Empirical Regularity Suggests Retirement Risks

Introduction

Baby boomers have often been characterized as a generation in love with consumption and incapable of accumulating assets for a rainy day — or retirement. But you couldn’t tell from the data. The Survey of Consumer Finances (SCF), the Federal Reserve’s comprehensive survey of household wealth in the United States, shows that the boomers have been accumulating wealth at much the same pace as the cohorts ahead of them. From 1983 through 2001, the period during which the surveys were conducted, the ratio of wealth to income has remained virtually unchanged at any given age. At first glance, this regularity seems comforting, suggesting that the boomers and the cohorts that follow are as well prepared for retirement as their parents. But that conclusion is wrong. For while the boomers have been accumulating wealth at much the same pace as their parents, the world has changed in four important ways: 1) the prevalence of defined benefit pension plans — an asset not included in the definition of wealth in the SCF — has declined dramatically over the last 20 years; 2) interest rates have fallen significantly, so a given amount of wealth will now produce less retirement income; 3) life expectancy has increased, so accumulated assets must support a longer period of retirement, and; 4) health care costs have risen substantially and show signs of further increase, indicating a need for greater accumulation of retirement assets.