This study uses the Urban Institute's DYNASIM model to project wealth and income at retirement for low-income boomers. The findings suggest that most with low lifetime earnings will also have low incomes at older ages unless they either continue working or move in with others who help support them financially. Saving more, working more consistently over their lifetime, and delaying retirement is projected to improve outcomes for low-earning boomers, but none of these actions will increase retirement living standards dramatically.
With the prospect of reduced replacement rates from Social Security benefits and declining prevalence of traditional employer-sponsored pension plans, Americans in the boomer cohorts have been bombarded with messages about the importance of saving for their own retirement well-being. However, diverting income from paying for current needs to saving for future needs remains infeasible for many low-wage workers. In addition, low-wage workers are much less likely than others to be covered by employer-sponsored defined benefit (DB) pension plans or to have access to employer-sponsored defined contribution (DC) plans. As a result, many low-wage workers will enter retirement with very little savings. To be sure, some will end up with relatively higher income in retirement. One way this can happen is through marriage to a high-earning spouse (Lerman 2005). Other ways of boosting retirement income are through continued work at older ages and delaying take-up of Social Security benefits (Butrica et al. 2004; Butrica, Smith, and Steuerle 2007). Further, low-income people can boost their living standards by co-residing with a higher-income individual, often an adult child or other relative.
Even good retirement planning does not guarantee retirement security. Despite their ability to work and save when young, a number of individuals will end up with low income in retirement because of events such as divorce, widowhood, job loss, and disability and other adverse health events (Johnson, Mermin, and Uccello 2006).
Numerous studies have examined the adequacy of retirement income to protect economic security, with implications for boomers. Most of these studies focused on current retirees or individuals on the verge of retirement (Gustman and Steinmeier 1999; Haveman et al. 2006; Moore and Mitchell 2000). Other studies have compared boomers in middle age with their parents when they were the same age (Easterlin, MacDonald, and Macunovich 1990; Easterlin, Schaeffer, and Macunovich 1993; Sabelhaus and Manchester 1995). Butrica and Uccello (2004) compared the overall level, distribution, and composition of retirement income of boomers with previous generations, and assessed the adequacy of this income in maintaining retirees’ economic well-being. But none of these studies focused specifically on low-income households.
Our analysis uses projections from the Urban Institute’s Dynamic Simulation of Income Model (DYNASIM) to assess the retirement preparedness of low-income boomers. We begin by identifying low-income boomers and understanding how their personal characteristics, wealth, and income differ from those of others in the boomer population. We then examine lifetime earnings and retirement income to increase our understanding of how much income mobility boomers can expect over their lifetime. We identify factors that will enable some boomers with low lifetime earnings to escape low income at retirement and those that will cause some boomers with higher lifetime earnings to end up with low income at retirement. Next we consider how the likelihood of being low income is expected to change over time, as well as the extent to which the personal and economic characteristics of low-income retirees will change.
After analyzing the retirement prospects of low-income boomers, we consider possible ways to increase their retirement living standards. There has been much discussion of the potential importance of higher saving rates and more years of paid work for improving retirement outcomes. Therefore, we will estimate the amount by which low-income boomers could have improved their economic status in retirement if they had saved more over their lifetime, worked more consistently when younger, or extended their working life past their projected retirement date.
© 2008 AARP: This report is reprinted with the permission of AARP.