Research

Podcast: Here come the boomers will Social Security survive?

The first official baby boomer reached age 62 and applied for Social Security benefits recently. Her action set off a ripple of reaction, fueled by a fear that plagues many Americans — that the Social Security system will collapse under the weight of millions of baby boomers entering retirement. Tracy L. Clark, associate director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business, posits that baby boomers have never done what was expected of them, and that the post-War generation may once again defy expectations. They may just work longer, in the process propping up the system for a few more years.

2007-10-24

The first official baby boomer reached age 62 and applied for Social Security benefits recently. Her action set off a ripple of reaction, fueled by a fear that plagues many Americans — that the Social Security system will collapse under the weight of millions of baby boomers entering retirement.

Tracy L. Clark, associate director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business, posits that baby boomers have never done what was expected of them, and that the post-War generation may once again defy expectations. They may just work longer, in the process propping up the system for a few more years.

Transcript:

Knowledge: This October, the first recognized baby-boomer applied for Social Security benefits at age 62. Her action focused attention on a fear that plagues many Americans — that the Social Security system will collapse under the weight of millions of baby boomers entering retirement.

Tracy L. Clark is associate director for the J. P. Morgan Chase Economic Outlook Center at the W. P. Carey School of Business. He posits the theory that, since baby-boomers have never done what was expected of them, this post-War generation may once again defy expectations and work longer, thus propping up the system for a few more years.

Tracy Clark: The basic idea is: "Yeah, we have all these assumptions on how the baby boomers are going to do things. But we really don't know anything for sure, because they've never followed convention to begin with." And so it's really hard to project, with any degree of certainty, exactly what they're going to do, because they've never followed what the people before them did. Everyone has all these actuary projections from Social Security and all this, and they think it's as if somebody actually knows what's going to go on; and they don't.

Knowledge: Going back to that point, about baby boomers not doing anything, or not very much, of what their predecessors have done, the question then is, "Are they going to go into early retirement, or will a good chunk of them be working for years?" Is that something that you've gotten any sort of handle on? And what would be each scenario's effect on Social Security, if the bulk of them take early retirement or they decide to keep working another 10 years?

Clark: It would have a significant effect on when Social Security gets in trouble. And we really don't know what they're going to do. Baby boomers tend to like their jobs; they've worked for a long time. And I believe a lot of companies will find ways to keep a lot of the baby boomers in the workforce, because they don't have anybody coming up behind them with the right skill set, because, during the '70s, '80s, and '90s, we took out all the middle management.

The way you got training to be in upper management was being in middle management first. And so you have the lower tier, nothing in the middle, and then the upper management. And they don't feel as if they have many people they can depend on to go into those jobs.

So I think that, because we could be facing working shortages, you'll see companies work on ways to keep boomers working longer, and that's actually going to stretch it out. Now, whether it stretches it out on average by seven years, 10 years, or what, we still don't know.

Knowledge: Does it seem that this generation would be amenable to working more than its predecessors? The baby boomers have gotten the reputation of: "They've worked hard, and now it's time to treat themselves." Why wouldn't that follow as they get older and it's time to retire?

Clark: It may follow for some of them. I think others are worried that they don't have enough savings put by for retirement. And in all likelihood, what may evolve is to have people who are working three-quarter time, half time, and have more flexible work arrangements, so that for example, if you did want to go on a scuba-diving vacation in Aruba, you could do that and do some other things and take off some time for your grandkids and do all those sorts of things, but still be working. Those are the kinds of adjustments that, I think, firms are likely to make.

Knowledge: One of the things that are interesting about the baby boomers is that, although everyone talks about them as just one big mass, they've already been separated into three groups: the early baby boomers, who were immediately after World War II; the big bulk that you saw coming to maturity during the '60s and early '70s; and then the tail end, many of whom tend to identify more with what's been called "generation X." Has that been studied, and will that have an effect on how they retire?

Clark: Yes, it has been studied. And they do expect that to affect how they retire and what they do. But there again, these cohorts haven't actually followed what anyone would consider a straight-line path, so that we're just not 100 percent sure exactly what they'll do. The cohort that's most likely to take the early retirement and do the things that we expect are the people who are in the oldest cohort, because they're most like the generation just preceding them.

They're likely to be more closely aligned with going to retirement communities and doing those sorts of things. The big unknown is what that big middle is going to do, in terms of where they want to retire, what they want to do when they're retired, whether they'll downsize their houses, and all of those questions. That's the demographic where the biggest question mark is.

Knowledge: You mentioned that historically, the highest earning and spending years are from 45 to 65, with groups on either side of that spending less. Will boomers keep spending, or will their spending drop off as well?

Clark: Well, I think that to some extent, it has to drop a little. I sometimes jokingly refer to that 45 to 65 as the "we're paying for college" years. The reason for which they're high-spending years is not only that the people are spending a lot on themselves, but also that they have to spend a lot on the children.

As they go into the next grouping, the amount of money that they have to spend on their children will drop some. I think that it's quite likely that boomers will spend more than has historically been the case for people 65 and over, but that they'll still spend less than they did for the 45-to-65 timeframe.

Knowledge: Going back to that bulk of the baby boomers and tying it in with children, they also tended to have children later in life. Would that affect why they would keep working longer, because they have their children later in life?

