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What You, Your Parents, and Your Kids Have In Common: Money Worries GAO Studies Generational Equity of Wealth and Future Income

Congressman Robert Andrews (D-NJ), the ranking minority member of the House Subcommittee on Employer-Employee Relations worries about our future retirement security and our ability to maintain a standard of living during in our golden years. He recently asked the General Accounting Office (GAO) to look at retirement income for three generations: current retirees, baby boomers and Generation X to see how they are faring.

"Retirement Income: Intergenerational Comparisons of Wealth and Future Income," compares wealth across the three generations: Pre-Baby Boom, Baby Boom and Generation X. GAO used the Federal Reserve Board's Survey of Consumer Finances, a nationally representative database on assets and debt that goes as far back as 1962. GAO selected the age group of 25 to 34 year olds as the basis of the study since comparable data was available for all three generations. The data was adjusted in terms of real dollars to make it comparable for all three generations. An overview of retirement income sources is provided in Chart 1 (PDF, 505KB).

The Good News

GAO reports that Baby Boom and Generation X have greater accumulated assets adjusted for inflation than current retirees had when they were the same age as illustrated in Chart 2 (PDF, 221KB). GAO attributes Baby Boomers' wealth to increases in home equity and increases in the rate of home ownership. They report that the median value of housing assets increased from $72,890 for Pre-Baby Boomers to $78,583 for the Baby Boom, while the percent of households owning their own home also increased from 39 to 45 percent.

Despite earlier reports that Generation X will get the short end of the stick, GAO reports that Xers beat out the Boomers when it came to retirement savings. GAO reports that Generation X will have more money in their 401(k) account. GAO found the median value of 401(k) account increased from $2,947 for a Boomer to $8,003 for Generation X.

Additionally, the percentage of households with 401(k) accounts increased too, from 20 to 40 percent for Generation X. GAO attributes the increased coverage by 401(k) plans to the switch from defined benefit to defined contribution plans. They report that the percentage of workers covered primarily by a 401(k) plan increased from 11 to 25 percent while the percentage of workers covered by a defined benefit plan declined from 35 to 21 percent. However, GAO did not estimate the value of defined benefit pensions and to the extent that the Pre-Baby Boom and Baby Boom generations enjoy defined benefit pensions, their assets are underestimated in the study.

Other financial and non-financial assets contribute only modestly to the increase in total assets across the three generations. Financial assets include savings accounts, mutual funds, and stocks and bonds as illustrated in Chart 3 (PDF, 234KB). Non-financial assets include vehicles, business interests and nonresidential real estate.

Lastly, GAO found that education, home ownership, length of work life, marital status, savings, and whether someone stays married or get divorced greatly influenced potential retirement security.

The Bad News

Baby Boomers and Generation X have more debt than the Pre-Baby Boom generation. GAO attributes the rising debt levels to increases in housing debt as shown in Chart 4 (PDF, 437KB). Of the three groups, Generation X carries the most debt. GAO found that the median level of debt for the Baby Boom is 38 percent greater than the Pre-Baby Boom generation while Generation X's median level of debt is 146 percent greater than the Pre-Baby Boom generation and 78 percent greater than the Baby Boom. GAO found that the percentage of households with debt changed very little across the generations, remaining roughly at 83-84 percent across the board. They concluded that those households that go into debt are going into debt more deeply with each new generation.

GAO is quick to point out that despite rising levels of debt that net worth is 60 percent greater than that of current retirees when they were the same age for Baby Boom and Generation X households with positive net worth at age 25 to 34. This point is illustrated in Chart 5 (PDF, 274KB). Despite greater net worth, increases in longevity may test both the ability to retire and length of retirement, not to mention the standard of living in retirement for the later two generations. In fact, GAO predicts that Generation X will feel the pinch of longevity most and anticipates that Xers' income replacement rate will be lower than the other two generations.

Additionally, GAO warns that retirement security for Baby Boomers and Generation X will be complicated by several factors, which are beyond their individual control. These factors include the rate of growth of real wages, the overall performance of the economy, the rate of return on financial assets, changes in housing prices, shifts in pension coverage and the generosity of benefits, the state of the health care system, changes in life expectancy, and the resolution to the funding shortfall for Social Security and Medicare.

Predictions

GAO offers no predictions from their study. In fact, they warn there is considerable uncertainty involved in their estimates starting with the assumptions and consideration of behavioral responses.

Just the Facts

What GAO does point out is that future retirees have a tougher row to hoe. Social Security trust funds are projected to be exhausted in 2042, which means unless action is taken, Social Security will no longer be able to pay scheduled benefits. Pension coverage has remained at 50 percent of the workforce while the composition of the coverage has shifted from defined benefit to defined contribution plans. This shift has put more responsibility on individuals to provide for their own retirement income. Plus, workers today are saving a smaller portion of their incomes than earlier generations did.

GAO does offer some sage advice for Baby Boomers and Generation X. That is to save more in order to maintain their standards of living and meet increasing health care costs in retirement. The challenge before future generations of retirees is not only to save more but also to invest better. That is why it is important that all retirement investors have a Stable Value Fund available to them. It makes a tough job a little easier since Stable Value provides not only diversification, but also safety through principal protection and certainty when it comes to earnings.

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