Baby Boomers Soon to Get Some Bad News
Americans may not be saving much, the stock market may be going into the tank, Social Security may be headed for trouble--but, hey, not to worry, frugal parents are about to bequeath baby boomers vast sums that will assure them of a comfortable old age.
Right?
Well, some economists and policymakers seem to think so. Figures as high as $136 trillion are being thrown around as the baby-boom generation’s total inheritance, and financial planners are licking their chops as they contemplate helping thousands of Americans handle their windfalls.
But a new study by two economists who have spent a lot of time looking at “intergenerational transfers” comes to this less sanguine conclusion: Don’t count on it.
In fact, when measured as a percentage of their wages, the bequests the boomers will get will be roughly the same as those received by their parents, according to Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland and Laurence J. Kotlikoff of Boston University.
“Not only will inheritances represent very minor additions to boomers’ resources, but their distribution across the recipient population is also likely to be highly unequal.
This substantially negates the view that inheritances will redress the shortfall in boomers’ retirement assets,” the two economists wrote in “The Baby Boomers’ Mega-Inheritance--Myth or Reality?” a paper published by the Cleveland bank.
To the extent that there is a generation that will benefit significantly from inheritances, it appears to be the children of the boomers, who represent a baby bust and will have fewer siblings with which to share bequests.
The study isn’t good news for the boomers.
The researchers followed two tracks, Gokhale said. First they asked, “What are the resources you need in retirement?”
Then, “Given that Social Security and Medicare are still in for trouble, the question is whether these alternative sources will plug” any gap, Gokhale said.
Total bequests today and in the future are much larger than they were 30 or 40 years ago, but the authors doubt that this increase translates into anything meaningful.
They assumed that boomers will want to have roughly the same standard of living in retirement that they enjoyed while working, so they looked to see how much of the boomers’ “labor income” might be replaced by inheritances and how much of their parents’ paychecks was replaced that way.
They used labor income because “the personal savings rate is so low, individuals are essentially spending what they earn” to maintain their standard of living, Gokhale said, and have relatively little investment income.
Their conclusion: Boomer parents in 1962 received bequests equal to 3% of their labor income, whereas boomers who inherited in 1997 got amounts equal to 3.7% of their pay. That figure probably won’t pass 5% before 2020, they said.
Assuming that retirees need anywhere from two-thirds to three-quarters of their working-life income to maintain their standard of living in retirement, it’s clear that bequests aren’t going to have a broad impact on retired boomers’ well-being.
There are several reasons for low bequest amounts, they said.
First, there is the sibling problem. The baby boom was just that, and families tended to have quite a few children.
Gokhale and Kotlikoff looked at the ratio of the number of people aged 35-45 to the number aged 60-70 (assuming parents tend to be about 25 years older than their children) and found that there are 2.3 younger people for every older one today, whereas in the 1960s the ratio was 1.8 to 1.
Second, much of the wealth possessed by the boomers’ parents is in the form of annuities, such as Social Security and many private pensions. Annuities are streams of income that usually end at the death of the annuitant and cannot be bequeathed.
“For a given amount of total wealth, the larger the share of annuitized resources, the smaller the share of bequeathable assets,” they write.
Third, life expectancies today are much higher than in the past, and the longer people live in retirement the more likely they are to draw down assets for living expenses.
Finally, the bumper sticker sometimes seen on motor homes--”I’m out spending the kids’ inheritance”--doesn’t seem to be entirely a joke.
They say economic evidence also indicates a “diminishing bequest ethic.” For example, the elderly have done little or nothing to reverse the increased annuitization of their wealth. To a certain extent, of course, they have no choice, as with Social Security benefits. But if they were really concerned about leaving money to their heirs, they might be expected to buy more life insurance, which they don’t, the authors say.
There will, of course, be some people who do receive sizable inheritances. But not many.
Looking at a snapshot of the population from a couple of years ago, the authors found that roughly 92% of the population had never gotten an inheritance, whereas a little more than 4% had gotten one but it was $25,000 or less. Only 1.6% had inherited more than $100,000.
The message in all this is twofold:
First, baby boomers and their parents would be well-advised to hold candid discussions about their finances. Those lucky enough to have genuinely well-to-do parents should begin planning so that the money is passed expeditiously and with as little tax as possible.
But merely looking at one’s parents and seeing that they seem to have plenty of money isn’t a good guide to what you might inherit. Social Security and a good pension can provide a good income for a couple but nothing for the heirs.
And health should be taken into account.
That’s hard to predict, of course, but timing of an inheritance, on the one hand, and the potential of having it eaten up by medical or nursing-home care on the other are important considerations.
And finally, if there is to be nothing from the parents, boomers should recognize that and begin ordering their own finances accordingly.
Saving in today’s world may mean doing without fun things, but it can be done, and the sooner people start, the better off they will be.
