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R ESEA R C H LIB R A R Y
CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE

Federal Reserve Bank

of St. Louis
JAN 2 5 199<t

S T U D Y
SEPTEMBER 1993

Baby Boomers in
Retirement:
An Early
Perspective

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BABY BOOMERS IN RETIREMENT
AN EARLY PERSPECTIVE

The Congress of the United $tates
(^ongressional Budget Office




NOTES
Unless otherwise indicated, all years are calendar years and all
dollar values are expressed in 1989 dollars.
Numbers in the text and tables of this report may not add to totals
because of rounding. Medians do not add to subtotals, and ratios
of medians are not equal to median ratios.

Preface
n less than two decades, the first wave of baby boomers will retire.
Many people are concerned that boomers will not do well financially in
retirement. In response to a request from the Subcommittee on Social
Security of the House Ways and Means Committee, this study looks at how the
incomes and wealth of baby boomers compare with those of their parents as
young adults, assesses the financial health of current retirees as a basis for
comparison, and discusses factors that will influence the financial well-being
of baby boomers in retirement.

I

Joyce Manchester of the Congressional Budget Office’s Macroeconomic
Analysis Division wrote the study under the supervision of Robert Dennis.
Paul Cullinan, Nancy Gordon, Kim Kowalewski, Larry Ozanne, John
Petersen, Murray Ross, Ralph Smith, David Torregrosa, Paul Van de Water,
and Roberton Williams offered useful comments. Sandy Christensen, Dan
Feenberg, Richard Kasten, Frank Sammartino, and especially John Sabelhaus
and Blake Mackey helped with acquiring and analyzing the data. The study
also benefited from suggestions and criticisms provided by William Gale and
Jonathan Skinner.
Paul L. Houts edited the manuscript. Christian H. Spoor provided edi­
torial assistance. Verlinda Lewis, with the help of Dorothy Kornegay and Rae
Roy, produced numerous drafts of the study. With the assistance of Martina
Wojak-Piotrow, Kathryn Quattrone prepared the study for publication.

Robert D. Reischauer
Director
September 1993







Contents

SUMMARY
ONE

INTRODUCTION
Who Are the Baby Boomers? 2
Why the Concern About the Finances of Baby
Boomers in Retirement? 3

TWO

ARE BABY BOOMERS BETTER OFF THAN
THEIR PARENTS WERE AS YOUNG ADULTS?
Incomes of Baby Boomers and Their Parents
as Y oung Adults 7
Wealth of Baby Boomers and Their Parents
as Young Adults 12
Composition of Assets and Liabilities 16
Conclusions 18

THREE

WHAT FACTORS HAVE INFLUENCED
THE FINANCIAL WELL-BEING OF
CURRENT RETIREES?
Incomes of Older Adults 19
The Role of Social Security 22
The Role of Pension Income 24
The Role of In-Kind Income for Health Expenditures 25
Wealth 26
Saving Rates and Rates of Return on Assets 30
Conclusions 31

FOUR




THE OUTLOOK FOR THE FINANCIAL WELL­
BEING OF BABY BOOMERS IN RETIREMENT
How Wage Growth and Labor Force Participation
Affect the Baby Boomers 33
Promised Benefits from the Social Security System 36
Trends in Private Pensions 37
The Role of Wealth from Housing 40
Savings 42
Baby Boomers at Risk in Retirement 44
Conclusions 46

vi BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

APPENDIXES
A

Description of the Data 49

B

Changes in Household Structure, 1960 to 1990 57

C

Income and Wealth of the Baby Boomers
and Their Parents 63

TABLES
1.

2.

Distribution of Income in 1959 and 1989, by
Age (25 to 44) and Marital Status of Household Head

8

Household Income in 1959 and 1989, Head of Household
Age 25 to 44

10

Wealth-to-Income Ratios and Wealth Within Income
Quintiles in 1962 and 1989, Head of Household
Age 25 to 44

13

Wealth and Income of Households in 1962 and 1989,
by Age (25 to 44) and Marital Status of Household Head

15

Distribution of Income in 1989, by Age (55 to 74)
and Marital Status of Household Head

20

Household Income in 1989, Head of Household
Age 55 to 74

22

Wealth-to-Income Ratios and Wealth Within Income
Quintiles for Older Households (Age 55 to 74) in 1989

27

Wealth and Income of Households in 1989, by Age
(55 to 74) and Marital Status of Household Head

28

9.

Annual Real Rates of Return on Selected Assets

30

10.

Labor Force Participation of Men and Women
Age 45 and Older

35

Estimated Average Social Security Benefit Payable
to Retired Workers at Normal Retirement Age,
by Preretirement Earnings Level, Based on
Midrange Assumptions

37

Sample Sizes for Income Data in 1959 and 1989,
Head of Household Age 25 to 44

52

Sample Sizes for Income Data in 1989, Head of
Household Age 55 to 74

53

3.

4.

5.

6.

7.

8.

11.

A -l.

