#9906
June 1999
Do Baby Boomers Save and, If So, What For?
by
John R. Gist
Ke Bin Wu
Charles Ford
The Public Policy Institute, formed in 1985, is part of the Research Group of the American
Association of Retired Persons. One of the missions of the Institute is to foster research and analysis
on public policy issues of interest to older Americans. This paper represents part of that effort.
The views expressed herein are for information, debate, and discussion, and do not necessarily
represent formal policies of the Association.
 1999, AARP.
Reprinting with permission only.
AARP, 601 E Street, N.W., Washington, DC 20049
#9906
June 1999
Do Baby Boomers Save and,
If So, What For?
by
John R. Gist
Ke Bin Wu
Charles Ford
TABLE OF CONTENTS
LIST OF TABLES
LIST OF FIGURES
EXECUTIVE SUMMARY. ................................................................................................... i
Introduction .......................................................................................................................... 1
Definitions............................................................................................................................. 2
Measuring Wealth ................................................................................................................. 3
Saving Adequacy of Boomers................................................................................................ 5
How Much Wealth Have Boomers Accumulated?.................................................................. 7
How Does Boomer Wealth Vary by Demographic Characteristics?...................................... 10
What Do Boomers Save For? .............................................................................................. 14
Savings Habits..................................................................................................................... 16
Financial Risk Taking .......................................................................................................... 17
Are Boomers Saving Enough? ............................................................................................. 18
What and Whom to Count. ............................................................................................ 18
Wealth-to-Income Ratios............................................................................................... 19
Adequacy Scenarios....................................................................................................... 22
Assumptions........................................................................................................................ 22
An Illustration. ................................................................................................................... 23
Hypothetical Saving Scenarios............................................................................................ 24
Summary and Conclusions................................................................................................... 26
REFERENCES ................................................................................................................... 28
LIST OF TABLES
Table 1. Median Net Worth Estimates from Three Wealth Surveys ....................................... 7
Table 2. Median Net Worth and Net Worth Less Home Equity of Baby Boomer
Family Heads, 1984, 1989 and 1994..................................................................... 8
Table 3. Median Net Worth of Baby Boomer Family Heads by Demographic
Characteristics, 1984, 1989, 1994....................................................................... 11
Table 4. Median Net Worth Less Home Equity of Baby Boomer Family Heads
by Demographic Characteristics, 1984, 1989, 1994 ............................................ 13
Table 5. Distribution of Reasons for Saving Among Householders of Different
Ages, 1995......................................................................................................... 15
Table 6. Saving Habits by Age of Householder, 1995 ......................................................... 16
Table 7. Willingness to Take Risk for Saving or Making Investment, by
Householder’s Age, 1995................................................................................... 17
Table 8. Median Wealth to Income Ratios Among Baby Boomer Householders,
1989 and 1995 ................................................................................................... 19
Table 9. Median Wealth to Income Ratios Among Baby Boomer Family Heads,
1984, 1989 and 1994.......................................................................................... 20
Table 10. Median Wealth to Income Ratios for Baby Boomer Family Heads by
Demographic Characteristics, 1984, 1989, and 1994 .......................................... 21
Table 11. Amount and Percentage of Wages That Must be Saved to Reach
Retirement Target .............................................................................................. 25
LIST OF FIGURES
Figure 1. Personal Saving Rate, 1959-97. ............................................................................. 2
Figure 2. Median Net Worth and Net Worth Less Home Equity of Older and
Younger Boomers at Same Age ........................................................................... 9
EXECUTIVE SUMMARY
Background
Baby boomers are not saving adequately for retirement, according to a commonly held
perception. Yet some analysts credit boomers’ saving and investment with fueling the
prolonged surge in the stock market. The contradictory views about boomers’ savings are
reflected in pessimistic reports that boomers save only a fraction of what they need to save in
order to maintain their pre-retirement standard of living in retirement, and in contrasting
optimistic reports saying that boomers will be substantially better off in retirement than their
parents. In light of the size of the baby boom generation and the demands it will place on our
private and public retirement systems, an important question for public policy is how well
prepared boomers are likely to be for their retirement years.
Purpose
The purpose of the paper is to assess baby boomers’ progress in their preparation for
retirement by examining what survey data reveal about how much boomers have saved, and
their attitudes toward saving. The paper also discusses the measurement of saving and
wealth, notable attempts to measure the adequacy of boomer saving, and shortcomings of
these attempts. It then explores the question of saving adequacy by comparing changes in
wealth relative to income among boomers and by testing the sensitivity of saving adequacy
projections to small changes in the assumption underlying the projections.
Methodology
After critiquing recent efforts to estimate the adequacy of boomer saving, we use simple
tabulations of three large government wealth surveys to estimate the savings of boomer
families between 1984 and 1994. Dividing boomer families into older (born 1946 through
1954) and younger (born 1955 through 1964) cohorts, it compares net worth and net worth
less home equity holdings among these two age cohorts in terms of various demographic
characteristics at three points in time—1984, 1989, and 1994—using the Panel Study of
Income Dynamics. Using another survey, the Survey of Consumer Finances, the study
attempts to answer why boomers save, how they save, and how they perceive risk as
compared with other large age groupings. Finally, using accumulated wealth and income
measured as of 1994, the paper attempts to estimate how much boomer families need to save
to achieve certain broadly accepted standards of retirement income adequacy.
i
Principal Findings
The typical boomer has accumulated just over $40,000 in total net worth as of 1994 (in
current dollars), not including Social Security and pension wealth. Older boomers had about
$58,000 in net worth, and younger boomers about $23,000. Not counting home equity, older
and younger boomers’ assets totaled nearly $18,000 and $7,000, respectively. Overall,
boomers’ net worth grew by an average of about 12 percent per year in real terms between
1984 and 1994. Older boomers had accumulated greater amounts of wealth than younger
boomers at comparable ages (in their thirties), although younger boomers had higher ratios of
wealth to income in their thirties than did older boomers. Boomers who are married, white,
college-educated, who have higher incomes, and who have children have accumulated more
wealth than unmarried, minority, lower-income boomers with less education and no children.
Boomers cite precautionary reasons as their primary reason for saving (29 percent), with
retirement second (23 percent) and investment third (22 percent). About 46 percent of
boomers save regularly for retirement, but about 24 percent don’t save at all, and the rest save
only occasionally. Boomers, like most other age groups, are generally risk-averse. Almost
half the total population (46 percent) reports being unwilling to take any investment risk at all,
but risk aversion is age-related. While about 37 percent of boomers and their younger
counterparts are unwilling to take any risks, about 46 percent of pre-boomers (50-64 year
olds) are unwilling to take risks, and the percentage rises to 67 among retirees. And while
only about one-fifth of boomers are willing to take above-average risks to earn above-average
investment returns, the figure drops to only 15 percent among pre-boomers (50-64 year olds),
and to only seven percent among those aged 65 and over.
Over 1984-94, the ratio of wealth to income among boomers nearly tripled from less than half
to 1.3 times annual income. Older boomers saw their wealth increase from 85 percent of
income in 1984 to about 1.8 times income by 1994, and younger boomers saw their wealth
increase from about one-quarter of income in 1984 to just over 90 percent of income in 1994.
As with wealth totals, the ratios of wealth to income tend to be higher for boomers who are
married, white, higher-income, college-educated, and have two or more children.
Although measuring the adequacy of saving for all boomers was beyond the scope of this
paper, we attempted to estimate the savings required by representative boomers to attain
reasonable retirement savings targets. In analyzing retirement saving adequacy, financial
wealth is far less important than either Social Security or pension saving, which together
account for more than half of total wealth for 90 percent of the pre-retired population. Our
representative scenarios suggest that, to achieve reasonable replacement rates in retirement,
average boomers would have to save anywhere between zero and 30 percent of future wages,
depending on numerous factors. Married couples are substantially better prepared than
singles, in part because they have somewhat higher net worth, but mostly because their Social
Security benefits are at least 50 percent greater than that for singles with comparable wages,
giving them much greater annuitized wealth. Younger boomers fare better than older
boomers in our scenarios because they have 10 more years to retirement, giving them more
ii
time to accumulate wealth and benefit from compounding. On the other hand, having 10 extra
years is no guarantee that younger boomers will save regularly during that time.
Conclusions
Analysts have drawn very different conclusions as to whether boomers are saving adequately
for retirement. An accurate assessment depends greatly on the treatment of annuitized wealth
(Social Security and pensions) and how accurately they are projected, since they are likely to
constitute more than half of total wealth for boomers at retirement. Counting these sources of
wealth as well as home equity, boomers are much closer to reaching reasonable retirement
savings targets than many have suggested. However, any assessment of retirement income
adequacy is highly sensitive to assumptions affecting resources, such as rates of return,
pension coverage, inflation, and annuitization costs, as well as a number of factors affecting
needs, such as longevity, health insurance coverage and health costs, ability to work, the cost
of children’s education, and possibly costs of caregiving.
iii
DO BABY BOOMERS SAVE AND, IF SO, WHAT FOR?
Introduction
Baby boomers are not saving adequately for retirement, according to a commonly held
perception. In the past, boomers have frequently been characterized as a self-absorbed, “livefor-today,” generation of avid consumers. More recently, however, they have been credited
by some with fueling the prolonged expansion in the stock market as they search for
investment opportunities in their high-earning years. At least one source has suggested that
saving by boomers has raised the saving rate about five basis points (.05 percentage points)
per year, and that the aging of the baby boom generation will ultimately add a percentage
point to the saving rate (Zandi, 1998). Another study estimates that the boomer generation
will eventually add up to 140 basis points (1.4 percentage points) to the saving rate between
1990 and 2010, although significantly less if capital gains are excluded (Cantor and Yuengert,
1994).
