Summary: Two new reports warn us about the predictable but so far ignored consequences of so many Boomers’ retiring with low savings, no pensions (other than SS), large debts — and long expected lives ahead. Unless we act, the effects will prove painful for not just them — but also on asset prices and US economic growth.
“Demography is destiny.”
— From The Real Majority by Richard Scammon and Ben Wattenberg (1970).
“Rising mortgage debt is threatening the retirement security of millions of older Americans. In general, older consumers are carrying more debt, including mortgage, credit card, and even student loan debt, into their retirement years than in previous decades.”
— “Snapshot of older consumers and mortgage debt” by the US Consumer Finance Protection Bureau, May 2014.
The rise of the Boomers brought massive and largely unexpected changes to American society. The tsunami of politically active young people revitalized both parties, tilting them to their respective extremes. Their buying of home boosted real estate prices. Their increased productivity with age boosted US growth.
Now most of those trends will flip into reverse during the next few decades. Oddly, despite the intense study of the Age Wave, many important and likely trends have received too-little attention. Such as the coming bust in consumer spending and rise of bankruptcies — as large numbers of Boomers retire with little savings, small or no pensions (other than social security), and large debt levels — facing multi-decade long retirements.
I and others have warned about this (see this post from 2015), but recently major reports have begun to highlight the danger.
We’re at the start the long steep climb in this curve
“Americans in their 50s, 60s and 70s are carrying unprecedented amounts of debt, a shift that reflects both the aging of the baby boomer generation and their greater likelihood of retaining mortgage, auto and student debt at much later ages than previous generations. The average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, according to data from the Federal Reserve Bank of New York released Friday. Just over a decade ago, student debt was unheard of among 65-year-olds. Today it is a growing debt category, though it remains smaller for them than autos, credit cards and mortgages.”
Also see this major report by the US General Accountability Office (GAO): “Most Households Approaching Retirement Have Low Savings“, 12 May 2015 — Summary…
Many retirees and workers approaching retirement have limited financial resources.
About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA). According to GAO’s analysis of the 2013 Survey of Consumer Finances, many older households without retirement savings have few other resources, such as a defined benefit (DB) plan or nonretirement savings, to draw on in retirement (see figure below). For example, among households age 55 and older, about 29% have neither retirement savings nor a DB plan, which typically provides a monthly payment for life.
Households that have retirement savings generally have other resources to draw on, such as non-retirement savings and DB plans. Among those with some retirement savings, the median amount of those savings is about $104,000 for households age 55-64 and $148,000 for households age 65-74, equivalent to an inflation-protected annuity of $310 and $649 per month, respectively.
Social Security provides most of the income for about half of households age 65 and older.
… As baby boomers move into retirement each year, the Census Bureau projects that the age 65-and-older population will grow over 50% between 2015 and 2030. Several issues call attention to the retirement security of this sizeable population, including a shift in private-sector pension coverage from defined benefit plans to defined contribution plans, longer life expectancies, and uncertainty about Social Security’s long-term financial condition. In light of these developments, GAO was asked to review the financial status of workers approaching retirement and of current retirees.
Expect to see more articles about folly of the poor
How sad that the poor spend their savings to live, as described in “Nearly Half of U.S. Employees Cash Out Their 401(k) Accounts When Leaving Their Jobs“, Hewitt Associates, 28 October 2009. They worry about the lack of discipline and foresight among the lower classes and young people. Pamela Hess, Hewitt’s director of retirement research, explains…
“Particularly during the economic downturn, employers and financial advisors have been increasingly vocal about the negative impact that cashing out of a 401(k) plan has on retirement savings. But employees don’t seem to be getting the message. In a society where less than 1 in 5 workers will likely be able to meet their needs in retirement, employers and policymakers need to work together to implement solutions that change employee behaviors and reduce cash-out rates. Otherwise, millions of Americans who rely on defined contribution plans will find themselves unable to achieve a financially secure retirement.”
What wonderful advice for the unemployed: give up eating and go live under a bridge. These are the keys to a secure retirement. Nowhere in this does it suggest that the unemployed might need to spend their retirement money in order to survive now.
Decades of the 1% siphoning off America’s productivity gains have left many or most Boomer’s in weak condition for retirement, while medical science gives them longer lives. It’s a relatively easily solved problem given the nation’s vast wealth and income, as shown by the experience of our European peers.
What can we expect? Boomers become sellers of their assets, largely homes and stocks — with a depressing effect on their prices. Retiring boomers slashing discretionary consumption — a strong drag on the vendors of those goods and services, and on the overall US economy. A rising rate of bankruptcies.
Unless we take large-scale public policy action, these effects are baked in, as usual for demographic trends on the one and two decade time-frame.
For More Information
We were late to see the effects of the Boomer’s aging. One of the first to see this was psychologist Ken Dychtwald, author of Age Wave: How The Most Important Trend Of Our Time Will Change Your Future (1990). To learn more about this trend I recommend George Magnus’ The Age of Aging: How Demographics are Changing the Global Economy and Our World.
- Some thoughts about the economy of mid-21st century America — Thoughts about future from one of the 20th century’s greatest minds
- Another easily solved problem: our massive government liabilities — No, we’re not certainly bankrupt.
- As boomers retire they create a drag on US GDP that will last for decades.
- What Happens When the Auto-Loan Boom Blows Up?
- NBER: rapidly rising household debt predicts recessions. See America’s future.
- We passed a dark milestone: more money came out of 401(k)s than went in (in 2015).