and 257 more just like it. A pile of 202 trillion bricks, one for every dollar of unfunded future liability in the Social Security system, would build a Great Wall that would circle the earth almost 12,000 times. As our elected leaders wrestle with the debt ceiling, sequestration, the federal budget, national debt and deficit, and tax code changes, entitlement reform will be a constant topic of discussion and disagreement. Entitlement programs now consume every single dollar the federal government receives in tax revenue and the cost is rising rapidly. That is the real cliff. Let’s hope they find an answer soon. s AND MEDIATION CENTER “A unique and effective style - a great mediator” Candice Stoddard The Novak Group would like to thank the following sources of data used in this article: U.S. Social Security Administration (SSA); U.S. Census Bureau, U.S. Treasury Department, Congressional Budget Office (CBO), Office of Management & Budget (OMB); American <strong>Association</strong> of Retired Persons (AARP); Boston University; The Independent Institute; The Wall Street Journal; James Brown’s Option Investor; David Wessell, Red Ink: Inside the High- Stakes Politics of the Federal Budget; UBS Wealth Management Research – Art Cashin, Director of Floor Operations, New York Stock Exchange. Perry A. Novak, J.D., is a financial advisor and Senior Vice President at UBS Wealth Management in Walnut Creek, CA. Perry is an active member of the Taxation, and Business Law & Corporate Counsel sections. He has served as an advisor to the Joint Economic Committee of the U.S. House of Representatives, the California Society of CPAs and the California Medical <strong>Association</strong>. He can be reached at (925) 746-0245 or by email at perry. novak@ubs.com. Ron Mullin Willows Office Park p 1355 Willow Way, Suite 110 Concord, California 94520 Telephone (925) 798-3413 p Facsimile (925) 798-3118 Email ronald@mullinlaw.com CONTRA COSTA COUNTY BAR ASSOCIATION CONTRA COSTA LAWYER 29
Page 1 and 2: Contra Costa LAWYER Volume 26, Numb
Page 3 and 4: TED AND HIS CALIFORNIA FORMS WERE I
Page 5 and 6: 2013 BOARD OF DIRECTORS Jay Chafetz
Page 7 and 8: CCCBA - It’s Your Organization pr
Page 9 and 10: erations and those concerned with g
Page 11 and 12: The California Cliff by Mark Ericss
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Page 15 and 16: Business Tax Provisions of ATRA 201
Page 17 and 18: IRS Return Preparer Regs Derailed b
Page 19 and 20: Annual Officer Installation January
Page 21 and 22: Meet Your New Commissioner: ANITA S
Page 23 and 24: Meet Your Local Judges, Family and
Page 25 and 26: RES IPSA JOKUITOR XVIII THE JOKE SP
Page 27: Elder Abuse Litigation Will & Trust
Page 31 and 32: Win A $100 GIFT CARD! We will be se
Page 33 and 34: that can be expensive for the clien
Page 35 and 36: CALENDAR UPCOMING EVENTS | OVERVIEW
Page 37 and 38: April 25 | Employment Section The E
Page 39 and 40: Why YOU should make referrals to CC

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