The contradictory views about boomers’ savings are reflected in reports that boomers save
only a third of what they will need to maintain their pre-retirement standard of living (Merrill
Lynch, 1997; Bernheim and Scholz, 1993), and in contrasting reports saying that boomers will
be substantially better off in retirement than their parents (Congressional Budget Office, 1993;
Lewin-VHI, 1994; Cantor and Yuengert, 1994; Hurst, et al., 1998).
This paper uses wealth survey data to examine what boomers have already saved, how
much their saving has increased over time, why they save, and their perceptions of risk. Our
analysis draws from three wealth surveys: the Survey of Income and Program Participation
(SIPP) wealth module, which provides the largest sample of the three surveys; the Survey of
Consumer Finances (SCF), which is conducted every three years by the Federal Reserve
Board; and the Panel Study of Income Dynamics (PSID), which included wealth questions in
1984, 1989, and 1994.1
The data reported here are drawn from Public Policy Institute tabulations of the SIPP,
SCF, and PSID surveys, as well as previously published data. All surveys have some degree
of measurement and sampling error, and these three wealth surveys have different purposes,
sampling procedures, and base years. They therefore estimate slightly different amounts of
household wealth. The SCF, which is generally regarded as the highest quality wealth survey,
oversamples the wealthy, allowing for more detailed analysis of the largest wealth holders.
Because wealth is so highly concentrated, standard sampling procedures will not adequately
capture the highest wealth holders. But the other surveys have strengths as well, SIPP
1
Two other high quality surveys, the Health and Retirement Study (HRS) and the Assets and Health
Dynamics of the Oldest Old (AHEAD), also collect wealth data. However, the HRS sampling frame is
restricted to the population aged 51-61 in 1992 (birth cohorts 1931-41), and the AHEAD survey includes the
population aged 70 and over in 1993 (cohorts born before 1923). They therefore do not include baby boomers.
1
providing a much larger sample, and PSID providing valuable longitudinal data (the same
households are sampled over time).
In the next two sections we discuss definitions and measurement issues, then explore the
question of the adequacy of boomer savings and why answers to that question are
oversimplified. That is followed by a description of the amount and distribution of wealth
boomers have accumulated, why they save, and how they perceive risk. We next address the
question of saving adequacy by examining how boomers’ wealth has grown relative to their
income, and how much they will need to save to reach retirement targets. A summary and
conclusions follow.
Definitions
Given the widely repeated assertions that Americans do not save enough and that saving
rates have declined in the U.S. (see Figure 1), it might come as a surprise that there is no
single definition or measure of saving (Bernheim, 1991). Indeed, there is debate and
disagreement about the accuracy of the official data on saving and its definition.2
Figure 1. Personal Saving Rate, 1959-97
Percent of Personal Income
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
10
9
8
7
6
5
4
3
2
1
0
Source: U. S. Council of Economic Advisers, Economic
Report of the President, February, 1999, Table B-30.
2
In fact, the National Income and Product Accounts (NIPA) measure of personal saving was revised in July of
1998 as a result of this ongoing debate.
2
Saving and wealth are concepts often used interchangeably, but saving is a flow and
wealth a stock. Gross assets are the total amount of financial and nonfinancial assets
accumulated by an individual or family, and saving is the increment to that amount over a
given period of time.
Some uncertainty exists regarding saving and wealth levels because of data limitations and
inconsistencies as well as problems inherent in measuring wealth. Much of our knowledge
about saving comes from aggregate studies using data from either the Federal Reserve’s Flow
of Funds Accounts (FFA) or the Commerce Department’s National Income and Product
Accounts (NIPA) data. However, these two aggregate data sources employ different
approaches to measuring some types of saving (e.g., consumer durables, government pension
contributions).3 The NIPA data measure personal saving as the difference between personal
disposable income and personal consumption. The Flow of Funds Accounts measure saving
as the difference in household wealth between two points in time. Accumulations in
government pensions and investment in consumer durables are not counted as personal saving
in the NIPA data, whereas they are in the FFA.
Although aggregate data sources provide the best measure of total wealth, these sources
reveal nothing about individuals. To say anything about boomers’ saving patterns, one must
rely on survey data. However, aggregate and survey data do not necessarily match, and
attempts to reconcile them require a number of significant adjustments (Bosworth, Burtless,
and Sabelhaus, 1991).4
Surveys have two different methods of measuring saving. One method is to subtract net
worth at one period from net worth at a later period, adjusted for asset price changes over
time, which, as noted above, is the approach taken in the Federal Reserve’s Flow of Funds. A
second way is to measure the difference between income and consumption over a given time
period, the approach taken in the National Income and Product Accounts (Hendershott and
Peek, 1989). Theoretically, either method should provide the same answer. In reality,
however, there are measurement differences that make reconciliation of these two methods
problematic.
Measuring Wealth
To understand and interpret the findings of wealth surveys, it is useful to understand some
key wealth measures. First, total assets refers to the total dollar value of assets, both
3
The July, 1998, revision to the NIPA measure of saving involved the method of counting capital gains
distributions by mutual funds. In the future, they will be treated as undistributed profits rather than as
dividends. As a result of this definitional change, private saving, which includes both business and personal
saving, did not change, but personal saving declined. See Macroeconomic Advisers, The U.S. Economic
Outlook, August 19, 1998.
4 Recent attempts to reconcile the SCF survey data with the Federal Reserve’s FFA have concluded that the
SCF captures about 98 percent of the total wealth measured in the Federal Reserve’s Flow of Funds Accounts
(Antoniewicz, 1996).
3
financial (such as bank deposits, CDs, bonds, stocks, money market funds, etc.) and nonfinancial (homes, automobiles, equipment, buildings, etc.). Net worth refers to total wealth
minus total debt.
“Net worth” is usually a more meaningful concept than “total assets,” because someone
with large amounts of assets may also have large debts, and thus have little net worth.
“Financial assets” provide a more meaningful measure than total net worth for some purposes,
because much of net worth for most households is in the form of equity in a home or
automobile, which is not readily available for consumption. Therefore, a measure of financial
assets that subtracts home equity from net worth is occasionally used. This measure will be
used below.
Wealth, like income, is typically measured by means or medians. Mean wealth represents
total wealth divided by the total population (the average), whereas median wealth represents
the amount of wealth held by the middle person in the population (sample) distribution.
Because income and wealth are not equally distributed but highly skewed at the upper end,
means are usually higher than medians and do not reflect the “typical person.” Therefore,
median figures are generally used for income and wealth, but they are particularly important
for wealth measures because wealth is much more unequally distributed than income.
To illustrate, the mean family income in the U.S. in 1995 was $51,353 in current year
(1995) dollars, and median family income was $40,611 (U. S. Bureau of the Census, 1996).
The mean is 1.3 times the median. By contrast, in 1995, mean net worth for all families (as
measured in the SCF) was $206,000 in 1995 dollars, and median net worth was $56,400
(Kennickell et al., 1998). Mean wealth was 3.6 times the median. It is worth noting here, to
anticipate the later discussion, that these estimates do not include annuitized wealth from
Social Security and defined benefit pensions. Social Security, which is more than 40 percent
of total wealth for the median family, actually has a mean wealth value that is below the
median (Gustman and Steinmeier, 1997), indicating a distribution that is much more equal
than the income distribution.
Comprehensive measures of wealth, such as median net worth, are generally calculated
over the total population, whereas components of wealth that have more limited ownership,
such as stocks or Treasury bills, are generally measured only for those who hold that
particular type of asset. Thus, if only 10 percent of households own Treasury bonds, the
median value of Treasuries held is based on just that 10 percent. Otherwise, if based on the
total population, the medians for most sources of wealth would be zero, since most are held
by relatively few households. For this reason, wealth tables frequently cite median values as
well as the percentage of households holding particular assets.
According to the 1995 SCF, the two most commonly owned assets are transaction
accounts (e.g., checking, savings, and money market deposit accounts), held by 87 percent of
all households, and principal residences, held by nearly two-thirds (64.7 percent). By
4
contrast, life insurance is held by 31.4 percent, stocks by 15.3 percent, mutual funds by 12.0
percent, and bonds by 3.0 percent of households (Kennickell et al., 1997).
Saving Adequacy of Boomers
Whether boomers are preparing adequately for their retirement has become a topic of
great media and public policy interest. The contention that boomers are undersaving has been
advanced most notably by Bernheim (1993, 1997), who has estimated that boomers save on
average only about one-third as much as they will need to maintain their pre-retirement
standard of living. His much-cited Baby Boomer Retirement Index, sponsored by and
prepared for Merrill Lynch, is supposed to tell what percentage of needed saving boomers
have actually done. The index increased slightly from 33.8 percent in 1993 to 35.9 percent in
1994 to 38.2 percent in 1995, declined to 35.9 percent in 1996, and rose again to 38.5 in
1997. In other words, according to Bernheim and Merrill Lynch, boomers’ saving adequacy
has remained virtually constant in recent years, at barely one-third of what they need to
maintain pre-retirement living standards into retirement.