A-2.







vii

Sample Sizes for Data on Wealth and Wealth-to-Income
Ratios in 1962 and 1989, Head of Household Age 25 to 44

54

Sample Sizes for Data on Wealth and Wealth-to-Income
Ratios in 1989, Head of Household Age 55 to 74

55

Labor Force Participation Rates for Married Women
and for Women with Children in 1960,1970,1980,
and 1990

58

Median Money Income of Different Types of
Households in 1960,1970,1980, and 1990

59

Number of Households by Type in 1960,1970,
1980, and 1990

60

Percentage of Households by Type
in 1960,1970,1980, and 1990

61

Families by Number of Own Children Under 18
in 1960,1970,1980,1985, and 1990

62

Wealth and Income of Households Ages 25 to 44
in 1962 and 1989, by Marital Status With
and Without Children

64

Wealth and Income of Married Couple
Households Ages 25 to 44 in 1962 and 1989,
by Number of Wage Earners

65

Wealth and Income of Households Ages 25 to 44
in 1962 and 1989, by Education

66

Composition of Assets and Liabilities of Households
Ages 25 to 44 in 1962 and 1989, Median Values
by Homeowner Status

67

Median Wealth and Income of Households
Ages 55 to 74 in 1989, by Marital Status
and Number of Wage Earners

68

Wealth and Income of Households Ages 55 to 74
in 1989, by Education

69

Composition of Assets and Liabilities of Households
Ages 55 to 74 in 1989, Median Values
by Homeowner Status

70

viii BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

FIGURES
1.

Number of Births, 1920 to 1992

2.

Shares of Total Income of Households
Age 65 or Older, 1990

3

23

BOXES
1.

The Role of Home Ownership in Accumulating Wealth

2.

How Much Must Boomers Save to Attain
Their Parents’ Wealth?

34

Risks Associated with Various Types of Pension Plans

39

3.




5







Summary

he impending swell of retired baby
boomers has raised concern that both
public and private resources will be
inadequate to provide for their financial well­
being in retirement. Ultimately, changes
that take place over the next few decades in
the national economy, workplace, and family
will determine how the baby boomers will
fare in retirement. Yet, one can glean some
insight about their future incomes from look­
ing at their present circumstances.

T

Viewing the Baby
Boomers Versus Their
Parents as Young Adults
Baby boomers-the generation born between
1946 and 1964—
are in general financially bet­
ter off than their parents' generation was as
young adults. Both real household income and
the ratio of household wealth to income are
higher on average for baby boomers ages 25 to
44 in 1989 than was true for young adults of
the same age in 1959 and 1962, respectively.
The advantage of older boomers is even
greater than that of younger boomers. For the
age group from 25 to 34, median household in­
come in 1989 dollars is 35 percent higher than
it was for a similar group in 1959~$30,000 in
1989 and $22,300 in 1959, after adjusting for
inflation. The slightly older group, ages 35 to
44, reports substantially larger gains, with
median household income 53 percent above
that of the corresponding group in 1959—
$38,400 in 1989 and $25,100 in 1959. The me­
dian value of real household wealth has




risen about 50 percent for the younger age
group, and the median ratio of wealth to in­
come has increased about two-thirds. For the
older group, the median value of real house­
hold wealth has risen about 85 percent, but
the median ratio of wealth to income has not
changed much.
There are, however, notable exceptions to
this general improvement in the financial sit­
uation of young adults, most particularly
those groups that have not shared in the eco­
nomic prosperity of the past 30 years. For ex­
ample, those households with heads ages 25 to
34 without a high school degree report median
household income that is lower in 1989 than in
1959 after adjusting for inflation, though to­
day's dropouts are a smaller, less-skilled
group than those of the early 1960s. House­
holds headed by unmarried individuals ages
25 to 34 with children report median income
about one-third that of married couples with
children and about one-twentieth as much
wealth. Married couples ages 25 to 34 with
only one earner report about two-thirds as
much wealth in 1989 as in 1962. Wealth
among nonhomeowners ages 25 to 34 has not
changed much since 1962 and has actually
declined among nonhomeowners ages 35 to 44.

Sizing Up the Financial
Situation of Those Close
to or Just Past Retire­
ment Today
In general, the cohort that includes parents of
the baby boomers, defined to be people ages 55
to 74 in 1989, has considerable income and

xii BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

wealth. These older people benefited from
strong economic and real wage growth until
1973, and since then from lackluster but posi­
tive real wage growth on average. Social Se­
curity benefits have expanded greatly over the
last few decades, pension coverage and bene­
fits for recent retirees have been rising, and
unexpected capital gains on housing and fi­
nancial gains on fixed-rate mortgages have
given many older households a welcome finan­
cial boost. For those age 65 or older, the gov­
ernment covers a large percentage of medical
expenses through the Medicare program.
One indicator of the financial circumstances
of current retirees is the relatively low share
of total income from earnings-perhaps a sig­
nal that many of the elderly do not find it nec­
essary to have a job in order to make ends
meet. In 1990, just 18 percent of the total in­
come of households with heads of household
age 65 and older came from earnings, down
from 37 percent in 1958. The main explana­
tion for this decline in the share of income
from earnings is the rise in Social Security
benefits. In 1990, 36 percent of total income of
the elderly came from Social Security, up from
22 percent in 1958.
The relative importance of other sources of
income has not changed much since 1958. The
share of income from assets has risen from 23
percent to 25 percent, and the share from pen­
sions has increased from 14 percent to 18 per­
cent. The share from public assistance
dropped slightly from 5 percent to 2 percent.
Closely related to the decline in the share of
income from earnings over the past few dec­
ades is the decline in the rate of labor force
participation among people 55 and older. In
1965, 85 percent of men ages 55 to 64 were in
the labor force, but that proportion dropped to
67 percent in 1991. Among men ages 62 to 64,
participation in the labor force fell from 73
percent in 1965 to 46 percent in 1991. For
men age 65 and over, participation rates fell
from 28 percent in 1965 to 16 percent in 1991.
Women ages 55 to 64 show small increases in
labor force participation over this same period,




