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.
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.