Other experts dispute Bernheim’s contention and his measurement of savings adequacy
(Congressional Budget Office, 1994; Gale, 1997, 1998; Manchester and Sabelhaus, 1995;
Manchester, 1994). Bernheim’s measure excludes both home equity and inheritances,
excludes all households with incomes below $20,000 (on the premise that they are
disproportionately households with transitory unemployment or low wages in that year), and
excludes all earnings after retirement, even though earnings constitute nearly one-fifth of the
income of those over age 65 (Gale, 1998).
These assumptions can produce biased results. The exclusion of home equity is a critical
assumption because including it increases the average savings adequacy measure from 35
percent to over 80 percent of the standard of need (Bernheim, 1992). While home equity is
not easily convertible to cash (i.e., it is not liquid), it is clearly a potential source of income if
needed, especially for emergencies, and reverse mortgages and home equity loans have
increased the potential liquidity of home equity.
With respect to Bernheim’s exclusion of inheritances, consider that one study has
projected future total bequests by Americans over age 50 of over $10 trillion (based on a 1989
wealth survey), and a mean bequest of $90,000 in 1989 dollars (Avery and Rendall, 1993).
That average bequest is approximately equal to the mean net worth per boomer family in 1989
(Kennickell and Shack-Marquez, 1992).5 In other words, many boomers might receive
inheritances that would double their own savings as of 1989, although the median, or typical,
bequest will be much smaller (Bernheim, 1997).
5
Kennickell and Shack-Marquez (1992) report a mean net worth in 1989 of $148,000 for older boomers and
a mean net worth of $47,000 for families headed by a person under age 34, which would include younger
boomers.
5
Bernheim assumes retirees have no earnings, even though about 16 percent of those over
age 65 have wage and salary income (Employee Benefits Research Institute, 1997). If they
are not working, then retirees can generally expect to have lower expenses than workers, if for
no other reason than not paying the FICA tax on wages. Bernheim’s exclusion of those with
incomes below $20,000 ignores those with the least savings of all, who will probably be the
most reliant on public transfers for their economic well-being in retirement. If saving is
defined to include Social Security and pensions, excluding these low-income people from the
index substantially underestimates saving adequacy, because low-income families are likely to
have fairly high replacement rates from Social Security alone, and even higher if they have a
pension. For example, low-wage individuals receive a replacement rate from Social Security
alone that well exceeds 50 percent of pre-retirement wages. Even without an employerprovided pension, this exceeds Bernheim’s adequacy measure. Pensions might provide up to
half again this percent of pre-retirement wages, potentially reaching a total replacement rate
of 75 percent before counting any individual saving.
Smith (1995) has shown that pre-retiree households in the lower half of the income
distribution will have relatively high replacement rates if Social Security and pensions are
taken into account. Those at the 50th percentile will have 45 percent of their household
income replaced by Social Security and pensions, and those in the bottom five percent have
over 92 percent replaced. As we shall see, however, the Bernheim index does not capture the
effect of Social Security on saving adequacy.
Those who cite the Bernheim-Merrill Lynch index generally do not explain that it is not a
measure of savings relative to total retirement need. Rather, it is the ratio of individual saving
to the retirement income need (measured by pre-retirement income) remaining after
subtracting Social Security and pension income. While this may sound logical enough, it can
be misleading. As Gale (1997) has observed, it is possible for an individual or a couple to
have achieved over 90 percent of its pre-retirement income level, yet achieve only one-third of
Bernheim’s adequacy index.
To illustrate, if total needs equal 100 percent, and Social Security, pensions, and individual
saving cover, respectively, 40, 51 and 3 percent of total needs (as defined in his model, i.e.,
pre-retirement income), then 94 percent of total needs are met. Because the Bernheim index
is the ratio of individual saving to the needs left unfilled by Social Security and pensions, the
adequacy index in this example is only 33 percent (3/9), suggesting that only one-third of
retirement income needs will be met. In reality, the overall replacement rate exceeds 90
percent (Gale, 1997).
Gale estimates that close to half of boomers are saving adequately for retirement, even if
no home equity is counted. He estimates that nearly two-thirds are saving adequately if half
of home equity is included, and over 70 percent are if all housing equity is counted (1997;
1998). However, because Gale’s analysis is based on the Bernheim model, his estimates are
subject to some of the same criticisms as Bernheim’s. Arriving at a reliable assessment of
saving adequacy is difficult because it depends on so many other factors: the standard or
benchmark of adequacy, the inclusion of annuitized Social Security and pension wealth in
6
measured saving, possible inheritances, age of departure from the labor force, and special
needs and obligations (children, dependent parents, debts, medical needs, etc.). We shall see
later that saving adequacy is extremely sensitive to small variations in these assumptions
(Mitchell and Moore, 1997). Correctly estimating the level of individual saving is in itself
problematic because most wealth data sets do not include pensions or Social Security among
their wealth variables, thereby excluding the two most important sources of retirement savings
for most households. Moreover, it would be overoptimistic to think that younger boomers
with children can reserve all their saving for retirement, when much of it will likely be needed
for their children’s education.
How Much Wealth Have Boomers Accumulated?
Table 1 compares the median net worth held by boomers from the three previously
mentioned surveys for the most recent survey year available. In this and other comparisons,
the boomer population is divided roughly at the midpoint chronologically, because there are
important differences between older boomers (defined here as those born between 1946-54)
and younger boomers (born 1955-64). For one thing, older boomers have had more time to
accumulate assets. There are also some important educational and family differences between
the first and second halves of the boomer generation. The first half has a higher percentage of
college-educated persons, a lower percentage of unmarried households with no children, and a
higher percentage of households with two earners than the second half of the boomer
generation (Lewin-VHI, 1994; CBO, 1993). These factors affect either the ability to save or
the need level.
Not surprisingly, all three surveys show that the older boomer birth cohorts have
accumulated more than twice as much wealth as younger boomers (Table 1). Levels of net
worth also appear to increase over time (represented by three survey years) among both older
and younger boomer cohorts. However, the differences may easily be due to differences in
the design of the surveys, such as the units of analysis (families or households), measurement
of wealth (e.g., whether pensions are included), and sampling techniques (e.g., oversampling
of certain groups), so the numbers should not be interpreted as representing a trend. The
substantially higher estimates in the SCF are consistent with the pattern found in other
research and are probably due to its better representation of the wealthiest households.
Table 1
Median Net Worth Estimates from Three Wealth Surveys
Birth Cohort of
Survey and Year
Head of Household
SIPP (1993) PSID (1994) SCF (1995)
1946-54
$51,275
$58,000
$70,870
1955-64
$22,025
$23,000
$32,200
Sources: Tabulations of the 1995 Survey of Consumer Finances, the 1993
SIPP, and the 1994 PSID by the Public Policy Institute. Amounts are all in
current dollars.
7
Table 1 provides an estimate of the total net worth that boomers have accumulated, but it
does not tell how much they are saving. In order to determine what boomers are saving,
either a measure of the annual change in wealth, or an annual measure of the difference
between income and consumption is needed.
It is possible to compare the same people over time using the PSID, which measures
wealth at three points over a 10-year period—1984, 1989, and 1994. While the PSID does
not allow us to estimate annual savings rates out of income, it does allow us to estimate how
much saving occurs over 5-year intervals. Table 2 compares two different measures of wealth
(net worth and net worth less home equity) of older boomers and younger boomers. In our
weighted estimates, we examine all boomer families in each survey year. Family composition
changes over time due to marriage, divorce, births, and deaths, so the estimates are not strictly
speaking longitudinal—i.e., they do not follow the identical families over time.
Table 2
Median Net Worth and Net Worth Less Home Equity of Baby Boomer Family Heads,
1984, 1989, and 1994
Median
Net Worth
Net Worth Less Home Equity
$*
$*
Older Boomers
1984
34,256
12,132
1989
43,054
15,308
1994
58,000
25,000
Younger Boomers
1984
1989
1994
5,780
11,959
23,000
4,282
7,175
11,000
Total Boomers
1984
12,989
7,137
1989
22,484
10,764
1994
41,500
17,807
* All dollars are at 1994 levels.
Data Source: PSID Wealth Supplement (1984, 1989, and 1994) merged with family files.
Sample size for baby boomer family heads was 3,703 in 1984, 3,870 in 1989, and
4,491 in 1994.
As Table 2 shows, the median net worth of all boomers (in 1994 dollars) increased nearly
$2,000 per year between 1984 and 1989, from about $13,000 to nearly $22,500 (73 percent).
Net worth then increased by nearly $4,000 per year between 1989 and 1994, to $41,500 by
1994 (over 80 percent). The average annual increase in net worth (saving) from 1984 to 1994
was 12.3 percent.6 Our measure of financial assets is net worth minus home equity. By that
measure, financial assets grew about $1,000 per year from 1984 to 1994, from $7,000 to
nearly $11,000 in the first five years (about 50 percent), and then to nearly $18,000 by 1994
(65 percent). The average annual percent increase in net worth less home equity between
1984 and 1994 was 9.9 percent.
6
Note that this average percentage increase in saving is not a saving rate, because the latter is defined as
saving relative to income. Table 2 shows increases in saving without regard to income.
8
When we divide boomers into the first and second half of the generation, we find that
older boomers have increased their net worth from $34,000 to $58,000, or $2,400 per year,
over the 1984 to 1994 period, a 70 percent increase and an annual average growth rate of 5.4
percent. During that time, their net worth less home equity doubled from $12,000 to $25,000,
an annual average increase of 7.5 percent per year.