September 1993

from 41 percent to 45 percent. Among women
age 65 and over, the rate dipped slightly from
10 percent in 1965 to 9 percent in 1991.
This optimistic picture of recent and soonto-be retirees is marred by some notable ex­
ceptions. Those men and women who are ages
55 to 64, not married, and not working report
substantially lower median incomes and
wealth than the median household in the co­
hort. Households with heads holding less than
a high school degree report about one-third of
the median income and less than one-quarter
of the median wealth of households with heads
who completed four years of college. Median
wealth for nonhomeowners in the 55 to 64 age
group is less than 1 percent of the median
wealth (including housing equity) of home­
owners in this age group. In the 65 to 74 age
group, median wealth for nonhomeowners is
less than 2 percent of the median wealth of
homeowners.

Looking Ahead to the
Financial Circumstances
of Baby Boomers in
Retirement
The Congressional Budget Office expects that
baby boomers in general will have higher real
retirement incomes than older people today
for a variety of reasons. First, as long as real
wage growth is positive on average during the
next 20 to 40 years, boomers will have higher
real preretirement earnings than today's older
people had in their working years. With cur­
rent law, this growth will increase the level of
boomers' Social Security benefits. Pension
benefits will be higher as well, and higher
earnings now will enable boomers to save
more for retirement. Second, increases in
women's participation in the labor force imply
that more boomers will have acquired addi­
tional years of work experience before retire­
ment. Not only will more women be eligible
for their own Social Security and pension

SUMMARY

benefits, but also their income from these
sources in some cases will be higher. Third,
boomers will be more likely to receive income
from pensions as a result of recent changes in
the pension system. Finally, baby boomers
may inherit substantial wealth from their
parents.
Several caveats must accompany these en­
couraging findings. One of the most impor­
tant assumptions leading to these results is
that wages will grow more rapidly than prices
during the next 40 years. In addition, no large
changes in government tax and benefit poli­
cies are built into the analysis. Changes that
increase taxes or reduce benefits could leave
retirees with lower discretionary income. For
example, during the next three or four dec­
ades, Social Security taxes could be raised or
benefits could be reduced. In addition, Medi­
care's benefits and financing may be altered as
part of the current effort to reduce the deficit,
and possibly as part of general health care re­
form.
Although the future looks bright for those
who are well educated, it is distinctly gloomy
for those without many marketable skills.
The baby boomers are one of the most highly
educated cohorts in history, with one of every
four completing four years of college as of
1989. Those with a college education can ex­
pect higher incomes, faster wage growth, and
more resources available for saving. However,
the prospects of earning a decent wage are
much poorer for those without skills valued by
the marketplace. The job opportunities for
those without a college education or technical
skills will probably continue to shrink in the
future as the workplace attaches a growing
premium to advanced skills and training.
Marital status is also important in deter­
mining financial well-being both before and
after retirement, especially for women. Being
married today usually means having two in­
comes and sharing many expenses, with hous­
ing among the most significant. Fringe bene­
fits, particularly health insurance coverage,
are usually better for married couples than for
singles because the gaps in one spouse's bene­



xiii

fits are often filled by the other. These finan­
cial benefits continue in the retirement years,
and under current law a large percentage of
wives also receive more generous Social Secu­
rity payments based on their husband's work
background rather than their own. Widows
especially gain from their husband's more ex­
tensive work history.
Home ownership is likely to be another key
indicator of the potential for lifetime earnings,
and at least in the past has contributed to
wealth through sizable capital gains on hous­
ing assets. Homeowners to date have accu­
mulated significantly more wealth than
nonhomeowners, in nonhousing assets as well
as in housing, though this may reflect the re­
lationship between income and wealth rather
than a direct link between home ownership
and wealth. If this trend continues, those who
are unable to buy a home as young adults
might be less financially well off in retirement
than those who could afford to become home­
owners. Although this study cannot forecast
whether housing will continue to be a lucra­
tive investment in the years to come, it does
demonstrate that households headed by older
people who own their homes tend to be finan­
cially better off in retirement.
Two implications emerge. The first is that
single, poorly educated baby boomers may
face a bleak economic future, depending heav­
ily on public assistance. This is true as well
for the current cohort of retirees. The second
implication is that nonhomeowners may be
unable to accumulate wealth at a rate that is
sufficient to give them a comfortable lifestyle
in retirement. Although most baby boomers
will enjoy higher incomes and more wealth
than their parents, some types of households
will be struggling to make ends meet.
These concerns notwithstanding, the some­
what optimistic view reached in this study
stands in sharp contrast to the widespread
concern that baby boomers as a group will not
fare well in retirement. Many people seem to
focus on the slowing of real wage growth, the
future of Social Security, the decline in
defined-benefit pension plans, low private

xiv BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

saving rates, and possible declines in the val­
ue of housing. In spite of those disturbing
trends, baby boomers can take comfort from
some positive signs: real wages are still grow­
ing, the work force is more highly educated,
and the participation rate of women in the




September 1993

labor force has increased. All of these factors
portend increases in household incomes of
baby boomers in retirement, in part by mak­
ing greater accumulation of assets possible
during their working years.

