65 has long been the magic number for many Americans when it comes to retirement age and almost 10,000 baby boomers turn 65 every day. The famed generation, defined as those born between 1946 and 1964, is causing something of a stir as they reach retirement age in droves. According to the United States Census Bureau, in 2020, the U.S. population over the age of 65 was about 56 million (nearly 17% of the total population); by 2031, the U.S. population over the age of 65 will number an estimated 75 million, almost double what it was just in 2008.1 A generation of this size transitioning out of the workforce will naturally effect the economy in many ways.
The effect on Social Security
In 2008, the first baby boomers reached age 62, which is the earliest you can elect for Social Security retirement benefits. The last of them will reach full retirement age in 2031. As mentioned earlier, there will be approximately 75 million people over the age of 65 in the U.S. That’s a lot of retirees drawing on Social Security.
As more and more baby boomers elect to begin receiving Social Security benefits, many people can’t help but adopt a stoic view of the financial security of the fund. With the majority of baby boomers likely collecting for roughly two decades, it seems as if a shortage is a matter of when, rather than if. Indeed, a 2015 report from the Social Security Administration (SSA) states that the Old-Age, Survivors, and Disability Insurance (OASDI) trust is projected to run out in 2033 if no adjustments are made.2 When it runs out, the SSA projects that tax revenue will be able to foot the bill for 77% of benefits.
That doesn’t mean that Social Security is likely to go bankrupt. The U.S. has been in this situation before, with the country staring down a Social Security funding shortfall in the 1980s. Congress took action, raising the full retirement age to 67 and implementing taxes on benefits. Expect Congress to act again before it’s too late. That could mean raising the cap on OASDI taxes, raising the retirement age once again, or changing how we calculate cost-of-living adjustments. In other words, Social Security isn’t going away, but it’s likely to see some changes in the years to come.
The effect on the labor market
As the tail end of the baby boomer generation blows out another batch of candles on their birthday cakes, many face the question, “Is this the year to trade in emails and meetings for relaxation and morning tee times?” One emerging trend is that more Americans are working through their 60s and even into their 70s.
There are a few different possible explanations for this trend. One is that many baby boomers haven’t saved up enough money to afford maintaining their lifestyle in retirement. So, their solution is to just not retire. Related to this is that the average life expectancy continues to rise. Not only does this mean more retirement to save for, but many baby boomers may prefer to spend a few more years working than embark on a retirement that lasts 20 years or more.
Forecasting how many baby boomers retire at their full retirement age and how many continue to work can be difficult. It’s important to keep in mind, though, that Social Security benefits max out at age 70 – a milestone that the first baby boomers have begun to hit. With less incentive to keep working at this point, more will be leaving the workforce for good. The bottom line is that the U.S. workforce is aging.
The effect on consumer spending
A report from the Stanford Center on Longevity states that almost one third of baby boomers had no retirement account as of 2014.3 According to a 2022 U.S. Census Bureau report, that percentage was approximately 40% six years later.4 This means that millions of people are approaching retirement without any savings to speak of. A popular rule of thumb is that you’ll need about 70% of your pre-retirement income to maintain your current lifestyle. Unfortunately, Social Security benefits supply only about half of that if you’re an average earner. If you don’t have any savings, you’re going to need to seriously cut back on spending.
This could mean an overall decrease in consumer spending, which is an important component of Gross Domestic Product (GDP). A decrease in spending means a decrease in consumer demand for products and services. In turn, that means a decrease in revenue for businesses and a hit to the overall health of the economy. This could result in the growth rate of the American economy slowing in the years to come as millions leave the workforce and find themselves with less money to spend.
The takeaway
Social Security, the labor market and consumer spending are just three aspects of the U.S economy that could be impacted by the baby boomer retirement wave. However, the continued aging of this generation may be felt across every aspect of the economy, from healthcare to technology to the housing market. Throw in the fact that the younger generations may have to spend time and money caring for and supporting their aging parents, and the picture gets even more complex.
Whatever happens, baby boomers and non-boomers alike should consider sticking to the personal finance principles that have proven timeless: Save money, invest in a diversified portfolio and prepare for any possibility.
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https://www.census.gov/content/dam/Census/library/publications/2020/demo/p25-1144.pdf
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https://www.ssa.gov/policy/docs/ssb/v75n1/v75n1p1.html
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https://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/
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https://www.census.gov/library/stories/2022/08/who-has-retirement-accounts.html
