Baby Boomers Facing a Serious Financial Crisis

It’s no secret that the Baby Boomer generation – those born between 1946 and 1964 (of which I am one) — is facing a retirement financial crisis. A recent article I read estimates that the retirement crisis will affect more Americans than the subprime crisis in 2008.

It is widely agreed that the three legs of the retirement “stool” are Social Security, private pensions and personal savings. According to a recent report from the National Retirement Planning Week, all three of the legs are in bad shape for many Boomers. For example,

• The average Social Security check is $14,000 a year, hardly a cushy retirement.
• 23% of Boomers ages 56-61 expect to receive income from a company pension plan.
• 38% of older Boomers expect a pension, but many large pension funds are in trouble.
• Worst of all, nearly half (45%) of Boomers have ZERO savings for retirement.

Think about it this way. US stocks have been in a bull market for almost a decade, with the S&P 500 Index rising almost 250% over that period. Yet the pension funds of Dallas, Chicago, and Houston – which invest heavily in stocks — are in serious trouble. Even worse, it isn’t just these municipalities that are in trouble, but most of the public and private pensions that still operate in the country today are underfunded.

Currently, many pension funds, like the one in Houston, are scrambling to lower expected return rates, issue debt, raise taxes and/or increase contribution limits to fill some of the gaping holes of underfunded liabilities in their plans. The hope is that such measures combined with a continued bull market and increased participant contributions will heal the plans in the future.

This is not likely to be the case. Let’s look at some numbers.

Moody’s Analytics estimated the total 75-year unfunded liability for all state and local pension plans at $3.5 trillion – and that was for 2016. That’s the amount not covered by current fund assets, future expected contributions and future investment returns. Another estimate from the American Enterprise Institute comes up with $5.2 trillion in such unfunded liabilities.

With employee contribution requirements extremely low, averaging about 15% of payroll, the need to stretch for higher rates of return have put pensions in a precarious position and have increased their underfunded status.

One of the primary problems continues to be the decline in the ratio of workers per retiree — retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers). This “support ratio” is not only declining in the US but also in much of the developed world.

This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age and a decrease in the fertility rate.

In 1950, there were 7.2 people aged 20–64 for every person of 65 or over in the OECD developed countries.  By 1980 the support ratio among OECD members dropped to 5.1 and by 2010 it was 4.1. It is projected to reach just 2.1 by 2050. The table below shows support ratios for selected (not all) OECD countries in 1970, 2010 and projected for 2050:

The problem is that while the Baby Boom generation is increasingly headed towards retirement years, there is little indication a large majority of them will actually be able to retire.  With a large majority of individuals being dependent on the pension systems in retirement, many Boomers will not be able to retire when they had planned.

Welcome to the so called “sandwich generation” when more individuals will be sandwiched between supporting one or both parents and children in the same household. It should be no surprise that multi-generational households in the US are at their highest levels since the Great Depression. 

Currently, over 75 million Baby Boomers in America – almost one-fourth of the US population– have reached or will reach retirement age between 2011 and 2030. Many of them are public-sector employees. In a 2015 study of public-sector organizations, nearly half of the responding organizations stated that they could lose 20% or more of their employees to retirement within the next five years. Local governments are particularly vulnerable, since a full 37% of local-government employees were at least 50 years of age in 2015.

If the numbers above are right, the unfunded obligations of apprx. $4-$5.6 trillion, depending on the estimates, would have to be set aside today such that the principal and interest would cover the program’s shortfall between tax revenues and payouts over the next 75 years.

That is simply NOT going to happen! It’s an unsolvable problem and a crisis is coming. And it will devastate many Americans. It’s just a matter of when.