Chapter One

Introduction

he baby boomers--a huge bulge of peo­
ple born from 1946 through 1 9 6 4 have raised concerns at every stage of
their lives. They put severe pressure on
school resources in the 1950s and 1960s; their
adolescence brought a rise in crime in the
1960s and 1970s; and their entry into the
labor force may have contributed to keeping
the growth of wages low in the 1970s and
1980s. But despite everything, the baby
boomers have done well on balance: they are
richer and better educated than their parents
were at the same ages, and they are behaving
similarly to their parents in their adult lives.

T

Looking to the future, however, many peo­
ple are worried about the financial well-being
of baby boomers when they retire. The con­
cern centers on the large numbers of people
who will retire between 2010 and 2030, the fi­
nancial condition of social support programs,
and declines in the national saving rate. The
share of the population that is age 65 and over
is expected to rise from about 12 percent in
1990 to about 20 percent in 2030 when the
youngest baby boomer is 66 years old. Pres­
sures will be felt in funding Social Security
and private pensions and in providing health
care to older people. And lower saving rates in
recent years reduce the odds that sufficient
resources will be available to provide for the
retirement of baby boomers.
In general, the economic behavior of baby
boomers to date is similar to that of their par­
ents as young adults, which bodes well for




their financial well-being in retirement. Baby
boomers as a whole have more real income and
wealth than their parents did as young adults,
but some demographic groups have not fared
as well as others. The parents of baby
boomers, now close to or just past retirement
age, for the most part seem to have adequate
financial resources in retirement, though that
may reflect transfer programs available to es­
sentially all of them and unanticipated gains
on housing assets rather than systematic fi­
nancial planning. In addition, as long as real
wages continue to grow and assuming that So­
cial Security and private pensions remain in­
tact and that health care expenditures do not
swamp other gains, most baby boomers are
likely to enjoy higher real incomes in retire­
ment than their parents.
Of course, predicting the financial situation
of baby boomers in retirement is a bit prema­
ture at this stage. Even though the older
boomers have completed almost half of their
working years, they have not completed half of
their financial preparations for retirement.
Significantly different profiles of the wealth of
baby boomers are apt to be apparent 10 to 20
years from now as they get much closer to
their retirement years and have more infor­
mation on which to base their saving deci­
sions. The current retirees acquired most of
their pension benefits and private assets after
they were older than the boomers are now.
Not least, baby boomers could inherit substan­
tial amounts of wealth from their parents over
the next 20 to 30 years.

2 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

This study relies heavily on household sur­
vey data to examine the income and wealth
positions of baby boomers and their parents,
but a number of problems plague survey
data.1 People sometimes have poor recall or
are reluctant to reveal their true income and
wealth when answering a survey, so the exact
values must be used with caution. Although
the income data come from two large, repre­
sentative surveys, information on wealth and
on the ratio of household wealth to income
comes from two much smaller and perhaps
less representative surveys. These surveys
are the best available sources for data on
wealth, but this information is almost cer­
tainly less accurate than that on income (see
Appendix A for more information on the data
sources).
Only changes in financial well-being as
measured by income and wealth are discussed
in this study. It does not address many "qual­
ity of life" issues that surely are of great im­
portance when comparing how baby boomers
live today with how their parents lived three
decades ago or with how the boomers will live
30 or 40 years into the future.
For example, the large increase in women's
participation in the labor force in recent dec­
ades may mean more family income and many
more opportunities for women today and in
the future. At the same time, when both par­
ents work, families must set up child care ar­
rangements outside the home and juggle the
needs of all family members during the few
hours of family time that remain each week.
Moreover, although improvements in medical
care, automobile safety, housing, and con­
sumer electronics have been remarkable, dete­
rioration of the environment and an increase
in crime rates exact high costs in terms of
health, safety, and enjoyment.

1.

The Congressional Budget Office used the 1960 Census,
the 1990 Current Population Survey (CPS), and the Sur­
vey of Consumer Finances (SCF) in 1962 and 1989. The
unit of observation used throughout this study is the
household, defined in the Census and the CPS to include
all people living in a dwelling unit. In the SCF, boarders
are not included as members of the household.




September 1993

Who Are the Baby
Boomers?
The baby-boom generation includes roughly
76 million people born between 1946 and
1964. The annual number of births reached a
low point of about 2.3 million during the Great
Depression but jumped soon after the end of
World War II and amounted to more than 4.2
million each year between 1956 and 1961.
The earliest boomers show up in the huge
increase-53 percent-in the under-five popula­
tion between 1940 and 1950.2 By 1960, the
number of children under five had grown an­
other 26 percent. Thereafter, births declined
but did not fall below 4 million until 1965.
They remained low during the rest of the
1960s and 1970s, so that the large baby-boom
generation was both preceded and followed by
smaller generations (see Figure 1).
This bulge is slowly working its way
through the population. In 1980, there were
almost twice as many young people ages 20 to
24 as in 1960. In 1990, 22 percent of all house­
holds were headed by a person age 35 to 44, up
from 17 percent just 10 years before. And the
proportion of the population age 65 and over
will rise from about 12 percent in 1990 to
about 20 percent in 2030.
For purposes of analysis, the baby boomers
are commonly split into two age groups. Those
born from 1946 through 1954 are known as
early boomers, and those born from 1955
through 1964 are called late boomers. In other
words, the early boomers are older than the
late boomers. In 1989, the most recent year
for which data on income and wealth are
available, early boomers were ages 35 to 43
and were becoming established with their ca­
reers and family lives. Late boomers, ages 25
to 34, perhaps had not yet fully completed

2.