Younger boomers have seen their net worth increase even faster, growing from nearly
$5,800 to $23,000 between 1984 and 1994, or 300 percent, an annual average increase of
14.8 percent. Their net worth less home equity increased from $4,300 to $11,000, or 157
percent, an annual average increase of nearly 10 percent.
Even though younger boomers’ wealth grew faster, the data in Table 2 show that younger
boomers did not accumulate as much wealth as older boomers at a comparable age. By
comparing the net worth and net worth less home equity of older boomers in 1984 with the
same measures for younger boomers in 1994, we can compare their accumulated assets when
they were “thirty-something.” Figure 2 shows that younger boomers actually held about
$11,000 less in net worth than their older counterparts (after adjusting for inflation) when
both groups were in their 30s, although their net worth less home equity was much closer in
amount.
Figure 2. Median Net Worth and Net Worth Less Home
Equity of Older and Younger Boomers at Same Age (30-39)
Dollars
Older Boomers
Younger Boomers
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Net worth
Net worth less
home equity
Public Policy Institute tabulations from PSID Wealth Supplements (1994$)
Previous research suggests that boomers will do better financially than their parents (CBO,
1993; Easterlin et al., 1993), although the estimates did not literally compare parents with
children, but merely age groups one generation apart. To the extent that these studies imply
general improvement in economic well-being over time, our results contradict that conclusion.
The PSID data in Table 2 and Figure 2 suggest that, measured by total net worth, younger
9
boomers will not necessarily do better than the older ones.7 These differences may be due to
some factors cited earlier—viz., older boomers are more likely to be college-educated,
married, and to have two-earner families, all of which are associated with higher wealth.
Older boomers are also more likely to have benefited from the 1970s boom in the real estate
market because a higher percentage of them own their own home.
How Does Boomer Wealth Vary by Demographic Characteristics?
Tables 3 and 4 compare the two wealth measures—net worth and financial assets (again
measured as net worth minus the value of home equity)—for all boomers along a series of
demographic variables, including marital status, race, income, level of education, family
structure, and number of children. As noted above, these estimates should not be treated as
longitudinal in the strict sense.
As Table 3 shows, married boomers’ net worth more than doubled from $35,000 in 1984
to about $73,000 in 1994, and they accumulated substantially more net worth in absolute
terms than single persons (either never married, divorced, or separated persons), although
unmarried individuals experienced higher percentage increases. Widows’ net worth also
increased substantially from $5,700 to $44,000 over the decade. These patterns are
substantially similar to those found by Mitchell and Moore (1997) in a study of the 1931-41
birth cohorts using the Health and Retirement Survey.
Race differences in wealth accumulation are even greater than the differences between
couples and single males and females, as Mitchell and Moore (1997) also found with the HRS
data. The net worth of whites increased from under $19,000 in 1984 to $52,000 in 1994,
while that of blacks increased from $900 to $6,800. While the annual average percentage
increase was twice as great for blacks as whites (22 percent to 11 percent), blacks still had
only about one-eighth the net worth of white respondents in 1994. Of course, the race
differences may be due in part to income differences. Comparing those with incomes above
and below $40,000 in 1994, we find that blacks with incomes below $40,000 have only
slightly more than 10 percent as much net worth as whites ($3,000 as compared with $27,000
for whites), whereas blacks with incomes above $40,000 have nearly 40 percent as much net
worth as whites ($41,000 in net worth compared with $109,000 for whites (data not shown)).
Net worth is correlated with education, and is considerably higher for boomers with a
college degree than those without a degree. This parallels the pattern of differential savings
by college graduates found by Bernheim and Scholz (1993) and also by Mitchell and Moore
(1997). Those with a college degree had more than twice as much net worth or financial
assets as those with less education, and many times more than those without a high school
diploma. Those with a college education saw their net worth climb from $37,000 in 1984 to
$85,000 in 1994, more than doubling its value. High school graduates accumulated over
$25,000 by 1994 from just over $10,000 in 1984, also more than doubling. Those with some
7
In fact, a recent study shows that even older boomers have done less well than the next older 10-year cohort
at a comparable age (see Hurst, Luoh, and Stafford, 1998, Table 10).
10
Table 3
Median Net Worth of Baby Boomer Family Heads by Demographic Characteristics,
1984, 1989, and 1994
Median
1984
1989
Demographic Characteristics
$*
$*
Sex
Male
21,279
33,487
Female
2,855
4,545
Marital Status
Married
34,541
48,520
Never Married
3,711
5,980
Widowed
5,709
24,159
5,709
9,637
Divorced or Separated
Race
White
18,555
29,301
Black
856
2,153
Others
4,282
9,568
Total Family Income
Under $10,000
0
0
$10,000-$20,000
2,569
2,631
$20,000-$30,000
8,939
9,927
$30,000-$50,000
22,980
23,202
$50,000-$75,000
59,948
58,483
$75,000-$100,000
109,191
119,597
$100,000+
230,372
282,846
Education Level
Not a High School Graduate
2,141
3,102
High School Graduate Only
10,348
16,744
High School Graduate with Other Training but No College
13,560
22,365
Some College Without Degree
17,271
24,767
College Degree and Above
37,111
47,241
Type of Family
Husband-Wife
34,541
48,520
Male-headed families (single or single parent)
6,423
9,568
Female-headed families (single or single parent)
2,855
4,545
Number of Children
None
8,707
14,830
1
13,695
23,441
2+
27,904
34,085
1994
$*
55,500
8,700
73,000
9,500
44,000
13,400
52,100
6,800
25,000
8,800
12,400
20,300
51,000
103,000
163,000
310,000
6,000
25,000
33,300
37,800
85,000
73,000
15,950
8,700
29,500
49,000
50,800
Total
12,989
22,484
41,500
* All dollars are at 1994 levels.
Data Source: PSID Wealth Supplement (1984, 1989, and 1994) merged with family files.
Sample sizes for baby boomer family heads were 3,703 in 1984, 3,870 in 1989, and 4,491 in 1994.
college did somewhat better, while those with no high school diploma, despite nearly tripling
their net worth to $6,000 in 1994 from $2,100 in 1984, had the lowest levels of net worth.
While those without a college degree had lower levels of wealth, their rates of growth in net
worth sometimes exceeded that of college graduates.
11
Husband-wife families are by far the most successful type of family in terms of wealth
accumulation, with a total of over $70,000 in net worth by 1994, up from $35,000 in 1984.
Male-headed families saw their net worth increase from $6,400 in 1984 to $16,000 in 1994,
and female-headed families had the lowest net worth, which increased from $2,900 to $8,700
over the ten-year period.
Boomer families with one or more children were more successful at accumulating wealth
than childless families. Boomer families with two or more children had nearly $28,000 in net
worth in 1984, which grew to over $50,000 by 1994. Childless families had under $9,000 in
net assets in 1984, which grew to nearly $30,000 by 1994. While boomers with children
appear better prepared for retirement, their savings will most likely also be needed to pay for
their children’s education. It is therefore difficult to know whether they are better prepared
than others for retirement. Much will depend on whether they accumulate savings faster than
childless families and on whether they have employer pension coverage.
To some extent differences in numbers of children in Table 3 may merely reflect age
differences, which we know are also correlated with wealth. This turns out to be the case, as
the average age of boomer families having two or more children in 1984 was nearly 32,
whereas for those with no children the average age was 28. Although families with one child
had less than half the net worth of larger families in 1984, by 1994 they had amassed almost as
much net worth as the larger families ($49,000).
Table 4 makes similar comparisons using financial assets (net worth less home equity) as a
measure. The median financial assets held by boomers increased by 2.5 times over the tenyear period, from just over $7,000 in 1984 to nearly $18,000 in 1994. This compares with net
worth, which more than tripled over the 10-year period. Thus, home equity appears to have
grown faster in value than other forms of wealth during the entire period, although it has
certainly not been true since 1994.
Married boomers had far more financial assets than other types of households. The
median grew from just under $12,000 to $32,000 in 10 years. All other persons—widows,
never-married, separated or divorced—had far fewer financial assets.
White boomers had accumulated far more financial assets than black boomers ($9,135
compared with $508) at the beginning of the decade, and their advantage remained substantial
at the end of the ten-year period as well ($23,000 to $2,000).
Boomers with a college degree or higher saw their financial assets go from $15,000 in
1984 to $44,100 in 1994. The next highest education group was those with some college but
without a degree, who saw their financial assets double in 10 years from $9,000 to $18,000.
Those with no high school diploma fared the worst in terms of total assets, although their total
assets also doubled from $1,200 to $2,400 by the end of the period.
