America's baby boomers—those born between 1946 and 1964—face a problem that could weigh on the economy for years to come: The longer it takes for the economy to recover, the less money they'll have to spend in retirement.
Policy makers have long worried that Americans aren't
saving enough for old age. And lately, current and prospective retirees have
been hit on many fronts at once: They have less money, they earn less on what
they have, their houses aren't rising in value and the prospect of working
longer to make up the shortfall has dimmed significantly in a lousy job market.
"We will have to learn to make do with a lot less in
material things," says Gary Snodgrass, a 63-year-old health-care
consultant in Placerville, Calif. The financial crisis, he says, slashed his
retirement savings 40% and the value of his house by about half.
Banks, home buyers and bond issuers are all benefiting as
the U.S. Federal Reserve holds short-term interest rates near zero to support a
recovery. But for many of the 36 million Americans who will turn 65 over the
next decade—and even for the 45 million who have another decade to go— the
resulting low bond yields, combined with a volatile stock market, are making a
dire retirement picture look even worse.
Low yields present retirees with a difficult choice:
Accept the lower income offered by safer bonds, or take the risk of staying in
the stock market. Either way, their predicament could put a long-term damper on
the consumer spending that typically drives U.S. growth.
"If these rates stay as low as they are, then a lot
more people are going to be hurting," says Jack Van Derhei, research
director at the Employee Benefit Research Institute. The non-partisan outfit
estimates that if current conditions persist, nearly three in five baby boomers
will be at risk of running short of money in retirement. "There are going
to be many luxury items that will simply have to be eliminated," for
retirees to make ends meet.
Despite the market's rebound from the lows of 2009, nest
eggs remain severely impaired. As of the first quarter of 2010, net household
assets—homes, 401(k) plans, pension assets and other investments minus
debts—stood at $54.6 trillion, down 18% from the end of 2007. That's an average
of about $171,000 per person, much of which is concentrated in the hands of the
wealthiest.
At the same time, the return people can hope to earn on
their assets has fallen, particularly for those who switch into bonds or
annuities to guarantee a fixed income. The average yield on U.S. government,
corporate and mortgage bonds stands at about 2.4%, while stock-market
valuations suggest a long-term return of about 6%. At those levels of return,
some 59% of people aged 56 to 62 will be at risk of not having enough money to
cover basic living and health-care costs in retirement, estimates Mr. Van
Derhei. If market returns are higher—8.9% for stocks and 6.3% for bonds—the
picture isn't a lot better: The percentage at risk falls to about 47%.
Before the recession hit, many economists assumed people
would solve their retirement problems simply by staying in the work force
longer. Now, "the recession has blown that idea out of the water,"
says Alicia Munnell, director of the Center for Retirement Research at Boston
College and co-author of a 2008 book that advocated working longer.
Older workers, who typically fared better than their
younger counterparts in recessions, have been hit just as hard by layoffs this
time around. As a result, the fraction of people 65 or older who are working
has leveled off after a long period of growth. As of July, it stood at 15.9%,
down from 16.3% in mid-2008.
With the overall unemployment rate hovering at 9.5%, many
older workers have now found themselves at the back of the line to return to
the work force. "Many employers seem to think it is not worth their time
or effort to train me in a position," says Kathleen McCabe, 59, a former
apartment manager in Tulsa, Okla., who has been out of work since April 2009.
"They assume I will leave for retirement soon."
The diminishing work prospects will require many older
folks to make do with less—a discouraging outlook for firms hoping to sell them
everything from restaurant meals to cars.
As of 2008, the latest data available, people aged 65 to
74 were spending 12.3% less than they did ten years earlier, in
inflation-adjusted terms. They cut spending on cars and trucks by 46%,
household furnishings by 35% and dining out by 27%. At the same time, they
spent 75% more on health care and 131% more on health insurance.
The impact isn't limited to people on the verge of
retiring. Younger people, too, will have to reduce consumption now to save
enough money to get by in retirement. That's one reason Richard Berner, chief
U.S. economist at Morgan Stanley in New York, estimates that even after the
economy recovers, consumer spending will grow at an annual, inflation-adjusted
rate of about 2% to 2.5% in the long term, compared to an average of 3.6% in
the ten years leading up to the last recession.
Policy makers have more immediate concerns, such as how
to create jobs for the nearly 15 million unemployed. The predicament of
retirees, though, demonstrates how policy decisions—for example, on whether to
stimulate the economy through interest rates or government spending—can have
repercussions for many years to come.