SEPTEMBER 2008: THE STATE WE'RE IN
The youngest boomers trail behind
Baby boomers are big news. Last year, the first boomer
collected her first Social Security check. Many boomers are
members of AARP and are forming a formidable voting bloc of
“gray panthers.” Rich and retiring boomers have
fueled Oregon’s condo building boom. The decline in their
portfolios has been blamed for Oregon’s condo bust.
BY ERIC
FRUITS
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Not every boomer is retired, however. While the first boomers
were basking in the Summer of Love, the last of the boomers
were getting ready to enter kindergarten. When the military
draft ended, the youngest boomer was 10 years old. Nearly a
third of Oregon’s baby boomers are under 50 (about
284,000 people). They are earning more than they ever earned
before. Many are also earning more than they ever will. On the
other hand, they have yet to send their kids to college and
have sizable home loans to pay off.
The average family income for a younger boomer with a college
degree is more than $100,000. Curiously, Oregon’s
college-educated boomers have family incomes that are
approximately 18% lower than the U.S. average. The disparity is
due in part to limited employment opportunities in high-paying
jobs and lifestyle choices that trade leisure time for work.
For example, many Oregon transplants have left the go-go rat
races of New York and California to take up a lower-stress (and
a lower-pay) lifestyle in the Northwest.
A recent survey by AARP found that more than 30% of younger
baby boomers are concerned about their ability to keep their
homes. Relative to the population as a whole, mortgage payments
consume a much larger share of younger boomers’ budgets.
They jumped into the housing market with both feet and they
financed their purchases with adjustable-rate mortgages. Those
are the loans that begin with a low “teaser”
interest rate for the first three to five years. After that,
the rates adjust to a market rate typically equal to some
interest-rate index plus 2-3%. Between 2003 and 2004, the
indexes began rising. By the time many of these adjustable-rate
mortgages began adjusting, the interest on the loans was as
much as twice as high as the “teaser” rate. That
adjustment can raise a mortgage payment by 50 percent. The
ongoing credit crunch has made it difficult for these boomers
to refinance into lower-cost mortgages.
On top of their hefty mortgage payments, younger boomers
appear to have a live-for-today attitude. They spend 11% more
than average on pets, toys and playground equipment and spend
10% less than average on life insurance and other personal
insurance. While they indulge their children and pets today,
they may not have enough to put their kids through college or
to ready themselves for retirement.
Many of these last boomers married and had children later in
life. As a result, many will be paying for their
children’s college education just at the time when they
might otherwise be saving for retirement. The college savings
problem has been exacerbated by a financial-aid system that
punishes saving. Under the current system, the more you save
for college, the more you pay out of pocket. Families with no
college savings and limited liquid assets tend to pay less
— after scholarship and grants — than those who
save for college. Rising tuition rates at Oregon’s public
universities may ultimately divert students and their parents
to out-of-state for schools that provide a bigger bang for the
buck.
While retirement is some ways off for the younger boomers,
because of their low savings rate combined with market
gyrations, retirement may be a long, long way off. These
boomers were in the middle of the dot-com boom and bust and
they are now going through a mini-bust in the stock market.
Because of the rising mortgages, rising energy prices and the
credit crunch, younger boomers are reported to be raiding their
retirement accounts. While some of these boomers have 20 years
or more left in the work force, their negative saving rate
means that many may end up as greeters at Wal-Mart in their
sunset years just to make ends meet.
As the boomers begin to exercise their political clout, we
will see pressure to shore up or increase Social Security. The
presidential candidates have sparred over raising the age to
receive Social Security payments. McCain says saving Social
Security may involve raising the retirement age. Obama has
ruled out raising the age. In reality Social Security benefits
cannot cover the costs of living. With little or no savings for
retirement, the youngest boomers may help keep Social Security
solvent by working well into their 70s and maybe their 80s.
There may be business opportunities in financial planning for
younger baby boomers. Rather than the stereotypical planner who
tells clients to put some money in stocks and some in bonds,
the younger boomers will demand a drill sergeant who teaches
them about putting off present purchases and saving for the
future. On the other hand, nobody likes to pay someone to tell
them what they don’t want to hear. So we will probably be
seeing a lot more of Suze Orman in bookstores and on
television.
Eric Fruits is president and
economist with Portland consulting firm Economics International
Corp. He also is an adjunct professor at Portland State
University.
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