Clark: Yes, it will, because they probably want to stay working while the children are in college. Also, the one thing that makes us think that they may retire later is that they really have done everything later: they married, on average, about seven years later; they had children, on average, about seven years later. It seems reasonable that they may delay a lot of different things, relative to what their parents in the previous generation did.

Knowledge: Earlier, you mentioned what the boomers' retirement would mean to housing. And there has been talk of downsizing; but there's also been the recent trend, which we saw before, when home prices began dropping, of many boomers' upsizing actually. Have you heard of that phenomenon, that they are upsizing in order to have a place where their kids and their grandchildren can come to visit them?

Clark: Yes. It's an interesting phenomenon, in that economists would term it they're "competing" for their grandchildren. Because you have blended families and a child may have two or three or four sets of grandparents, there is some idea that you may keep a larger house so that it's more attractive for you to get the grandkids for a couple of weeks in the summer, rather than downsizing and then having no place for anybody to stay if they want to come visit.

It hasn't played out yet fully, so we don't know exactly the way it'll work its way out. But boomers have typically had larger houses than their parents and the generations before have and it's not unreasonable, also, that they may feel more comfortable in those larger spaces and would feel too confined in the 1,400-square-foot space that their parents were comfortable in.

Knowledge: How do you think this will affect the elder-care industry, if they are investing a lot in these homes and waiting to retire? Would there be more at-home nursing, which could then affect the elder-care industry in terms of retirement homes?

Clark: I think that boomers, being a relatively independent lot, will try to extend the period during which they're in their own homes. So you'll see in-home care, you'll see probably many people finding small, group-home types of elder care more attractive. But the sheer number of people who will need this kind of care is, just by itself, going to have a huge effect on both medicine and elder care, because we've never had to take care of that many people at once.

And we're probably going to see a heavy infusion of technology into the care package, if you will, with people having more monitoring systems to allow them to stay in their homes longer. But, eventually, they'll get to the point of needing what we today think of as a nursing home; and there'll just be huge numbers of them.

Knowledge: One of the things that has been brought up is how big the baby boomer generation was, how much smaller the following generation, generation X, was. And then, again, another fairly large — not as large as the baby boomers, but definitely much larger than generation X — the so-called generation Y. If the baby boomers stay in the workforce longer, how will that benefit these following generations, in terms of Social Security benefits? Or will it?

Clark: The longer the boomers stay in the workforce, the later the problems occur for Social Security and the less draconian the solutions have to be. By 2030, you'll have two persons working for every one person retired, which isn't very many. And, at the current tax levels, those two aren't going to be putting enough into the system to support that one person in retirement.

And so as we move forward, there'll have to be some combination of either lower benefits or higher Social Security and Medicare taxes. And people — politicians in particular — don't want to face this, because there's no politically palatable solution. So, the longer the baby-boomers work, the less nasty the solution will have to be.

Knowledge: Much has been made of the very first baby boomer to apply for Social Security. She turned 62 and applied for Social Security. But, again, we don't really know what's happening, because of that great big unknown, which was the big bulge in the middle of the baby-boomers, on how they're going to react. They've really been the most unpredictable of the group.

Clark: Yes, they have. And I was recently at a conference with a bunch of economists, and economists tend to plan fairly well. They were talking about this subject, and somebody asked, "How many people in the room are baby boomers?" and virtually everyone raised a hand.

And then they asked, "How many people know when they're going to retire and what they're going to do?" and no one raised a hand. So part of the problem is that not even the baby boomers themselves know what they'll do. So it's not as if you can go out and survey people and say: "Aha! 86% of them will retire early." They don't know.

Knowledge: And again, because of the lot of the unknowns, many of those who are in their 50s still have children in junior high or high school.

Clark: Right. Will they send them to a private college, or a public college? Will the kids be coming back in their 20s because they can't afford housing? You have to play it day by day and just play it by ear, and that doesn't lend itself to helping economists and others plan for what will happen with the economy.

Knowledge: Just supposition: where's the smart money on where the bulk of the baby boomers will be? Retiring early or retiring later?

Clark: My personal opinion is that a significant percentage of them, probably more than half, will work later. Partly because that's the only way they can get full benefits, and partly because, I believe, firms will find incentives to keep baby boomers working longer, because they have no idea at all how to replace them. And most of the baby boomers — I am one, although I am at the younger end of it — like working.

They don't have a great deal of stuff planned out for what they'll do in retirement. And so kind of a phased retirement, in which they might start working a little bit less, and a little bit less, and a little bit less, would be very attractive to them as they move forward. I'd like to emphasize that, when you read stories that say, "This percentage is projected to retire here; we think this is going to happen; we think that's going to happen," we don't really know.

And it is going to be the single largest effect on the economy going forward. The last two recessions were very mild. And I'm convinced that one of the reasons for which they were mild was that so many baby boomers were in that 45-to-65 age group and spending a lot of money.

In 2011, the number of people going into that 45-to-65 age group starts dropping; and once that happens, I think, the economy could become more volatile, so that recessions after about 2011 could well be more cyclical than what we've seen in the last two. And people need to factor those sorts of possibilities into what they're planning.

Economics Faculty