Louise B. Russell, The Baby Boom Generation and the
Economy (Washington, D.C.: Brookings Institution,
1982).

INTRODUCTION

CHAPTER ONE

Figure 1.
Number of Births, 1920 to 1992
Millions of Births

3

concern. Among them are arguments about
"crowding effects," observed trends in eco­
nomic performance and social programs, and
possibly inadequate private provisions for re­
tirement.

Economic Consequences
of the Baby Boom

SOURCE:

Congressional Budget Office using data from the
National Center for Health Statistics.

their formal education and were still in the
early years of their careers.
For this study, the Congressional Budget
Office chose to look at people ages 25 to 44 in
1989, even though this group includes those
born in 1945, just before the conventional
start of the baby-boom years. The reason for
this approach is that the Bureau of the Census
publishes population statistics in terms of 10year intervals-ages 25 to 34, 35 to 44, and so
on. In 1989, the most recent year for which
sufficient information is available, people
born in 1945 were 44 years old. Thus, includ­
ing those born in 1945 as well as all the baby
boomers allows a quick check against pub­
lished statistics.

Why the Concern About
the Finances of Baby
Boomers in Retirement?
Many people, including the baby boomers
themselves, are concerned that the demands
on private and public resources to support the
baby-boom generation in retirement will be
unduly large. Reasons abound to justify this



A large cohort may suffer from crowding in all
aspects of life—
from getting into nursery
schools, to attaining the best jobs, to obtaining
high-quality medical care in old age. The de­
mographer Richard Easterlin developed a the­
ory suggesting that smaller birth cohorts,
such as those of the 1930s, are more likely to
enjoy economic good fortune and generally
have relatively larger families.3
Larger cohorts tend to have less economic
success and consequently have smaller fam­
ilies. Being part of a large birth cohort
decreases the likelihood of economic success
for both individuals and the cohort.4 Members
of large birth cohorts face increased competi­
tion for entry-level positions, less opportunity
for advancement, and less likelihood of im­
proving economic status relative to expecta­
tions. Since these factors apply to a specific
age cohort, they are sometimes called "cohort
effects."

Trends in Economic
Performance and
Social Support Programs
Sluggish economic growth in this country over
the next 20 to 40 years could reduce the ability
of households to save for retirement, both pri­
vately and through employment-based pen­
sion plans. Slow economic growth together

3.

Richard A. Easterlin, Birth and Fortune: The Impact of
Numbers on Personal Welfare (Chicago: University of
Chicago Press, 1987).

4.

See Finis Welch, ’’Effects of Cohort Size on Earnings:
The Baby Boom Babies' Financial Bust,” Journal of
Political Economy (October 1979).

4 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

with the changing demographic composition of
the U.S. population could also endanger the
ability of the government to maintain needed
social support programs.
Productivity growth, which is the main fac­
tor determining growth in real wages, has
slowed in recent decades compared with the
1950s and 1960s, and no clear sign of a pickup
is in sight. Households may save less as a re­
sult of slower growth in national income, and
firms will find it more difficult to provide jobs
with decent wages and satisfactory fringe
benefits such as adequate pension plans and
health insurance.
At the same time, sluggish economic growth
in the long term will make reducing the fed­
eral government’s deficit more difficult and
make funding social support programs more
problematic. Tax revenues are lower during
periods of slow growth, and demands for gov­
ernment support programs are higher. Lower
revenues and increased expenses will push
federal deficits higher and will further hobble
long-term economic growth.5 Government
programs such as Social Security and medical
services for the elderly could face stiff fiscal
pressure even before the time that the bulk of
the baby-boom generation reaches retirement
age.
The changing age composition of the popu­
lation may also imply trouble ahead for main­
taining social support programs for older peo­
ple, though the ratio of children plus elderly to
workers will not change much. Programs such
as Social Security and Medicare rely on pay­
roll taxes on current workers to support retir­
ees. The ratio of the retired to the working
population (proxied by the ratio of those age
65 and over to those ages 20 to 64) is projected
to rise from 0.21 in 1990 to 0.27 in 2020 and
then reach a high of 0.37 in 2035, when the
oldest baby boomers are almost 90 and the
youngest boomers are just past 70.

5.

See Congressional Budget Office, The Economic and
Budget Outlook: Fiscal Years 1994-1998 (January
1993), Chapter 5.




September 1993

On the bright side, the overall dependent
population-including both the aged and the
young—
will rise much more slowly. The sum
of population age 65 and over and population
under age 20 divided by the population ages
20 to 64 is projected to be 0.70 in 2020, just as
it is today, and then rise somewhat to 0.80 in
2035.

