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Retirement Planning > Saving for Retirement > 401(k) Plans

Why Young Boomers Have So Little Wealth at Retirement Age

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What You Need to Know

  • A new analysis shows the Great Recession continues to dog a generation of American workers, namely younger baby boomers now entering retirement.
  • This generation would be expected to have excess 401(k) plan wealth relative to the oldest baby boomers, but the opposite is true.
  • Gen X is likely not doomed to the same fate, researchers conclude.

The Great Recession may increasingly feel like the distant past in the day-to-day work of financial advisors, but a new analysis published by the Center for Retirement Research at Boston College shows that today’s near-retirees continue to experience negative effects from the banking crisis turned full-fledged international economic catastrophe.

The new analysis was penned by CRR staffers Anqi Chen, Alicia Munnell and Laura Quinby. The research was pursuant to a grant from the Social Security Administration as part of the Retirement and Disability Research Consortium.

As the paper spells out, because of changes in the retirement landscape in recent decades, younger baby boomers who are now nearing retirement would be expected to have less wealth from traditional pensions, Social Security and housing compared with “mid boomers” and “early boomers” when they were at the same age.

On the other hand, the hypothesis goes, younger baby boomers should have more assets held in 401(k) plans and individual retirement accounts compared to older baby boomers when they were at the same age. This is assumed because 401(k) style plans have been more important savings vehicles in the workplace for more of younger boomers’ careers relative to older boomers.

Strikingly, however, younger boomers have actually seen a relative drop in their 401(k) and IRA assets compared with older boomers, and the unintuitive patterns seems to be playing out for a handful of interrelated reasons that should concern policymakers, according to the CRR.

The Big Picture

According to Chen, Munnell and Quinby, about a quarter of the drop in retirement wealth between older and younger boomers was due to a broader population-level shift toward households that simply have lower average 401(k) and IRA balances based on lower career “achievement” from an earnings perspective.

Another factor is the rising number of Black and Hispanic Americans that make up younger baby boomer households, as well as a declining share of households that are married and have college degrees.

Most of the remaining decline is due to a weakened link between work and wealth, the analysis suggests. That is, younger baby boomers who were able to retain their jobs after the Great Recession tended to earn less, and they were less likely to participate in a 401(k) — accumulating fewer assets when they did.

In the end, the results are troubling for younger baby boomers, but there is some potential good news for Generation X, the researchers say, given that economic factors linked to the Great Recession, which should abate over time, were such a powerful wealth-sapping culprit among younger boomers.

According to the authors, the study has a number of big policy implications, ranging from potential changes to the Social Security program to the adoption of automatic enrollment retirement accounts for working Americans. Such policy changes may not do a lot to help today’s near-retirees, but they can insulate future generations from similar financial instability.

Digging Into the Data

As the researchers highlight, the broader shift from defined benefit pension plans toward 401(k)s and IRAs has been accompanied by a decline in Social Security wealth, thanks in large part to the fact that the full retirement age has risen to 67 for today’s near-retirees.

This drop in financial wealth has been accompanied by a sharp drop in housing wealth stemming from the Great Recession, according to the authors, particularly for Black households.

“Thus, the expected pattern by cohort is a clear shift away from DB plans, slightly less Social Security wealth and significantly less housing wealth,” the authors explain. “Sanguine observers hoped that some of the losses would be offset by higher 401(k) and IRA balances, given younger cohorts’ greater reliance on these plans. … The data, however, for the [younger boomers] present a much more dismal picture.”

According to the authors, comparing the younger boomers to middle and older boomers reveals not only the predicted declines in Social Security, DB wealth and housing, but also a “significant drop” in defined contribution assets.

Specifically, 401(k) and IRA balances dropped from an average of $52,300 for the middle boomers to just $32,700 for younger boomers. Even more surprising, the authors point out, the pattern is evident across all wealth quintiles except the top.

From here, the researchers cite prior research to show that the typical Black and Hispanic household has less than half the retirement wealth of their white counterparts, emphasizing that these differences would be much greater in the absence of the “equalizing effects” of Social Security. The racial lens is important to consider, the authors suggest, but so is the broader decline in wealth across demographic segments.

Potential Implications and Policy Considerations

According to the authors, these data points raise an important pair of questions.

If most of the drop in younger boomers’ wealth is explained by the Great Recession, should policymakers expect more positive outcomes for older members of Generation X and subsequent generations? Or, if the more structural explanations tied to race and marriage status dominate, will Gen Xers continue to see a decline in average wealth?

While there are some reasons to be cautious about the conclusion, the researchers say, it seems that the first question is more apt, and that the answer is in the affirmative.

In statistical terms, the authors conclude that an “Oaxaca-Blinder decomposition” helps to demonstrate two main factors are at play in the surprising drop in 401(k) wealth among younger boomers — a change in the composition of households and a weakening for younger boomers of the link between work and wealth accumulation.

“This is not a tale of the deteriorating status of Black and Hispanic households; indeed, the wealth of non-white households has increased relative to their white counterparts,” the authors conclude. “But Black and Hispanic households have less wealth than white households, so when they increase as a share of the total households, average cohort wealth will decline.”

Similarly, a decline in the percentage of households married or with a college degree will bring down the average, the authors explain. For total wealth and retirement wealth, the changing demographics accounted for between 24% and 29% of the total decline.

“The rest was attributable to shifting coefficients — the most important of which was the weakened link between work and wealth,” the authors explain. “Work, for [younger boomers], simply did not produce the boost to wealth accumulation that it had for previous cohorts.”

Ultimately, the authors suggest, this finding is “potentially good news” for the wealth holdings of future generations.

“While the demographic/education shifts will continue to bring down the average, these factors were not the major source of the decline,” they explain. “The big change was the weakening of the link between work and wealth accumulation for the [younger boomers] who were in their 40s during the Great Recession and never recovered.”

In the end, to the extent that the decline in wealth is a Great Recession story, some of the downward pressure on wealth holdings at retirement should abate.

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