Younger baby boomers demonstrate markedly weaker preparedness for retirement relative to older members of their generation, according to the Center for Retirement Research at Boston College, and the reasons why relate to some complex demographic trends and the lingering effects of the Great Recession.
These issues are explored in the CRR's latest issue brief publication, which was penned by Alicia Munnell, Laura Quinby and Anqi Chen and based on the trio's May 2023 paper on the same subject.
As the paper and new brief spell out, because of changes in the retirement landscape in recent decades, younger baby boomers who are now nearing retirement would be expected to have less wealth from traditional pensions, Social Security and housing compared with middle boomers and early boomers when they were at the same age.
On the other hand, younger baby boomers should have more assets held in 401(k) plans and individual retirement accounts compared to older baby boomers when they were at the same age. This is assumed because 401(k) style plans have been more important savings vehicles in the workplace for more of younger boomers' careers.
Strikingly, the CRR researchers find, younger boomers have actually seen a relative drop in their 401(k) and IRA assets compared with older boomers, and the unintuitive patterns seems to be playing out for a handful of interrelated reasons that should concern policymakers.
As Munnell, Quinby and Chen emphasize in their new brief, part of the drop is due to a decline in the share of boomers who are white, married and have college degrees in the younger group. The main factor, though, is that late boomers saw a weakening in the link between work and wealth due to the Great Recession.
The brief goes on to suggest the Great Recession story contains "a bit of good news" for younger cohorts, as some of the downward pressure on their wealth holdings should abate as the 2008 time period fades further into recent history.
Surprising Wealth Data
The original research paper considers wealth from three sources: Social Security, defined benefit pension plans and defined contribution plans, such as 401(k)s and individual retirement accounts.
The underlying data, drawn from a much-cited longitudinal study run by the University of Michigan, covers five birth cohorts, and, in order to compare the most recent cohort to the others, the focus is on households at ages 51 to 56.
For purposes of the analysis, Social Security wealth is equal to the expected present value of benefits at age 62, discounted back to the age at the survey year and prorated based on earnings. This approach allows the researchers to facilitate a comparison to other wealth that households have accumulated by ages 51 to 56.
Projected income from defined benefit plans is also transformed into a wealth measure, like Social Security, by calculating the expected present value of lifetime benefits, while defined contribution wealth is simply the self-reported account balances.
According to the CRR experts, the results for the middle wealth quintile show that the pattern of wealth holdings across cohorts is generally as expected. That is to say, defined benefit wealth declines, Social Security wealth stays roughly constant and defined contribution wealth increases.
"That pattern, however, comes to an abrupt halt with the late boomers, when defined contribution wealth drops sharply," the CRR brief explains. "One possible explanation for the decline in retirement wealth of late boomers could be shifting demographics. Indeed, Black and Hispanic households in the middle quintile hold only a fraction of the wealth of their white counterparts."
Interestingly, however, late boomers in these traditionally disadvantaged groups have not experienced the same decline in retirement wealth as white Americans.
"With their Social Security wealth holding steady and modest changes elsewhere, retirement wealth for Black and Hispanic households relative to white households actually rose from middle boomers to late boomers," the brief notes.
What's Really Going On?
According to the new issue brief's interpretation, the fact that the decline in wealth from middle boomers to late boomers was not driven by a worsening situation for Black and Hispanic households does not mean that the racial composition of the population is not relevant to the decline in wealth from one cohort to the other.
"Specifically, since Black and Hispanic households still have less wealth than their white counterparts, to the extent that non-white households increase as a share of the total, average cohort wealth will decline," the researchers explain. "The decomposition procedure described in the final section attempts to sort out how much of the decline can be attributed to demographics as opposed to other factors."
According to the researchers, the most relevant "other factor" is clearly the labor market experience of late boomers. This conclusion, they note, is drawn by comparing the Health and Retirement Survey Findings with data from the Federal Reserve's triennial Survey of Consumer Finances.
The results of such a comparison show that late boomers were not always behind in private retirement savings. In fact, until their mid-40s, late boomers held more 401(k)/IRA assets than earlier cohorts at the same age — as would be expected.