Private Efforts to Provide
for Retirement
Declines in household saving rates over the
past decade or two and uncertainty about the
availability of housing wealth to finance re­
tirement expenses have been a source of con­
cern about how prepared households are for
retirement.
In recent years, saving out of disposable
income—
the personal saving rate-declined to
levels well below those of earlier decades. The
adjusted personal saving rate fell from 7.1 per­
cent in the 1960s to 6.1 percent in the 1980s.6
Household survey results suggest a significant
drop in saving rates in the 1980s by house­
holds with a head of household age 45 to 64,
the cohort that is now close to or just past
retirement age.7
Whether or not baby boomers are saving
enough to provide for their retirement de­
pends to a great extent on the standard of com­
parison. A recent study of saving finds that,
on average, baby-boomer households are sav­
ing only 34 percent as much as they should to
maintain their preretirement level of con­
sumption in retirement.8 The study assumes

6.

Adjustments to the national income and product ac­
counts’ measure of the personal saving rate were made
for consumer durables, inflation, the market value of
federal debt, and defined-benefit pension plans. See
Congressional Budget Office, Assessing the Decline in
the National Saving Rate (April 1993), Table 14.

7.

Barry Bosworth, Gary Burtless, and John Sabelhaus,
’’The Decline in Saving: Evidence from Household Sur­
veys,” Brookings Papers on Economic Activity, no. 1
(1991).

8.

B. Douglas Bernheim, Is the Baby Boom Generation Pre­
paring Adequately for Retirement? Summary Report
(Princeton, N.J.: Merrill Lynch, January 1993).

INTRODUCTION

CHAPTER ONE

Social Security benefits will continue at cur­
rent levels, ignores housing wealth as a com­
ponent of total wealth, and accounts carefully
for job changes, pension benefits, and family
composition. Although the conclusions about
the adequacy of saving may be valid under the
assumptions of that analysis, the question
posed in this study is whether baby boomers
will have higher real incomes in retirement
than their parents. Baby boomers may do bet­
ter than their parents in retirement even
though they are not accumulating assets fast
enough to maintain preretirement levels of
consumption.
The role of home ownership and housing
wealth is an important issue in assessing pri­
vate provision for retirement for two reasons.
First, the parents of baby boomers enjoyed
strong capital gains from housing, but baby
boomers should not expect similar gains.
Some people even fear a sharp decline in real

housing values. Second, some analysts ques­
tion whether households view wealth tied to
housing as being available to finance retire­
ment expenses. These analysts argue that
households do not appear to reduce housing
equity as they age and therefore do not finance
living expenses from housing equity. Others
counter that housing equity can be used if
needed, that more financial instruments are
becoming available to allow housing equity to
be tapped, and that households do, in fact, re­
duce housing equity in the year or two before
death. For the purposes of this study, housing
wealth is included as part of total wealth (see
Box 1).

The Standard of Comparison
Will the baby boomers* real income and
wealth in retirement exceed that of their par­
ents? The answer to that question appears to

Box 1.
The Role of Home Ownership in Accumulating Wealth
Although home ownership is strongly corre­
lated with the accumulation of wealth, buying
a house certainly does not guarantee high lev­
els of wealth. True, homeowners have some
opportunities to accumulate capital that are
not available to renters. Some current home­
owners have benefited from capital gains on
housing assets in the past, and payment of the
monthly mortgage bill results in some "forced
saving” as a portion of the payment adds to
the homeowner’s equity in the house. After
paying off the mortgage, homeowners end up
with a sizable asset. However, other circum­
stances are more important factors in deter­
mining the accumulation of wealth, and
homeowners today cannot count on large
rates of return on their housing equity in the
future.
Alternatively, home ownership might in­
dicate the potential lifetime earnings of
household members or their preferences to­
ward saving. Perhaps people who are cashconstrained with little expected growth in
real income or are improvident with little con­
cern about the future do not save much or
become homeowners. Those who accept the




5

discipline that comes with saving for a down
payment, paying property taxes, and main­
taining the home in good condition may care
more about providing for their future through
the accumulation of wealth.
Some evidence of the association between
home ownership and the accumulation of
wealth is available from the Survey of Con­
sumer Finances, although the evidence in
large part reflects the relationship between
income and wealth. In 1989, the median val­
ue of wealth, excluding housing equity, for
homeowners ages 35 to 44 was more than 20
times as great as that for nonhomeowners.
For households headed by people ages 55 to
64, the median value of nonhousing wealth
for homeowners was almost 50 times as large
as that for nonhomeowners. However, in­
come for homeowners was higher than for
renters in each cohort examined for this
study. For example, median income of home­
owners ages 35 to 44 was $45,800 in 1989
compared with $25,200 for renters. Median
income of homeowners ages 55 to 64 was
$36,400 in 1989 compared with $17,700 for
renters.

6 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

be yes. But that standard, applied throughout
the economy, would imply a very low level of
national saving and abandoning the goal of in­
creasing standards of living. Higher rates of
saving-by baby boomers, their parents, and
the generation following the boomers—
and
lower government deficits would increase the
likelihood of continued growth in standards of
living, both for the boomers in retirement and
for their children.
Other studies of future retirement incomes
have used higher standards, though they are




September 1993

not related to any specific concern about over­
all national saving. Some studies suggest that
baby boomers might seek to maintain some
proportion of their preretirement standards of
living when they retire, with the proportion
ranging up to 100 percent. Full replacement
of preretirement income is probably a higher
standard than current retirees have met, and
there is no way of knowing what replacement
ratio boomers would find acceptable. (This
study does not examine how boomers' retire­
ment income might relate to their preretire­
ment income.)