12
Table 4
Median Net Worth Less Home Equity of Baby Boomer Family Heads by Demographic Characteristics,
1984, 1989, and 1994
Median
1984
1989
1994
Demographic Characteristics
$*
$*
$*
Sex
Male
9,563
15,548
25,000
Female
1,998
2,751
4,100
Marital Status
Married
11,847
19,733
32,000
Never Married
3,069
4,186
6,200
Widowed
4,567
5,561
7,000
3,140
3,947
7,000
Divorced or Separated
Race
White
9,135
13,813
22,950
Black
508
598
2,020
Others
3,711
5,442
25,000
Total Family Income
Under $10,000
0
0
3,050
$10,000-$20,000
2,070
1,794
6,100
$20,000-$30,000
5,567
5,083
8,000
$30,000-$50,000
10,277
11,362
25,000
$50,000-$75,000
24,265
25,295
49,000
$75,000-$100,000
54,239
50,530
95,750
$100,000+
118,968
153,084
236,000
Education Level
Not a High School Graduate
1,199
1,985
2,400
High School Graduate Only
5,709
7,774
9,000
High School Graduate with Other Training but No College
7,137
9,927
11,500
8,992
13,155
18,000
Some College Without Degree
College Degree and Above
14,987
23,321
44,100
Type of Family
Husband-Wife
11,847
19,733
32,000
Male-headed families (single or single parent)
4,567
6,099
10,000
Female-headed families (single or single parent)
1,998
2,751
4,000
Number of Children
None
7,137
9,927
16,000
1
5,852
10,525
17,000
2+
7,422
11,960
19,000
Total
7,137
10,764
17,807
* All dollars are at 1994 levels.
Data Source: PSID Wealth Supplement (1984, 1989, and 1994) merged with family files.
Sample sizes for baby boomer family heads were 3,703 in 1984, 3,870 in 1989, and 4,491 in 1994.
13
Boomer couples amassed more financial assets than other types of families, growing in 10
years from nearly $12,000 to $32,000, more than three times as much as single male
householders, who reached just $10,000 by 1994, and eight times that of single female
householders, whose financial assets reached only $4,000 in 1994.
With respect to numbers of children, there was virtually no difference in financial assets
between families with two or more children, one child, or no children. All three types of
families had $16,000 to $19,000 in financial assets in 1994. This suggests possibly greater
vulnerability in terms of liquidity among boomers who must support their children’s college
education prior to retirement. That is, those with children have greater total net worth, but
once home equity is excluded, those with and without children have comparable assets.
What Do Boomers Save For?
Economists frequently divide people’s reasons for saving into three broad categories—
saving for precautionary reasons (hard times, illness, emergencies, etc.), saving for retirement,
and saving for the purpose of making bequests, especially for their children. In reality, since
assets are fungible, saving can be undertaken for many purposes at once. The Survey of
Consumer Finances attempts to discern respondents’ reasons for saving as well as their
financial obligations, their savings tendencies, and their attitudes toward risk. The survey asks
an open-ended question about reasons for saving, the responses to which are coded into 22
separate categories.8
Many of the potential responses, such as emergencies, unemployment, illness, or medical
expenses, fell under the rubric of precautionary savings. But only a few fell obviously into the
“retirement” or “bequests” category. Many of the items on the list refer to current
consumption needs, such as travel or vacations, ordinary spending, the purchase of
automobiles or other durable goods, or education.9 Several refer to investment such as the
purchase of a home. There is some ambiguity as to how to classify certain categories of
spending, such as automobiles or education, which could both be classified as either
investment or consumption spending.
We collapsed the original set of 22 reasons for saving into seven—precautionary,
retirement, bequests, investment, consumption, miscellaneous, and another category of
“cannot save” (see Table 5).
Among boomers, the most common reasons identified for saving are various precautionary
reasons (29%), retirement (23%), and investment (22%). Of course, investment is not an end
in itself, so it could be inferred that those who are investing are actually saving for something
else. Another 12 percent saved for bequests or intergenerational transfers (for their children’s
8
9
For more detail on the reasons offered see footnotes to Table 5.
Of course, the last two could be regarded as investment spending as well.
14
education or their future), while eight percent saved for consumption.10 Another six percent
said they could not save.
Table 5
Distribution of Reasons for Saving Among Householders of Different Ages, 1995
Age Group
Reason for
Saving
Under 31
31-49 (boomer)
50-64
65+
Total
N (1000)
%
N (1000)
%
N (1000)
%
N (1000)
%
N (1000)
%
Precautionary
4,699
29.2
11,990
28.8
6,287
32.0
8,489
39.2
31,500
31.8
Retirement
1,439
8.9
9,569
23.0
6,849
34.8
4,496
20.8
22,400
22.6
Bequests2
2,017
12.5
5,081
12.2
774
3.9
853
3.9
8,725
8.8
5,597
34.8
9,085
21.8
3,009
15.3
2,406
11.1
20,097
20.3
1,342
8.3
3,438
8.3
1,252
6.4
2,547
11.8
8,579
8.7
0
0.0
32
0.1
36
0.2
1,087
5.0
1,155
1.2
1,010
6.3
2,408
5.8
1,450
7.4
1,767
8.2
6,636
6.7
1
3
Investment
4
Consumption
5
Miscellaneous
Can't Save, No
Money
Total
16,104 100.0 41,603
100.0 19,657
100.0
21,645 100.0 99,092
100.1*
* Numbers may not sum to 100 because of rounding.
1
Including "reserves in case of unemployment," "in case of illness," "medical/dental expense," "emergencies,"
and for "security" and "independence."
2
Including children's education and help children/family.
3
Including purchasing house, durable goods (including home improvement and repair), and vehicles; investing
or buying own business/farm and investing to earn interest or buying other forms assets; for the future, to
maintain standard of living and for meeting commitments, such as debt repayment, insurance, tax, pay off house.
4
Including ordinary living expenses/bills, travel/vacation, and having extra income but no special purpose.
5
Including charity and burial expenses.
Data Source: Survey of Consumer Finances, 1995.
Boomers are just about as likely as those under 30 or those aged 50-64 to save for
precautionary reasons, but retirees had the highest percentage of respondents who said they
saved mainly for precautionary reasons. Boomers are less likely than pre-retirees to be saving
for retirement (35 to 23 percent), but two and one-half times as likely as younger age groups
(under 30) to be saving for retirement, and somewhat more likely than those over 65 to be
saving for retirement. Boomers are more likely than older groups, and as likely as younger
age groups, to be saving for their children’s education, support, or bequests.
Over one-fifth of boomers saved for investment reasons, more so than any age group
except, surprisingly, those under age 30. If investment is not an end in itself but a means,
older boomers may be investing for the purpose of increasing retirement nest-eggs, while
younger boomers may be preoccupied with saving for their children’s futures. Boomers are as
likely as younger groups, more likely than preretirees, and less likely than retirees to be saving
for consumption, although the differences are not large. On the other hand, boomers are the
least likely to say they cannot save because they have no money.
10
In some sense, any wealth that remains at death could be defined as saving for bequests.
15
The patterns in Table 5 are consistent with a story that boomers are saving as much as
pre-boomers for their children’s education and that their retirement saving effort is diluted by
other priorities, but their retirement saving will accelerate in the next few years.
Savings Habits
The SCF also asked respondents about their savings habits, or how they go about trying
to save, and the responses were divided into six categories: 1) don’t save—usually spend
more than income; 2) don’t save—usually spend about as much as income; 3) no regular
saving—save whatever is left over at the end of the month; 4) save income of one family
member, spend the other; 5) spend regular income, save other income; 6) save regularly by
putting money aside each month. The responses to this question are summarized in Table 6.
The results appear to follow a regular life cycle pattern, with regular saving increasing with
age up to retirement.
Table 6
Saving Habits by Age of Householder, 1995
Age Group
Saving Habits
Don't Save-Usually
Spend More Than
Income
Don't Save-Usually
Spend about As
Much As than
Income
No Regular SavingSave Whatever Is
Left Over at the End
of Month
Save Income of One
Family Member,
Spend the Other
Spend Regular
Income, Save Other
Income
Save Regularly by
Putting Money Aside
Each Month
Under 31
N (1000)
%
31-49 (boomer)
N (1000)
%
50-64
N (1000)
%
65+
N (1000)
%
Total
N (1000)
%
1,333
8.3
3,312
8.0
1,053
5.4
961
4.4
6,660
6.7
2,784
17.3
6,699
16.1
2,933
14.9
3,939
18.2
16,350
16.5
5,599
34.8
12,430
29.9
5,804
29.5
9,041
41.8
32,870
33.2
429
2.7
1,055
2.5
673
3.4
302
1.4
2,460
2.5
397
2.5
1,552
3.7
816
4.2
1,542
7.1
4,306
4.4
5,562
34.5
16,550
39.8
8,379
42.6
5,861
27.1
36,360
36.7
19,658 100.0
21,646
100.0
99,006
100.0
100.1* 41,598 100.0
16,104
Total
* Numbers may not sum to 100 because of rounding.
Data Source: Survey of Consumer Finances, 1995
Forty percent of boomers said they save regularly by putting money aside each month, and
another six percent saved regularly by other means, while about 24 percent said they did not
16
save at all (they either saved nothing or actually dissaved). Another 30 percent said they
saved irregularly, putting aside whatever was left over at the end of the month. Boomers
were somewhat more likely to save regularly than younger age groups, and even more likely
to save regularly than those over 65, but slightly less likely to save regularly than those aged
50-64.
Financial Risk Taking
The Survey of Consumer Finances also asks respondents what kinds of risks they are
willing to take in saving or making investments. This question is instructive in the context of
Social Security reform, because privatization proposals generally assume that people will
realize much higher returns in exchange for taking greater risks.
But boomers are not very willing to take risks. Of the boomer respondents in the survey,
more than one-third (37 percent) said they were not willing to take any risks in making
investments or saving, and this was the lowest percentage among the three oldest groups. It is
not clear how literally to take these responses. It seems reasonable to suppose that people are
willing to accept at least small amounts of risk, because any investment, even the safest federal
Treasury securities, carries some risk. People may not see these as risky investments, which
itself tells us something about their perceptions of risk. Jianakoplos and Bernasek (1998)
report that women, for example, say they are more risk averse than their allocations suggest.
