Are Baby Boomers Saving Enough for Their Retirement?

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Abstract

This paper estimates the ratio of post- to pre-retirement consumption to explore how well boomers are prepared for retirement. I show that some of the poorest households are best prepared because they can maintain consumption by relying almost solely on Social Security while many of the most affluent households are poorly prepared because they will experience a decline in consumption upon retiring.  Nonetheless, affluent households will be able to maintain a consumption level many times that of poor households. The paper discusses whether equalization of pre- and post-retirement consumption provides a useful adequacy yardstick at all income levels.

Introduction

There is a widespread belief that self-indulgent baby boomers are spending themselves into an impoverished retirement. Like all caricatures, this one contains an element of truth. And, like all caricatures, it greatly oversimplifies the problem.

You cannot decide whether people are saving enough for retirement unless you know how much they will need once they stop working. That seems pretty obvious, but when one attempts to dissect the meaning of “need,” the complexities multiply like a virus. A major problem is that need depends very much on individual tastes. If you are satisfied to tend your garden, read books, and do your own cooking and home repairs, not much is required in retirement. If you like fine wines and an annual trip to Paris, you’d better save like a miser. Data that will be discussed later suggest that many baby boomers do not have France in mind. But many—perhaps most—are prudently preparing for retirement as they make their way toward their “golden years.”

Because it is so common to believe that baby boomers are profligate, a 2003 Congressional Budget Office (CBO) study came as a big surprise. It concluded that baby boomers save about the same amount as their parents and will have about the same ratio of wealth to income on the eve of retirement. At first sight, the conclusion seems astonishing, given the average saving rate has plummeted over the past three decades. According to CBO, one possible explanation of this paradox is that working people are saving about as much as they ever did, but retired people are on a consumption binge. That view is not without controversy, but, if true, it suggests that today’s retired are living pretty well on average. What is more, the standard measure of saving does not include capital gains. Although capital gains do not help fund new physical investment for the nation, they do add to a household’s purchasing power. Saving measures including capital gains show no discernable trend over the past 50 years.

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