Chapter Two

Are Baby Boomers Better Off Than
Their Parents Were as Young Adults?

ost baby boomers have higher real
incomes and more wealth than their
parents had at a comparable stage of
their lives, and these factors bode well for the
baby boomers’ financial circumstances in re­
tirement. However, some types of households
have not improved their lot in life as much as
others during the past three decades. Among
young adults ages 25 to 44, many of those
who are less well educated or do not own their
homes have lower household incomes and less
wealth than similar groups 30 years ago.

M

Incomes of Baby
Boomers and Their
Parents as Young Adults
Most households headed by young adults are
earning higher incomes today than did similar
households in the early 1960s. Based on data
from the 1960 Census and the 1990 Current
Population Survey, median household income
(in 1989 dollars) for the age group from 25 to
34 has risen 35 percent in real terms, from
$22,300 in 1959 to $30,000 in 1989.1 The co­

1.

Appendix A describes Census and Current Population
Survey data and reports sample sizes for the specific
household types analyzed in this study. It also discusses
how the choice of price deflator affects measured income
growth. CBO used the implicit personal consumption
expenditure deflator to convert 1959 dollars into 1989
dollars. The Current Population Survey measure of in­
come includes cash income from all sources, including
wages and salaries, business income, interest and divi­
dend income, and current income from pensions and
Social Security. It does not include capital gains or inkind income such as food stamps or governmentprovided medical care.




hort age 35 to 44 reports substantially larger
gains, with the median household income ris­
ing 53 percent, from $25,100 to $38,400. The
gains are even larger if incomes are adjusted
for the reduction in average household size
from 3.3 in 1960 to 2.6 in 1990.2 For house­
holds with a head of household age 25 to 34,
median household income adjusted for house­
hold size increased 75 percent. It jumped 82
percent for households with a head of house­
hold age 35 to 44.3
Unlike their parents, who enjoyed the bene­
fits of a dynamic economy as young adults,
baby boomers achieved these gains in income
despite the lackluster performance of the U.S.
economy in the 1970s and 1980s. The average
real rate of growth of the U.S. economy in the
1950s was about 4.1 percent a year, followed
by 4.0 percent average annual growth in the
1960s. Growth in earnings was strong during
the 1950s and 1960s as well. Disposable in­
come per full-time-equivalent worker in­
creased by 2.5 percent a year from 1947 to
1973.4

2.

The Congressional Budget Office used the official pov­
erty thresholds from the Bureau of the Census to adjust
for household size. In particular, total household cash
income was divided by the ratio of the poverty threshold
for the household's size to that for a household with only
one member. For example, the income of a four-person
household is divided by 2.0084 to obtain adjusted house­
hold income. When a household has only one person,
adjusted income is equal to household income.

3.

Young people ages 25 to 34 quite possibly got a faster
start on their careers in 1962 than was true in 1989. If
this is the case, income and wealth of the late boomers
might catch up to that of the early boomers with time.

4.

Frank Levy and Richard J. Murnane, "U.S. Earnings
Levels and Earnings Inequality: A Review of Recent
Trends and Proposed Explanations," Journal o f Eco­
nomic Literature (September 1992), pp. 1,333-1,381.

8 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

The economic environment was less rosy,
however, for baby boomers as young adults.
The average rate of real gross domestic prod­
uct (GDP) growth in the 1980s was only 2.4
percent, as the economy struggled with a stub­
born recession during the early years of the
1980s. Disposable income per full-timeequivalent worker increased by only 0.7 per­
cent a year from 1973 through 1988.
At the same time that the growth of the
economy as a whole was slowing, the distribu­
tion of incomes for households in the 25-34 age
group was becoming more skewed, and it
showed some increase in skewness for house­
holds in the 35-44 age group as well. For

September 1993

households headed by someone age 25 to 34,
the median real income for the two lowest
quintiles in 1989 was just 11 percent above
that in 1959, and the median real income for
the two highest quintiles was 56 percent
greater than in 1959 (see Table 1, top panel).

Changing Household
Composition
During the past three decades, and during the
1970s in particular, the number of households
composed of working father, stay-at-home
mother, and several children grew much more

Table 1.
Distribution of Income in 1959 and 1989, by Age (25 to 44) and
Marital Status of Household Head (In 1989 dollars)
1959
All Households
20th percentile
40th percentile
60th percentile
80th percentile
Median
Ratio of 80th to 20th percentile
Unmarried Head of Household
20th percentile
40th percentile
60th percentile
80th percentile
Median
Ratio of 80th to 20th percentile
Married Head of Household
20th percentile
40th percentile
60th percentile
80th percentile
Median
Ratio of 80th to 20th percentile

Age 25 to 34
1989

______ Age 35 to 44
1959
1989

13,400
19,800
24,700
32,000
22,300

14.900
25.000
35.100
49.900
30.000

14,200
21,900
28,400
38,100
25,100

19,700
32,200
45,400
63,100
38,400

2.39

3.35

2.68

3.20

4,900
10,100
16,200
24,300
22,300

9,500
17,800
26.100
38,500
30.000

5,300
11,300
17,200
25,500
25,100

11,400
20,500
30,100
44,900
38,400

4.96

4.05

4.81

3.94

15,400
20,700
25,500
32,400
23,300

21.900
32.100
42.100
55.900
36,700

17,000
23,900
30,000
38,700
26,700

29,000
40,800
53,100
71,200
46,800

2.10

2.55

2.34

2.46

SOURCE: Congressional Budget Office tabulations using the 1960 Census and the 1990 Current Population Survey.
NOTE: Values apply to the household at the 20th percentile, 40th percentile, and so on.




