Aging members of America's middle class worry about retirement, and for good reason. When the TV talking heads aren't reminding us about plummeting house prices, they're speculating about not whether but by how much politicians will cut Social Security and Medicare benefits. And the financial and economic crises of the last several years have left the country 10% poorer, obliterating $6.1 trillion in wealth, a healthy chunk of which was in retirement savings.
The country's financial crisis came at a particularly bad time. This year, the oldest of the 78 million people born from 1946 to 1964 are turning 65 and becoming senior citizens. Because of the immense size of this baby boom generation, the number of senior citizens will more than double between now and 2050, from 40 million to 89 million. And older folks will make up an ever-larger share of the population, increasing from 13% now to 20% in 2050.
Thanks to Botox and treadmills, the boomers are aging well. But their finances aren't. Baby boomers, like most Americans, have seen no wage gains for two decades. In 2007, families headed by younger boomers — those 45 to 54 — earned a median income of $64,200, almost exactly the same, in inflation-adjusted dollars, as families in the same age group earned in 1989. (All numbers in this article are adjusted for inflation.)
For years, boomers made up for their stagnant wages by borrowing, which helped expand the credit bubble. Two decades ago, the average American family headed by someone in his late 40s or early 50s owed $38,100, in 2007 dollars; by the time the global debt mania peaked in 2007, such families had more than doubled their indebtedness, to an average of $95,900. (This figure doesn't include the 13% of such families that had no debt at all, a number that has remained fairly stable for 20 years.) Older boomers, too, dramatically increased their debt relative to earlier generations, from $15,400 in 1989 to $60,300 in 2007 — and the percentage that didn't owe money fell from 29% to 18%.
Until the real estate bubble burst, middle-aged Americans told themselves that their homes were their nest eggs, investments that would more than enable them to pay back what they owed. They had reason to believe this: Over the two decades leading up to 2007, the values of homes owned by people age 45 to 54 exploded, rising 68% after inflation to an average of $230,000. Boomers also diligently socked away money in retirement accounts, and they watched their savings grow. By 2007, the two-thirds of younger boomers who had such accounts held $63,000 in them, on average; older boomers held $100,000.
Thanks to the rising value of real estate and of stocks, younger boomers had managed, on the eve of the financial crisis, to amass an average net worth — assets minus debt — of $184,900, a modest but very real gain of 16% relative to their counterparts 20 years earlier. Older boomers had $254,100, a striking 61% better than the previous generation. By 2009, though, all of the younger boomers' gains were gone. Their stock and house values had crashed, but their massive debt remained.
So what can be done?
Part of the solution to the retirement crisis will have to be to shorten the years of retirement. "Working longer is the key to a secure retirement for the vast majority of older Americans," notes Alicia Munnell, a Boston College management professor and director of the school's retirement research center. If you're working, you're not consuming your savings as much; in the best case, you're still adding to them.
This is already starting to happen. Men today retire at 64, on average, up from 62 two decades ago, Munnell has found. (Women now retire at 62, but comparisons with previous eras are tricky, since married women didn't work throughout their lives.)
Washington is partly responsible for the shift. Nearly three decades ago, President Reagan and the Democratic Congress enacted a law that gradually increased the age at which people could retire and get full benefits, from 65 at the time to 67 in 2027. People retiring this year, for example, must be 66 to receive full benefits — though a Nixon-era change gives them even higher benefits if they wait until 70.
So far, people have changed their behavior only gradually. But as those who have received these signals during their entire working lives approach traditional retirement age, it's probable that more and more of them will keep working.
Another part of the solution is likely to come from the boomers themselves. Whatever happens, the baby boom retirement crisis is bound to have its unexpected turns. As the members of this generation were born, they sparked the construction not just of homes but of entire towns and school districts; as they went to work, they created day-care centers for their children. As they age, they'll surely continue to change the economy, though the effects are hard to predict.
When boomers exchange their bigger houses for smaller ones, house prices may fall even more than they already have, helping younger Americans to use their own savings more productively and generating more wealth. When boomers leave the workforce, wages for younger people may rise, pressuring supply to keep up with demand. Retirees may support younger generations — just as the homemakers who stayed out of the workforce half a century ago contributed to the economy with their unpaid labor — by baby-sitting their grandchildren, freeing mothers to work and perhaps encouraging a higher fertility rate. Instead of selling their homes, boomers may invite younger generations to come live with them.
The crisis is real. But members of the baby boom generation have never settled for simply responding to reality; instead, they have shaped their own reality. They will continue to do so in the next decades, fashioning solutions in real life that policymakers can't devise in advance on paper.
Nicole Gelinas is a City Journal contributing editor and a fellow at the Manhattan Institute. This piece is adapted from the fall issue of City Journal.