Depending on whom you talk to, the pending retirement of baby boomers could be a huge windfall or an economic catastrophe.
It’s all a matter of the most basic rule of economics – the principle of supply and demand. When demand exceeds supply, shortages result, causing prices to rise. When supply exceeds demand, a surplus results and prices fall.
So what happens when supply and demand is considered in the context of the baby boom generation? The U.S. Census Bureau says there are more than 77 million baby boomers, defined as those born between 1946 and 1964. The oldest boomers hit 65 this year. By 2030 all boomers will be over 65 and will represent an estimated 20% of the population.
Impact of Boomer Retirement
While no one can predict for certain how this shift in the supply of workers entering retirement will affect the economy, the following are possible outcomes:
Talented employees will be in high demand. The highly educated, talented baby boom generation will be missed by corporate America. Some boomers, especially those who failed to save adequately, will stay in the workforce. Regardless, the demand for skilled employees may cause salaries to increase.
Foreign economies will benefit. Employers will fill jobs by outsourcing abroad. Globalization and other factors will also continue to boost the economies of other countries. As a result, international investments may play a larger role in American investors’ portfolios.
Taxes may increase. With fewer taxpayers supporting government expenditures, either Congress will increase taxes or cut spending. Based on past experience, it’s a safe bet that taxes will increase.
Social Security will be underfunded. Social Security is a pay-as-you-go system. Today’s Social Security contributions benefit people who are retired today. When the Social Security system was created, there were 41 workers for every retiree. Today, the ratio has dropped to three workers for every retiree. The Social Security Administration (SSA) projects that the ratio will drop to 2.2 workers per retiree by 2030 and 1.8 workers per retiree by 2070.
In addition, because people are living longer, they are relying on Social Security payments for a longer period. Life expectancy has increased from 69 in 1940 to 78 today, yet the typical retirement age is still 65. Instead of funding an average of four years of retirement, Social Security must now fund an average of 13 years of retirement.
The cost of Social Security payments has increased from 2% on the first $3,000 to 6.2% of the first $90,000. It is likely to continue to increase unless the system is overhauled.
Health care prices will rise. As a percentage of gross domestic product, spending on Social Security, Medicare and Medicaid will more than double by 2030, from a total of 7% to 15%, according to The Wall Street Journal.
Not only will the number of retirees jump from an estimated 47 million to 77 million, but retirees will live longer, putting further strain on federal programs designed to aid retirees.
Noting the difficulty of accurately forecasting healthcare costs, a study by The Center for Retirement Research at Boston College predicts that retiring boomers will devote “implausibly large shares of income” to healthcare costs that are not covered by Medicare.
One such cost will be for long-term care. The Washington Post estimates that the cost of a year in a nursing home now averages more than $70,000. Imagine what it will cost when boomers advance to old age and demand soars.
Most boomers will live well. Much has been written about baby boomers failing to prepare for retirement. It’s true that many have saved little. As the first generation to grow up with defined contribution plans, such as 401(k) plans, boomers will not have the guaranteed pension payments that their parents enjoyed.
However, in most cases, boomers will benefit from both spouses having worked. That means they will potentially have two pensions and two Social Security payments. Boomers have also benefited from tremendous growth in the stock market. As a result, those who saved and invested wisely should have the capital to maintain their lifestyle. Those who haven’t may not.
According to The Economic Policy Institute, boomers have higher income than their parents did (even after adjusting for inflation), have accumulated more wealth and are saving for retirement at the same pace.
In addition, boomers stand to benefit from the hard work of their parents. A widely published study by two Cornell University professors predicted that baby boomers will inherit $10.4 trillion. While those funds will be received over a long period and will be distributed to 77 million people, that’s still a huge amount of money.
Preparing For Boomer Retirement
Given the potential impact retiring boomers will have on the economy, what’s the best way to prepare?
Whether you’re a baby boomer or a post-boomer, the best way to prepare for the future is to develop clear financial goals and to have a plan for meeting those goals. The only thing we can safely predict about the future is that you will need a great deal of money to provide for your retirement and that the federal government will not be able to meet all of your needs.
With careful planning, you may end up saving more than you need during retirement, but that will allow you to make choices that otherwise would not be available to you.
Darrell J. Canby, CPA, CFP® is President of Canby Financial Advisors, LLC, located at 161 Worcester Road, Suite 408, Framingham, MA. He offers securities and advisory services as a Registered Representative of Commonwealth Financial Network, a registered investment adviser and member firm of FINRA/SIPC. He can be reached at 508-598-1082 or firstname.lastname@example.org.