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How an aging population will kill the American Dream

The number of people over the age of 65 in the United States will rise to 20 per cent in 2050 from 13 per cent in 2009.

Spencer Gordon/iStockphoto

The American dream is coming to an end and it's the nice, grey-haired lady next door who is to blame, economist Laurence Kotlikoff told a banking conference in Zurich this week.

That dream of prosperity – owning a home, building a business, perhaps even striking it rich – was a tantalizing prospect for generations of Americans. But it's fading quickly thanks to a critical shift in demographics towards a much older population coupled with what Mr. Kotlikoff terms the "Ponzi" retirement scheme of recent decades.

"The demographic change because of the level of benefits that the elderly are being told they're going to receive, this demographic change is going to drive countries broke, particularly the U.S.," warned Mr. Kotlikoff, a professor at economics at Boston University.

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The dramatic shift in demographics isn't taking anyone by surprise. Birth rates have come down in developed countries like the U.S., while life expectancy has increased significantly over the past 50 years. The number of people over the age of 65 in the U.S. will rise to 20 per cent in 2050 from 13 per cent in 2009.

Even the elderly will grow older: Mr. Kotlikoff highlighted projections that there will be 835,000 centenarians in the U.S. by 2050, enough to inhabit a city the size of Washington or San Francisco.

As more of the population ages – the baby boomers are officially starting to retire now – there will be fewer workers. In 1970, there were 5.3 workers to a retiree in the U.S., by 2010 that ratio had slipped to 4.5 and by 2050 it will reach 2.6, according to Mr. Kotlikoff. The result is fewer workers to pay for those pensions.

Mr. Kotlikoff is obviously no fan of what he terms the "take as you go" Second World War retirement policy, saying it would make even Bernie Madoff "blush."

He believes the costs are enormous but unknown to many Americans. The official U.S. debt stands at $11-trillion. But Mr. Kotlikoff prefers to look at the so-called fiscal gap, which takes into account all of the government's spending along with taxes and other income. He calculates that figure is some $222-trillion U.S.

The fiscal gap as a percentage of current GDP is 12 per cent in the U.S., higher than in European crisis-stricken countries like Greece and Italy, according to Mr. Kotlikoff.

"The U.S. is actually in worse shape on the proper measure than Greece in terms of the fiscal position," he said at the NZZ Capital Market Forum, a controversial viewpoint for the European attendees who are used to dire forecasts being reserved for their continent.

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An immediate and permanent tax hike of some 64 per cent would be required to close the gap, according to Mr. Kotlikoff. If ignored, the tally will become impossible for future generations to pay. One generations' dream may be the next one's nightmare.

"This policy has also left our kids with an enormous bill," Mr. Kotlikoff said. "What you're seeing in this picture and in the other figures is the end of the American dream. That's it."

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