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Greenspan Tells Boomers to Get Ready': Warns of Severe Social Security, Medicare Shortfalls

NEW YORK-When Alan Greenspan speaks, markets move and people listen. Usually.

But it's unclear if even the former Federal Reserve chairman can get Baby Boomers' attention when it comes to preparing financially for life after work.

"At best, a majority of the resources required for retirement is going to be the individual's responsibility," Greenspan told an audience of roughly 150 at the Million Dollar Round Table's "Boomertirement Industry Summit" last week.

The problem is, many of the 77 million Baby Boomers now approaching retirement are counting on resources that simply will not be there. "We're going to have to confront an issue we don't want to," said Greenspan, who served as head of the Fed from 1987 until 2006.

Although, he technically retired in January 2006, Greenspan, 81, still works. He predicted that many millions of Boomers will have to do the same; only, unlike him, the reason will be need, not passion.

"I am fearful that the government is promising people money, and that people are believing it," he told a room filled primarily with financial planners.

But as those born between 1946 and 1964 exit the workforce, what they will find, increasingly, is that so-called entitlements such as Social Security, and even more so, Medicare, are anything but guaranteed.

"There is no solution other than individuals deciding how to handle this, and then coming to individuals such as yourself," Greenspan said.

If companies providing products want to help cater to the needs of this growing and under-prepared Boomer market, they will have to offer solutions to the two major shortfalls this market faces: income replacement and healthcare costs.

The good news for investment companies is that while most bonds and annuities generally have similar rates of return over time, historically, equities, if held long term, do better. "If you have the stomach to have your net worth go all over the place, you'll be better off," he said.

While that's good advice for younger workers, Boomers have less time to ride the market out. This problem is compounded by the fact that the vast majority of Boomers aren't approaching retirement with all that much saved. Sixty-two percent of those who do have retirement accounts, such as a 401(k) and an IRA, have less than $250,000 saved in employer-sponsored or other retirement accounts, and more than 50% of Boomers have less than $10,000 invested in such accounts, said Jack VanDerhei, director of the Employee Benefits Research Institute in Washington, in a separate presentation.

As people live longer, retiring older-thereby earning and investing longer-may seem natural. In fact, when EBRI asked 1,000 working Americans over 25 at what age they expected to retire, more than 30% gave figures over 65, with more than 15% saying they expected to work until 70 or beyond. But the reality is that 59% of women and 54% of all men actually retire at 62, according to Alicia Munnell, director of the Center for Retirement Research at Boston College.

When EBRI researchers asked Boomers what they thought their primary source of income in retirement might be, about 20% said Social Security.

That's a problem, Greenspan said, because that system simply cannot provide what people expect. In fact, back in 1983, he was among a group of economists who warned that Social Security would be drained by 2008 unless the system was restructured. Twenty-four years later, that structure remains unchanged.

"There is a lack of political will," said Greenspan, who quipped that the whole problem could be solved in a single 20-minute meeting-including 15 minutes of pleasantries-but no one seems willing to attend.

"The Medicare problem, on an order of magnitude, is many multiples more difficult," he said. Unlike Social Security, where there are finite possibilities and options, the future of healthcare costs remains a wildcard. "If you look at the data on Medicare in this country, they are, in effect, guessing what the numbers are," he said.

Since the system was developed, healthcare has consumed a larger and larger chunk of people's expendable income, and the group among whom it is growing fastest is retirees.

"The problem is that we have promised more than we can deliver," said Greenspan of the Medicare system. "It is fundamentally immoral."

It's also a reason for Boomers, who may have 30 or more years to live after retirement, to purchase products that help hedge against the risk of living too long. People primarily pick annuities and insurance products, if they are thinking about longevity risk at all.

For those still working who actually do plan ahead, the Health Savings Accounts, created by Congress in December 2003, offer an option. The accounts, which allow individuals under 65 who meet certain qualifications to invest, to a limit, in plans not dissimilar to 401(k)s, can be used to help cover the cost of healthcare. They can also be rolled over. But they are not an easy sell.

"Most of the time, we bring it up [with clients]," said Nathan M. Perlmutter, president of the Forest Hills Financial Group in New York. Usually, those who are interested have witnessed medical bills erode a parent's or relative's savings, he said. The challenge is getting Boomer clients to understand the real threat of inflation, Perlmutter said.

With time, and Boomer's experience, though, he believes HSAs will become more popular, as will other products that help address medical costs.

"This year already, we have had even more [new HSA account openings] than last year," he said. Every American should save more for health, he said.

"At some point, medicine takes over the whole economy," said Greenspan of the unknown but unavoidable cost of healthcare.

Again, he reiterated the importance of individuals to seek the advice and tools to ensure they can provide for themselves, rather than rely on so-called entitlements.

"I suppose it is scary for everyone, but that's what life is all about," Greenspan said.

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