Is There a Retirement Crisis?

Nov 7, 2011 by

by Nicole Gelinas –



Yes, but it’s one that we can manage if we act now.

Aging middle-class Americans worry about retirement, and for good reason. The financial and economic crises of the last several years have left the country 10 percent poorer, obliterating $6.1 trillion in wealth, some of which people were saving for retirement. When the TV talking heads aren’t reminding us about plummeting house prices, they’re speculating about not whether, but by how much, politicians will cut Social Security and Medicare benefits. The baby-boom generation must wonder if it’s about to go bust.

The problems aren’t limited to the boomers themselves. As America ages, Social Security, Medicare, and Medicaid expenditures will inexorably rise, leaving less money for infrastructure, defense, and other important things. There’s also the risk that tens of millions of boomers, discovering that they haven’t saved enough money for their dotage, might all sell their assets at the same time and severely pare back their spending, plunging the economy not just into recession but into long-term stagnation.

Americans in their late forties through their early sixties shouldn’t stock up on cat food quite yet, though. Nor should we accept as inevitable a future in which the elderly consume so many public resources that they suppress growth for decades. Mass retirement will transform America, yes; and for some people, the transformation may be unpleasant. But it need not drag the nation under.

At first glance, the situation does look bleak: more retirees, less money. This year, the oldest of the 78 million babies born between 1946 and 1964 are turning 65 and becoming senior citizens. Because of the immense size of this baby-boom generation, the number of senior citizens will more than double between now and 2050, from 40 million to 89 million. And because the nation’s overall population will grow more slowly, older folks will make up an ever-larger share of it, increasing from 13 percent now to 20 percent in 2050.

Thanks to Botox and treadmills, the boomers are aging well. Their finances? Not so much, as some Federal Reserve numbers show. Baby boomers, like most Americans, have seen no wage gains for two decades. In 2007, families headed by younger boomers—those aged 45 through 54—earned a median income of $64,200, almost exactly the same, in inflation-adjusted dollars, as families in the same age group earned in 1989. (The comparison doesn’t work well for the older boomers—those aged 55 through 64—because, as we’ll see, people are retiring later these days, which skews their incomes.)

For years, boomers made up for their stagnant wages by borrowing, helping expand the credit bubble. Two decades ago, the average American family headed by someone in his late forties or early fifties owed $38,100, in 2007 dollars; by the time the global debt mania peaked in 2007, such families had more than doubled their indebtedness, to an average of $95,900. (All numbers in this story are adjusted for inflation, and this particular figure doesn’t include the 13 percent of such families that had no debt at all, a number that has remained fairly stable for 20 years.) Older boomers, too, dramatically increased their debt relative to earlier generations, from $15,400 in 1989 to $60,300 in 2007—and the percentage that didn’t owe money fell from 29 percent to 18 percent.

Everyone knows the chief culprit behind the debt explosion: mortgages. In 2007, the typical younger boomer family with a mortgage—66 percent of the group—was $110,000 in house-secured debt. That was nearly triple the amount that a similar family owed two decades earlier ($41,900). The average older boomer family with a mortgage, meanwhile, owed $85,000 in 2007, well over twice the $32,200 that the equivalent family owed in 1989. More older boomers, too, had mortgage debt: 55 percent, compared with 37 percent in 1989. Another sign that the boomers weren’t paying down their mortgages enough in preparation for retirement was that in 1989, 45-to-54-year-olds owed a full 35 percent less in mortgage debt than people a decade younger did. By 2007, the figure had fallen to 14 percent.

Until the real-estate bubble burst, middle-aged Americans told themselves that they were nurturing nest eggs, investments that would more than enable them to pay back what they owed. The facts seemed to bear them out: over the two decades leading up to 2007, the values of homes owned by people aged 45 to 54 exploded, rising 68 percent after inflation, to an average of $230,000. Older boomers made similar gains. Boomers also diligently socked away money in retirement accounts. By 2007, the two-thirds of younger boomers who had such accounts held $63,000 in them, on average; older boomers held $100,000.

Thanks to the rising value of real estate and of stocks, younger boomers had managed, on the eve of the financial crisis, to amass an average net worth—assets minus debt—of $184,900, a modest but very real gain of 16 percent relative to their counterparts 20 years ago. Older boomers had $254,100, a striking 61 percent better than the previous generation.

By 2009, though, all of the younger boomers’ gains were gone. When their stock and house values crashed but their massive debt remained, younger boomers’ average wealth contracted to $145,400, 9 percent below what folks had two decades ago. Older boomers fared better, but still lost 15 percent, with their wealth shrinking to $214,800.

At first glance, that decline seems catastrophic. That $145,400, even if it grew 5 percent a year for another 20 years until retirement, would generate only the future equivalent of $15,400 in 2011 dollars in annual retirement income. As for older boomers, because they have much less time for their assets to grow, their current $214,800 would generate only about $14,000 a year in retirement income. True, older boomers are likelier to have corporate pensions to supplement their assets. But for most Americans, those sums would offer a bare subsistence, not a fulfilled existence—especially if politicians slashed Social Security, too, as conventional wisdom has long regarded as inevitable.

It’s no surprise, then, that folks feel queasy about their retirement prospects. The Employee Benefit Research Institute (EBRI) conducts an annual survey, sponsored largely by financial groups, to quantify this unease. The 2011 edition found that “Americans’ confidence in their ability to afford a comfortable retirement has plunged to a new low.” Half of workers of all ages were “not at all confident” or “not too confident” that they could save enough before they stopped working, up from 29 percent in 2007, before the financial crisis. Of people aged 45 through 54, 29 percent lacked any confidence in their retirement prospects, more than double the 11 percent similarly worried in 2007.

Graph by Alberto Mena

via Is There a Retirement Crisis? by Nicole Gelinas, City Journal Autumn 2011.

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