The Mysterious Retirement Weakness of Late Boomers

What You Need to Know

Younger baby boomers have significantly fewer 401(k) and IRA assets than older boomers.
Two key factors — demographic trends and the timing of the Great Recession — explain much of the gap.
Some of the downward pressure on their wealth holdings should abate as the Great Recession fades further.

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.

The Depth of the Damage

As noted, even among working households, the Great Recession appears to have taken a greater toll on late boomers than on earlier cohorts.

According to the CRR researchers, when late boomers reached their 40s, their average earnings flattened out and then declined continuously thereafter, leaving them in their 50s with earnings generally well below those of early and middle boomers.

“The late boomers’ lower earnings were accompanied by a decline in the share of these households participating in a 401(k) plan,” the brief points out. “Even for those working households who were participating, the trajectory of their 401(k)/IRA balances changed dramatically after the Great Recession.”

In short, the brief concludes, the decline in 401(k)/IRA balances for the late boomers reflects not only the unemployment caused by the Great Recession but also the deterioration of labor market outcomes for those who stayed employed.

The researchers say the “ultimate question” is how much of the deterioration in the retirement wealth of late boomers was due to their worse labor market experience as opposed to the shifting demographics described earlier. They use a series of regression analyses in an attempt to derive an answer.

The Demographic Component

The regression calculations show average retirement wealth for middle boomers is $350,400, compared with $299,700 for late boomers — or a difference of $50,700. According to the researchers, the results indicate that the higher share of Black households among late boomers compared to middle boomers is responsible for $600 of the total decline in retirement wealth for late boomers. For Hispanic households, the comparable number is $2,700.

Late boomers also saw a drop in the share of households that were married and those headed by college graduates, and these factors account for $4,300 and $5,900, respectively, of the decline in their retirement wealth.

“On the economic side … late boomers worked less than middle boomers when they were ages 42 to 49,” the analysis explains. “This reduction in work results in $1,300 less in retirement wealth. In all, the change in the demographic characteristics and work activity between middle to late boomers explains $14,800 of the decline in retirement wealth, or 29% of the total decline.”

Other regression results cited in the brief indicate that the most important factor in the whole analysis is the change in the coefficient for the percentage of household years worked among those with a head ages 42 to 49.

“Specifically, this link between work and wealth accumulation declined significantly for late boomers compared to middle boomers, reducing their retirement wealth by $55,600 more,” the analysis posits.

The Bottom Line

As summarized in the new issue brief, the bottom line for these results is twofold.

“First, the decomposition analysis brings home the fact that one cannot look at the trends in average wealth by households without considering the demographics,” the brief claims. “As long as non-white households earn less, inherit less, and therefore accumulate less assets than white households, any increase in their share of the total population will bring down any measure of average wealth.”

The second big implication is that the weakened link between work and wealth meant that even late boomers who had a job after the Great Recession earned less, and they were less likely to participate in a 401(k) plan and accumulated fewer assets in those plans.

“Work, for these middle quintiles of late boomers, simply did not produce the boost to wealth accumulation that it had for previous cohorts, and this changing relationship was the single most important factor,” the analysis concludes.

In this limited sense, the Great Recession story is actually good news for future cohorts, as the expected link between work and retirement wealth can be expected to reassert itself over time.