Why Younger Boomers Are Poorer at Retirement Age

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 Blacks and Hispanics 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.