Women who said they are “unwilling to take any risk at all” were still invested in risky assets.
Table 7
Willingness to Take Risk for Saving or Making Investments, by Householder's Age, 1995
Age Group
Willing to Take Risk
Under 31
N (1000)
Taking Substantial
Financial Risks
Expecting to Earn
Substantial Returns
31-49 (boomer)
%
N (1000)
%
50-64
N (1000)
65+
%
Total
N (1000)
%
N (1000)
%
882
5.5
1,759
4.2
456
2.3
446
2.1
3,544
3.6
Taking Above Average
Financial Risks
Expecting to Earn
Above Average Returns
3,206
19.9
7,003
16.8
2,516
12.8
1,056
4.9
13,800
13.9
Taking Average
Financial Risks
Expecting to Earn
Average Returns
6,089
37.8
17,380
41.8
7,647
38.9
5,481
25.3
36,600
37.0
Not Willing to Take
Any Risks
5,927
36.8
15,460
37.2
9,039
46.0
14,700
67.7
45,100
45.5
41,602
100.0
19,658
21,683
100.0
99,044
Total
16,104
100.0
Data Source: Survey of Consumer Finances, 1995
17
100.0
100.0
But it seems unlikely that over a third of boomers are literally unwilling to take any investment
risk, given that virtually all of them have at least some type of investment, even if small.
Another 42 percent were only willing to take average financial risks in exchange for the
expectation of earning average returns. Only four percent of boomers said they were willing
to take substantial financial risks expecting to earn substantial returns (see Table 7).
In general, risk aversion seems to be directly related to age. Boomers appear to be
somewhat less risk-averse than older age cohorts, but slightly more risk-averse than younger
persons.
Are Boomers Saving Enough?
To date, the answers given to this question range from Bernheim’s unqualified “no” to
Gale’s more sanguine assessment. However, the answers given suffer from a variety of
shortcomings already cited, perhaps most importantly because of what sources of saving and
what groups the analyses have excluded.
What and Whom To Count. What counts as saving, and whose savings count, may seem
obvious, but these questions are answered differently by different analysts. Assets such as
savings accounts, CDs, bonds, stocks, etc. are generally recognized as sources of retirement
savings. For most families, however, these are the least important sources of retirement
wealth. The most important source is usually Social Security. For example, Gustman et al.
found that Social Security represents 43 percent of the accumulated wealth at retirement for
the middle decile (45th to 55th percentile) of the wealth distribution, for the 1931-41 birth
cohorts (1997). Social Security accounted for 27 percent of the projected wealth at
retirement of the entire HRS sample. Yet Social Security is sometimes excluded from wealth
analyses, either because it is not thought of as wealth or because wealth surveys do not
include any way of estimating Social Security wealth. Defined benefit pension plans are also
frequently excluded, although for those who have them they are often the second most
important source of retirement saving. Gustman et al. estimate pension wealth as almost onefifth of the total received by its representative HRS household (1997). Together, Social
Security and pension wealth account for more than half of total wealth for all but those in the
top ten percent of the wealth distribution.
Although wealth surveys include the value of one’s home, many analysts would question
the inclusion of owner-occupied housing in retirement saving, because of its relative illiquidity,
people’s reluctance to move as they age, and the desire to leave a home as a bequest.
However, homeownership has historically been the single largest source of personal saving,
and the home represents an asset that provides a flow of services (shelter) that is equivalent to
income (since one would otherwise have to rent).
Although a home is a qualitatively different type of asset from Social Security or a
traditional pension, all are sources of future income or of services that would otherwise be
purchased with income, and all should probably be included in a truly comprehensive analysis
18
of saving adequacy. The availability of Social Security, pensions, and owner-occupied
housing will also influence the willingness to save for retirement.
A comprehensive analysis of saving adequacy also cannot ignore lower-income people.
Although their individual saving may be lower and their needs relative to resources greater
than those with higher incomes, they may actually have to save less on their own to achieve an
adequate11 replacement rate than do higher-income people because Social Security and
pension will provide them a higher replacement rate than for higher-income groups.
Although a comprehensive analysis of saving adequacy among boomers is beyond the
scope of this paper,12 we will attempt to shed some light on adequacy by two further analyses.
In the first analysis, we examine how much boomers have accumulated through traditional
savings vehicles—i.e., outside of Social Security and pensions—relative to annual income in
selected years. In the second analysis, we will use estimated levels of individual saving and
earnings levels to construct hypothetical savings adequacy scenarios for representative
families.
Wealth-to-Income Ratios. To get a picture of saving adequacy, first we report wealth-toincome ratios for boomers in 1995 using the SCF compared with similar estimates from the
1989 SCF published in a 1993 CBO report (CBO, 1993). The wealth/income ratios from the
SCF are then compared with similar ratios calculated from the PSID wealth data over a tenyear period. We can also determine how consistent these two data sources are.
Table 8 compares wealth/income ratios for older and younger boomers in 1989 and 1995
based on the SCF.13 The median wealth/income ratio represents the ratio for the family with
the value of wealth to income that is right in the middle of the distribution. Older boomers
Table 8
Median Wealth to Income Ratios* for Baby Boomer Householders, 1989 and 1995
Median Wealth to Income Ratios
1989**
1995***
Percent Changes
1989-95
Older Boomers
1.23
1.62
31.7%
Younger Boomers
0.42
0.99
135.7%
n/a
1.28
n/a
Total Boomers
Note:
* Wealth to Income Ratio is defined as net worth divided by total family income.
** Data are in "Baby Boomers in Retirement: An Early Perspective" CBO September 1993, Table 3, p. 13.
n/a Data not available.
Data Source: "Baby Boomers in Retirement: An Early Perspective," CBO September 1993 and
1995 Survey of Consumer Finances machine readable data file.
11
It should be clear by now that referring to the adequacy of the replacement rate makes no judgment about
the adequacy of the income level itself—only that the retirement income is thought to be sufficient to maintain
one’s pre-retirement living standard, which may itself be unacceptably low.
12 In a separate report, we will attempt to address this issue more directly.
19
had wealth equal to 1.23 times annual income in 1989, and this increased to 1.62 times by
1995, an increase of over 30 percent. Younger boomers’ wealth increased from 42 percent of
income to an amount almost equal to their income between 1989 and 1995, an increase of 135
percent.
The PSID data over 1984-94 show that older boomers’ wealth grew from about 85
percent of income to about 1.8 times income over 10 years, or more than 110 percent in that
period (Table 9). The wealth of younger boomers nearly quadrupled from about one quarter
of income in 1984 to over 90 percent of income by 1994.
Table 9
Median Wealth to Income Ratios of Baby Boomer Family Heads, 1984, 1989, and 1994
Median Wealth to Income Ratios
Percent Changes
1984
1989
1994
84-89
89-94
84-94
0.848
1.051
1.808
24.1%
71.9%
113.3%
Younger Boomers 0.246
0.385
0.912
56.1%
137.2%
270.4%
Older Boomers
Total Boomers
0.459
0.615
1.314
34.2%
113.6%
186.5%
Note:
Wealth to Income Ratio is defined as net worth divided by total family income.
Data Source: PSID Wealth Supplement (1984, 1989, and 1994) merged with family files.
Sample sizes for baby boomer family heads were 3,703 in 1984, 3,870 in 1989, and 4,491 in 1994.
The PSID estimates for older boomers are slightly lower for 1989 than the SCF estimates,
but slightly higher for 1994 than the SCF 1995 estimates. The PSID estimates for younger
boomers are quite close to the SCF estimates for 1989, and the 1994 PSID and 1995 SCF
wealth/income ratios for younger boomers are also quite similar.
In their 30s, younger boomers actually had a higher wealth/income ratio (.912) than older
boomers (.848) at a comparable age. This suggests that younger boomers may be better
situated for retirement than are older boomers. This appears consistent with Gale’s finding
that, within the baby boomer generation, adequacy rates decline somewhat with age (Gale,
1998). However, recall that Figure 2 showed that both net worth and financial assets of
younger boomers were lower than for older boomers at comparable ages. This discrepancy
between the wealth and wealth/income ratios for older and younger boomers apparently
derives from the fact that younger boomers’ incomes are also lower than those of older
boomers at comparable ages, making younger boomers’ wealth/income ratios higher even
though their overall net worth is lower than that of older boomers. Younger boomers may
realize a higher replacement rate despite lower levels of wealth.
Table 10 compares median wealth/income ratios over 10 years by demographic group, and
the percent change for 5-year periods. For the entire period, wealth increased relative to
income by nearly a factor of three, from just under 0.5 to 1.3, almost a 200 percent increase,
13
The data for 1989 are taken from the study of boomers by the Congressional Budget Office (1993).
20
and it more than doubled for most of the demographic groups in the table over the 10-year
period. The wealth/income ratios were generally larger among boomers who were married,14
white, higher-income, college-educated, and had two or more children.
