Older Americans' Spending Growth Is No Longer Supercharged: BofA

News October 31, 2024 at 03:28 PM
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What You Need To Know

  • Older generations may have played catch-up in spending post-pandemic.
  • Inflation's impact on older Americans' spending patterns also is a likely factor.
  • Retirees, happy with their finances, seem less confident than younger people in their financial future.
an older cople shopping

Stronger spending growth among older Americans relative to younger generations in 2022 and 2023 appears to be subsiding this year, according to credit and debit card data from Bank of America Institute.

The bank suggests a reason for the narrowing gap: the annual cost-of-living adjustment, or COLA, to Social Security income had been stronger than wage growth, but that's not the case anymore.

"The COLA increase effective in January 2025 will likely not change this situation," Bank of America said in a report released Thursday.

While some retirees also receive income from pensions and other sources, data doesn't indicate that these households have significantly stronger spending growth than those relying solely on Social Security, according to the bank.

"Traditionalists," born before 1946, and baby boomers, born from 1946 to 1964, had significantly stronger spending growth than younger consumers last year and the year before, the report noted.

"Rising net financial wealth could support the spending growth of some older generations, but we think this is likely to be fairly concentrated," it said. "And thus far, we don't see strong evidence for the spending growth of higher income retirees being faster than that of lower income retirees."

From roughly mid-2022, Bank of America credit and debit card spending growth per household was stronger among older generations, especially among baby boomers, who now are 60 to 78 years old, and traditionalists, now older than 78, the report said.

The trend "appears to have increasingly run its course thus far this year," BofA added.

Part of older generations' strong spending growth "was likely a 'catch-up' effect. Older generations had a weaker bounce-back in spending following the pandemic, in part because they were likely more sensitive to the health risks around resuming social activities," the report explained.

"As a result, some of their recent strength in spending was likely them making up for lost time."

Meanwhile, inflation's impact on older Americans' spending patterns also is a likely factor, the report added.

Wage Growth by Generation

The cost-of-living adjustment, which the Social Security Administration announces in October for the following year, is flattening, the report said. The 2023 COLA was 8.7%, the highest boost in four decades, which was significantly higher than after-tax wage growth for Gen X, millennials and Gen Z workers at the time, the bank reported.

"So, for a while, retiree incomes from Social Security were rising faster than the incomes of people in employment, which helped older generations grow their spending faster than younger ones. But this situation is changing," BofA said.

The COLA that took effect this year was 3.2%, roughly in line with after-tax wage and salary growth for Gen Xers but weaker than millennials' growth in pay. The recently announced COLA for  2025 will be 2.5%, below the current after-tax wage growth of Gen Xers and millennials, BofA reported.

"So the narrowing of the gap in spending growth between older and younger generations likely also reflects the fact that Social Security incomes are not rising as quickly relative to wages," the report said.

Spending growth for retirement-age households that appear to be working has been relatively weak since mid-2023, according to the report.

"This is consistent with Bank of America internal data on post-tax wages, which shows that older generations have had significantly softer wage growth than younger generations," the report said.

Baby boomers' after-tax wage growth in September was 1.3% year-over-year, compared with 3.8% for millennials, the bank added.

"It also appears that households that have both Social Security and pension income have had only slightly faster spending growth than those solely reliant on Social Security since 2023. And both cohorts appear to have experienced a similar slowdown in spending growth over 2024," the report said.

The bank also cited a new proprietary study suggesting that retirees "are feeling less confident about their finances going forward." While most groups indicated that they expect their finances to be in better shape over the next six months, "retirees lagged all other cohorts despite being relatively happy with how their finances are today."

Image: Fabio/Adobe Stock

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