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 Majorityby 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
We have a new report by the New York Fed. Here is a Dow Jones News story about it. I’ll report more as the Fed releases details.
“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.
Conclusions
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
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about demographics, and these about the future…
- 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).
You know, I view the Social Security crisis as overwhelmingly fraudulent, but I love your take here. Your point is exactly the correct one: Even if things are as bad as we thought, that’s a reason to fix Social Security and otherwise fix our economy.
You put the 1% as the core cause of the problem, just like those people who point out that our credit epidemic is not an accident or a result of profligate people but an obvious outcome of a decline of real purchasing power. Well-done sir. Superlative.
Arekexcelsior,
Not only is the social security crisis a fake, but the retiree medical cost threat is also exaggerated (i.e., medicare, medicaid, tricare). Medical care costs are the largest share of our future liabilities (i.e., estimated growth of future govt debt), but it is an solvable problem if we copy successful methods used by our peers.
For details see Another easily solved problem: our massive government liabilities — No, we’re not certainly bankrupt.
Agreed entirely sir. It’s exactly as Chomsky has been saying for about two decades: The Social Security crisis is a non-crisis, and fixing the non-crisis would be relatively easy. Dealing with purchasing power and credit issues might be tougher, but eminently doable.
I too am concerned about how the Silver Tsunami will actually turn out. It’s my parents’ generation, and good children want to be able to look after their parents.
Obviously there are some very wealthy Boomers around, especially those who were lucky enough to have bought and held real estate in the now-affluent coastal cities. But even for them, some unexpected (although perhaps not unlikely) medical event could wipe out decades of savings.
Of the people with no savings and no pensions, according to the above it looks like they’re already used to living on less than $20,000 per year, so maybe they’ll be able to maintain a similar standard of living on SSI for a while, at least until the big medical and long-term-care bills start to come in.
I think the common budget-buster for both rich and poor is going to be the medical costs, and hence the obvious but politically difficult solution of emulating the healthcare systems of our international peers. If only we can muster the will.
About cashing out 401k’s, I do think it’s important for us to remember that many people do so out of necessity because they’re suddenly unemployed and need the money, and not necessarily due to poor planning or lack of impulse control.
That said, I’ve known a few people who barely understand what a 401k is at all. They are only vaguely aware of the money coming out of their paycheck because it’s just one out of a dozen other nebulous deductions on that piece of paper they get every two weeks. When they leave their job, either voluntarily or involuntarily, and they get a big check in the mail from some financial company saying ‘401k’, they assume it’s a windfall and take it to the bank without ever understanding the greater financial implications.
Giving people a general financial education, even just making them aware of their retirement needs, could go a long way to helping the national problem. But yes, as each household does become aware of their shortfall, and reduces their spending and downgrades their lifestyle accordingly, it will have a very depressing effect on the overall economy.
Todd Guthrie,
“Giving people a general financial education” unfortunately must be sought. In my life time, and I’m a boomer, it was never offered and had to be taken as an ‘elective’ back in school (thankfully I did, but classes were not that full). Why, when money is the root of all (not soley evil) , it’s not a heavily required course of instruction is something I’ll never ever understand.
So, in ‘going a long way to helping the national problem, financial education MUST become mainstream. This depressing effect on the overall economy is the fault of our own and our educators.
With you, I fully agree.
Regards,