Table 10
Median Wealth to Income Ratios for Baby Boomer Family Heads by Demographic Characteristics,
1984, 1989, and 1994
Median
Percent Change
Demographic Characteristics
1984
1989 1994
1984-89
1989-94
1984-94
Sex
Male
0.615 0.764 1.588
24.2%
107.8%
158.0%
Female
0.183 0.213 0.474
16.5%
122.3%
158.9%
Marital Status
Married
0.825 0.949 1.852
15.0%
95.1%
124.4%
Never Married
0.214 0.286 0.437
33.7%
52.9%
104.4%
Widowed
0.684 0.731 6.484
6.9%
787.3%
848.4%
0.241 0.262 0.606
8.7%
131.5%
151.7%
Divorced or Separated
Race
White
0.602 0.736 1.504
22.1%
104.5%
149.6%
Black
0.051 0.103 0.320
99.3%
212.3%
522.4%
Others
0.170 0.357 0.652
110.3%
82.5%
283.8%
Total Family Income
Under $10,000
0.000 0.000 1.684
n/a
n/a
n/a
$10,000-$20,000
0.176 0.184 0.813
4.7%
341.9%
362.9%
$20,000-$30,000
0.332 0.404 0.787
21.6%
94.8%
136.8%
$30,000-$50,000
0.596 0.580 1.307
-2.7%
125.2%
119.2%
$50,000-$75,000
0.983 0.977 1.730
-0.7%
77.1%
75.9%
$75,000-$100,000
1.321 1.451 1.863
9.8%
28.5%
41.0%
$100,000+
1.605 2.271 2.247
41.6%
-1.1%
40.0%
Education Level
Not a High School Graduate
0.118 0.146 0.500
24.5%
241.5%
325.1%
High School Graduate Only
0.382 0.557 1.143
45.7%
105.2%
198.9%
High School Graduate with Other Training but No College 0.444 0.627 1.212
41.2%
93.1%
172.7%
0.557 0.638 1.190
14.7%
86.5%
113.9%
Some College Without Degree
College Degree and Above
0.810 0.947 1.778
16.8%
87.9%
119.5%
Type of Family
Husband-Wife
0.825 0.949 1.852
15.0%
95.1%
124.4%
Male-head families (single or single parent)
0.275 0.374 0.683
35.9%
82.7%
148.3%
Female-headed Families (single or single parent)
0.181 0.213 0.455
17.5%
113.3%
150.6%
Number of Children
None
0.327 0.473 1.080
44.9%
128.2%
230.7%
1
0.447 0.647 1.394
44.8%
115.4%
212.0%
2+
0.743 0.780 1.526
5.1%
95.5%
105.4%
Total
0.459 0.615 1.314
34.2%
Note:
Wealth to Income Ratio is defined as net worth divided by total family income.
Data Source: PSID Wealth Supplement (1984, 1989, and 1994) merged with family files.
Sample sizes for baby boomer family heads were 3,703 in 1984, 3,870 in 1989, and 4,491 in 1994.
113.6%
186.5%
The table shows that wealth grew slowly relative to income for the first five years of the
period, from 46 percent of income to 62 percent. Between 1989 and 1994, however, wealth
grew more rapidly relative to income, more than doubling in a period of five years, an increase
14
Except for the widowed, who appear to have experienced either large wealth transfers, reductions in
income, or both.
21
of 114 percent. The more rapid increase in the later period may reflect the improvement in the
equities markets as well as the relative stagnation of incomes that occurred after 1989.
Incomes did not recover their 1989 levels until well into the 1990s for most age groups, and
slower income growth would cause these ratios to increase faster.
Adequacy Scenarios. Forecasting the adequacy of boomer savings would require estimating
their total assets at retirement, including Social Security and pension wealth, and is beyond the
scope of this paper. However, we can use the survey data on accumulated wealth and
earnings to provide some stylized calculations of what representative boomers need to save
under various scenarios. Our approach is to take average wealth and earnings levels for older
and younger boomer subgroups from the 1994 PSID and project them forward to retirement
at generally accepted rates of growth.15 We then calculate a hypothetical Social Security
benefit and estimate the amount of additional retirement income they would need each year in
retirement to replace 80 percent of pre-retirement earnings. Some may question a
replacement ratio this high, because replacement rates vary inversely with income levels. But
80 percent is a plausible standard for all but the highest income levels (Mitchell and Moore,
1997), and we also use a 70 percent rate to test the sensitivity of the results.
After calculating the annual Social Security benefit and expected pension benefit (for
scenarios assuming a pension) in 1994 dollars, we determine the other income needed to reach
the replacement rate target in retirement, and convert that to a lump sum amount. We then
calculate the amount of added saving over and above existing wealth (as of 1994) that the
individual or family would have to achieve every year until retirement in order to reach that
target. We calculate that saving amount in 1994 dollars and as a percentage of 1994 earnings.
In subsequent years, the same real dollar amount would have to be saved,16 but its value as a
percentage of earnings would decline slightly if wage growth exceeded inflation. Because of
the importance of employer-provided pensions, we also estimate the necessary savings based
on scenarios with and without a private pension.
Our goal is to suggest how much typical boomers would have to save for retirement to
reach certain targets, and, more importantly, to show how that amount can vary when
assumptions such as rates of return or longevity vary. Any such projection is sensitive to
small changes in assumptions (Mitchell and Moore, 1997). It is also sensitive to the accuracy
of earnings histories, since both Social Security wealth and pension wealth depend on
earnings. Since we start with only a single-year average estimate of earnings and project
forward, our estimates of Social Security and pension wealth should be regarded as reflecting
an average scenario.
Assumptions. We use four stylized illustrations, including younger and older boomer
singles and single-earner couples with an income level in the middle decile of the income
15
In the case of earnings, we applied the rate of growth in average wages with no attempt to adjust for
seniority increases. In the case of wealth, we applied a 4.9 percent rate of growth (before administrative costs),
which is approximately the historical real return on a portfolio composed of 50 percent stocks and 50 percent
bonds. Later we modify this assumption to reflect more realistically conservative investment portfolios.
16 We assume here that all future saving comes from earnings.
22
distribution for their respective group (e.g., for a single older boomer we use the average of
the incomes between the 45th and 55th percentiles for single older boomers) and with the
median net worth. We make numerous simplifying assumptions to facilitate the calculations.
We assume a birth year of 1950 for older boomers and 1960 for younger boomers. We
assume a need standard of 80 percent of pre-retirement earnings, that people begin work at
age 22, that older boomers retire at age 66 and younger boomers at 67, and that earnings
grow at the rate of growth of average wages. We also assume that life expectancy at age 65
is 20 and 16 years for older boomer women and men, respectively, and 21 and 17 years for
their younger counterparts, and that there are no survivor benefits for couples (i.e., no spouse
outlives the other). Investment portfolios are assumed to consist of 50 percent equities and
50 percent long term bonds, with a composite real rate of return of 4.9 percent (2.8 percent
on bonds and 7 percent on equities), both before and after retirement (unless annuitized).
Administrative costs are assumed to lower rates of return by 100 basis points, or one
percentage point, yielding a net real return of 3.9 percent. Annuities are assumed to yield only
two percent in real terms. For private pensions, we assume the annual benefit is based on the
average of the highest five years of earnings times 1.5 percent times the number of years of
service. We use 10 years of service in our base case examples.
Later, we test the results for sensitivity to modifications in some of these assumptions.
For example, the annual rate of return on asset portfolios is assumed to be 4.9 percent in our
base case, assuming a portfolio composed of half equities and half bonds. However, average
investors are more conservative and are likely to average a lower return. Consequently, we
will provide examples of the sensitivity of needed savings to lower rates of return, as well as
different adequacy standards, longevity, pension coverage and credits, and annuitization.
An Illustration. To illustrate our calculation method, assume that a single younger female
boomer born in 1960 earns $35,000 and has a net worth of $14,200 in 1994 (this is the
estimated median net worth of boomers with earnings between $30,000 and $40,000 in the
1994 PSID). If this worker’s wages grow at the same rate as average wages in the economy,
her wage level reaches over $135,000 in nominal dollars in 2027 when she retires, and her
Social Security benefit will equal just under $45,000 in nominal dollars. If her standard of
need is 80 percent of pre-retirement wages, her Social Security benefit replaces about 33
percent of earnings, and about 42 percent of her need standard.
Assuming she has no pension and lives to age 86, she will require additional annual
income at retirement of over $63,000 to reach $108,000 (80 percent of her pre-retirement
wages). She will need over $690,000 in saving at retirement to achieve this annual income
level, but her 1994 saving level will reach only $129,000 by retirement, assuming 3.9 percent
growth net of administrative costs. Therefore, she needs to amass an additional $561,000 by
her retirement in 2027. To get there, assuming 3.9 percent net growth in assets both before
and after retirement, she needs to save about $4,300 per year, which equals about 10 percent
of her annual earnings on average.
If she had no pension but she were willing to accept replacement of only 70 percent of
earnings, she could reduce her required savings from 10 to 7.4 percent. If her replacement
23
rate target were 80 percent, but in retirement she earned only two percent instead of 3.9
percent per year (e.g., by purchasing an annuity), she would have to save over $5,000 per
year, or nearly 12 percent of earnings. And if her rate of return were reduced nearly in half to
two percent real, either because of poor investment performance, bad advice, or a
conservative investment strategy, she would need to save over $8,000 annually, or 19 percent
of her earnings.
However, if she were to have a defined benefit pension that paid 1.5 percent of average
wages for the top five earning years and had 10 years of credits with her employer, her
situation would change substantially. Now her pension would replace about 14 percent of her
final earnings (17 percent of her need standard), and she would need only $360,000 in
additional savings at retirement. To reach that amount would require savings of about $2,750
per year, or about 6.4 percent of earnings. The pension has reduced her required saving by
one-third relative to the no-pension case. If she had a pension and were employed for 20
years rather than 10 with her employer, she would need to save only $1,200, or about 2.7
percent of wages.
