New consumer spending data published by Bank of America shows older generations' spending growth is outstripping that of younger generations, and the strength in older Americans' spending appears to be rooted in more than just a favorable base effect of relatively weak spending measured a year ago.
In particular, the new data shows baby boomers (defined here as those born between 1946 and 1964) and traditionalist households (born between 1928 and 1945) are showing significantly higher year-over-year spending growth versus both Generation X and millennials.
According to Bank of America's experts, part of the explanation for the spending growth gap could be based in the fact that older households have benefited from significant cost-of-living adjustments made by Social Security in both 2022 and 2023. Younger generations, for their part, are more exposed to higher housing costs and the pending end of the student loan repayment moratorium.
As the researchers emphasize, traditionalist households are now relatively few in number, but there are many more baby boomers entering and living in retirement. Collectively, these groups' faster spending growth is to some extent holding up the average.
Asked to comment on the new data, two retirement researchers pointed out to ThinkAdvisor the important differences that exist between raw spending data and more targeted analyses of consumer confidence. All in all, the data presents a complicated picture with respect to Americans' financial well-being and preparedness for retirement.
Is Higher Spending a COLA Story?
As the report points out, the 2023 Social Security cost-of-living adjustment (or COLA) of 8.7% was the largest in 40 years, and around three-quarters of the increase will have gone to those ages 65 and older, largely in the form of higher retirement benefits.
"We estimated [in January] that the rise in Social Security payments might lead to a significant boost to spending for those recipients," the spending report explains. "[Our data] suggests there continues to be some positive impact from the COLA increase, though it has faded somewhat."
According to the BofA experts, the 2022 and 2023 COLAs likely remain one reason for stronger spending by older adults, but the gap between the younger and older groups is "probably a little too large" for it to be the only explanation.
"When we look at the breakdown of spending by generations across income cohorts, we find that the outperformance of older generations' spending is taking place at higher income levels, too," the analysis explains. "Since the Social Security rise would proportionately tend to benefit lower-income groups, this suggests there may be other factors at play."
Asked by ThinkAdvisor to comment on the new data, Christine Benz, director of personal finance for Morningstar, said in an email that she would be hesitant to ascribe the recent disconnect between older and younger adults' spending to the COLA.
"It seems like housing costs are likelier the bigger factor," Benz writes. "Housing expenses are the biggest line item in most household budgets, and older adults have a higher rate of homeownership than younger ones. That means that older adults have been less affected than younger consumers by the one-two punch of higher borrowing costs and higher rents."
What's Holding Younger Households Back
As Benz suggests, the Bank of America data shows that Gen Z and millennials are indeed seeing a much higher rise in median rent and mortgage payments compared with older generations.