Hypothetical Saving Scenarios. In Table 11 below we present examples of the savings
required by typical younger and older single boomers and single-earner couples based on 1994
data. The cells in the table represent the dollar amount that would have to be saved in 1994
(and later years) to reach the 80 percent replacement rate target, as well as the average
percentage of earnings those dollars would constitute over the worker’s remaining work life.
In years subsequent to 1994, the dollar amount would be a decreasing percentage of total
earnings, assuming earnings increased slightly faster than inflation. The percentages in Table
11 reflect an average percentage of earnings. The table compares base case scenarios with
and without defined benefit pension plans, and demonstrates the sensitivity of required saving
to both optimistic and pessimistic changes in individual assumptions. The final scenario
combines two pessimistic assumptions regarding longevity and rates of return.
In general, the most striking impression left by Table 11 is the remarkable range of
variation in rates of saving needed to reach the retirement target when types of households
and assumptions are varied. Required saving rates for the eight base cases (the four boomer
examples with and without pensions) range from single digits for couples with pensions, to
nearly 15 percent of earnings for single older boomers with no pension. At one extreme, the
negative saving rate for older boomer couples with a 70 percent replacement rate suggests an
ability to reach the target with even slightly less saving. At the other, the required saving rate
reaches as high as 30 percent of earnings for long-lived single boomers with no pension who
earn a low return on their investments.
It is clear that couples do substantially better than singles, in part because they start out
with slightly more assets, but mostly because their Social Security benefit is 50 percent greater
than the single person benefit, which greatly increases their annuitized wealth.
24
Table 11
Amount and Percentages of Wages That Must Be Saved to Reach Retirement Target
25
Older Boomers
Single
Couple
1994 Earnings: $24,987
1994 Earnings: $51,296
1994 Savings: $7,000
1994 Savings: $48,000
Amount
Average
Amount
Average
of
percent
of
percent
earnings
saved until
earnings
saved until
saved (1994)
retirement
saved (1994)
retirement
With DB Pension
$2,661
9.1%
$1,787
3.0%
70% replacement
$1,548
-$499
-0.8%
5.3%
Live to 90
$3,476
11.9%
$3,209
5.4%
Pension-15 years
$1,891
$207
0.3%
6.5%
Annuity-2%
$3,019
10.4%
$2,411
4.0%
Rate of return-2%
$4,070
$4,654
7.8%
14.0%
Live to 90 and 2% return
$5,515
18.9%
$7,175
12.0%
No Pension
70% replacement
Live to 90
Annuity-2%
Rate of return-2%
Live to 90 and 2% return
$4,201
$3,087
$5,406
$4,729
$6,244
$8,381
14.4%
10.6%
18.6%
16.2%
21.5%
28.8%
$4,948
$2,662
$7,176
$5,922
$9,118
$13,058
8.3%
4.5%
12.0%
9.9%
15.3%
21.9%
Younger Boomers
Single
Couple
1994 Earnings: $21,696
1994 Earnings: $44,596
1994 Savings: $3,000
1994 Savings: $19,000
Amount
Average
Amount
Average
of
percent
of
percent
earnings
saved until
earnings
saved until
saved (1994)
retirement
saved (1994)
retirement
$1,520
5.7%
$1,417
2.6%
$899
3.4%
$140
0.3%
$1,922
7.2%
$2,054
3.8%
$1,090
4.1%
$533
1.0%
$1,712
6.4%
$1,721
3.1%
$2,664
10.0%
$3,416
6.2%
$3,485
13.1%
$4,719
8.6%
$2,380
$1,759
$2,981
$2,667
$4,073
$5,301
8.9%
6.6%
11.2%
10.0%
15.3%
19.9%
$3,183
$1,907
$4,232
$3,684
$6,312
$8,453
Note: Assumptions for Baseline: Older boomer is born in 1950, younger boomer in 1960; work career starts at 22; retirement occurs at age of eligibility for full
benefits; the standard of need is 80 percent of pre-retirement wages; life expectancy at 65 based on Social Security Trustees' Projections; pension benefits calculated
as 1.5% of 5 highest years salary times the number of years of service; real rate of return is 3.9% net of administrative expenses (4.9% gross).
Variations from base case are not cumulative. They reflect change in only a single parameter as compared to the base case.
5.8%
3.5%
7.7%
6.7%
11.5%
15.5%
Second, those with defined benefit pensions are much better off than those without.
Single younger boomers having a pension have to save only $1,520 in 1994, or 5.7 percent of
earnings, to reach their goal, while single older boomers must save over $2,600, or about nine
percent of their earnings. However, without a pension, their required saving rises to 9 and
almost 15 percent, respectively.
Both younger and older boomer couples with pensions need to save less than five percent
of their incomes to reach their targets, although these figures more than double for those
without a pension. On the downside, single boomers, whether younger or older, who have
pensions but get relatively poor returns on their investments and live to age 90 will need to
save nearly 20 percent of earnings to reach their retirement goal. Those single boomers with
no pensions, low returns, and who live to 90 are going to have to save nearly 30 percent of
their earnings to reach their savings target.
The calculations in Table 11 underscore the wide range of variation and the uncertainty in
attempts to project boomers’ retirement prospects. In this respect, they are consistent with
the caution expressed by Mitchell and Moore (1997), who emphasize the sensitivity of saving
adequacy estimates to the assumptions employed. Their study suggests the needed saving
rates may vary from zero to over 60 percent. Gale also tempers his optimism with the caveat
that the glass may be seen as half-full or half-empty, and that “two issues matter tremendously
to any characterization of the problem: the heterogeneity of saving behavior across
households and uncertainty concerning the right measures of wealth to use and the future
course of the boomers” (1998, p. 17).
Summary and Conclusions
Three separate wealth surveys have been used in this study to examine the savings
behavior of baby boomers. Boomers’ total net worth has grown by an annual average of over
12 percent per year between 1984 and 1994, according to data from the Panel Study of
Income Dynamics. Their financial assets have grown by an annual average of nearly 10
percent per year over the same period. Older boomers have experienced slower rates of
growth in their assets during this period than younger boomers, but they still had accumulated
higher levels of net worth ($58,000) and net worth less home equity ($25,000) by 1994 than
their younger counterparts ($23,000 and $11,000 respectively).
In fact, older boomers had greater net worth than younger boomers at the same age (30s).
This trend bears watching in the future because it is contrary to the expectation that economic
well-being will generally improve over time for successive age cohorts. However, younger
boomers had higher wealth relative to income than older boomers because their incomes are
also lower. This finding seems consistent with that of Gale and Bernheim.
Boomers who are married, white, have higher incomes, and are college-educated have
higher levels of wealth. Boomers cite precautionary motives as the single most important
reason for saving, with retirement in second place and investment in third. They cite
retirement as a reason for saving more frequently than other age groups except those aged 5026
64 (in 1995). About 40 percent save regularly, while over half either do not save or save
“whatever is left over at the end of the month.” Boomers are risk-averse, with over threefourths willing to take only average or no risk, but in this respect they are not much different
from younger age groups, and even less risk-averse than older groups.
With respect to the adequacy of their saving, no study has yet measured boomers’ saving
adequacy taking into account the value of Social Security, private pensions, and individual
saving together for people at all income levels. Bernheim’s estimate that boomers save only
one-third of what they need is questionable because his model excludes those below $20,000
in wages, excludes pension income estimates, excludes home equity, and has other design
flaws that can produce misleading results. Gale’s estimate is substantially higher than
Bernheim’s, although it is based on data from Bernheim’s model.
The median ratio of wealth to income for boomers as a whole was 1.3 in 1994, and this
does not include any Social Security or pension benefits they might receive in retirement. The
median older boomer had wealth equal to about 1.8 times his 1994 income, and the median
younger boomer had wealth equal to about 90 percent of his 1994 income.
Measuring the adequacy of saving for all boomers was beyond the scope of this paper, but
we attempted to characterize the savings required by representative boomers in different age
and income groups to reach reasonable retirement savings targets. Depending on the
scenario, the required saving rate varied from zero to nearly 30 percent. Couples are
generally better prepared than singles, partly because of higher net worth to start, but mainly
because their Social Security wealth is much greater than that for singles with comparable
wage histories. Younger boomers are better situated for retirement security than older
boomers in our scenarios, largely because they are assumed to have ten more years to prepare.
Those with pension coverage will be much better able to reach their retirement target than
those without. How much boomers will have to save is also highly dependent on assumptions
about rates of return, longevity, their standard of need, the presence of children, and
numerous other factors.
Analysts have drawn very different conclusions as to whether boomers are saving
adequately for retirement. An accurate assessment depends greatly on the treatment of
annuitized wealth (Social Security and pensions) and how accurately they are projected, since
they are likely to constitute more than half of total wealth for boomers at retirement.
Counting these sources of wealth as well as home equity, boomers are much closer to
reaching reasonable retirement savings targets than many have suggested. However, any
assessment of retirement income adequacy is highly sensitive to assumptions affecting
resources, such as rates of return, pension coverage, inflation, and annuitization costs, as well
as a number of factors affecting needs, such as longevity, health insurance coverage and health
costs, ability to work, the cost of children’s education, and possibly costs of caregiving.
27
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