CHAPTER TWO

ARE BABY BOOMERS BETTER OFF THAN THEIR PARENTS WERE?

slowly than the number of less traditional
households.5 In households composed of mar­
ried couples, the wife was more likely to be
employed outside the home and less likely to
be the mother of three or more children. The
increased tendency of individuals to live
alone, have smaller families, and be part of
the paid labor force as wives and mothers
helps to account for the increase in skewness
of household incomes.
Increased Share of Households Headed
by Unmarried Individuals. In the younger
age group, the growing proportion of house­
holds headed by unmarried individuals ac­
counts for some of the increased number of
households at the lower end of the income dis­
tribution. These households tend to have low­
er incomes than married couples. The propor­
tion of households headed by unmarried peo­
ple rose from 14 percent to 46 percent among
people ages 25 to 34, and the median house­
hold income for unmarried households in­
creased 68 percent. Growth in household in­
come at each quintile was 58 percent or more,
with growth at the 20th and 40th percentiles
somewhat higher than at the 60th and 80th
percentiles (see Table 1, middle panel).®
In the older age group-those ages 35 to 4 4 the proportion of households headed by un­
married people rose from 16 percent to 38 per­
cent, and median household income for these
households grew slightly faster than for the
younger group. Median household income for
these households grew about 78 percent, and
income at each quintile increased by 75 per­
cent or more-again with faster growth in the
lower quintiles.

5.

Appendix B contains more detail on the changes in
household structure that occurred during the 1960s,
1970s, and 1980s for households of all ages.

6.

Each quintile contains 20 percent of the households,
rather than 20 percent of the individuals, to be consis­
tent with the focus in this study on the household as the
unit of comparison. After separating households headed
by unmarried people from those headed by married peo­
ple, the distributions look very similar whether weight­
ed by people or by households.




9

Household income for almost all households
headed by married people increased substan­
tially between 1959 and 1989, but at a slightly
slower rate than that for unmarried house­
holds. Median household income for marriedcouple households in the younger cohort in­
creased 58 percent between 1959 and 1989,
with more rapid growth above the median and
less rapid growth below it (see Table 1, bottom
panel). Increased skewness is seen in the ratio
of household income at the 80th percentile to
household income at the 20th percentile,
which rose from about 2.1 to 2.6.
Among the early boomers, households head­
ed by married people show even greater gains
in household income over their parents' gen­
eration. Among married couples in the 35-44
age group, household incomes increased sub­
stantially at every quintile, with the median
income growing 75 percent and only a small
increase in skewness.
Single people are gaining ground relative to
married people among the younger cohort as
young adults delay the age for first marriage,
but the older group shows little change in this
respect. Among those ages 25 to 34, the ratio
of the median household income for unmarried
people to that of married people rose from 0.56
in 1959 to 0.60 in 1989. Among the older co­
hort, however, the ratio remained steady at
about 0.54.
Increased Share of Households Without
Children. The share of households without
children more than doubled between 1959 and
1989, and this increase may account for some
of the skewness by allowing more adults to
work for pay, work longer hours, or get more
advanced training. In the 25 to 34 age group,
the percentage of households composed of un­
married individuals without children in­
creased from about 8 percent in 1959 to about
30 percent in 1989 (see Table 2). Real income
for the median household of this type is about
53 percent higher in real terms in 1989 than
in 1959. Among households headed by un­
married individuals with children, median
household income has risen by about twothirds since 1959. These households account

September 1993

10 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

Table 2.
Household Income in 1959 and 1989, Head of Household Age 25 to 44
Median Income
(1989 dollars)
1959
1989

Percentage of
Households
1959

1989

Head of Household A ge 25 to 34

By M
arital Status

All Households

22,300

30,000

100.0

100.0

Unmarried
No children
With children
All households

17,000
8,100
13,000

26,000
13,300
21,900

7.6
6.0
13.6

29.9
16.1
45.9

Married
No children
With children
All households

26,500
22,700
23,300

44,500
34,600
36,700

10.9
75.5
86.4

14.0
40.1
54.1

One earner
Two earners
All households

21,900
25,500
23,300

28,100
41,500
36,700

52.8
33.6
86.4

18.2
35.9
54.1

By Education of Head of Household
All Households

22,300

30,000

100.0

100.0

No High School Degree
High School Degree
Four Years of College

18,600
23,900
29,200

16,300
29,000
41,800

42.1
43.2
14.7

13.2
61.5
25.4

Head of Household A ge 35 to 44

By M
arital Status

All Households

25,100

38,400

100.0

100.0

Unmarried
No children
With children
All households

16,800
10,900
14,200

28,700
20,900
25,300

9.0
7.0
16.1

22.9
15.0
38.0

Married
No children
With children
All households

28,000
26,300
26,700

50,500
46,200
46,800

11.6
72.4
83.9

11.3
50.8
62.0

One earner
Two earners
All households

24,700
29,600
26,700

38,500
50,400
46,800

50.8
33.1
83.9

19.3
42.7
62.0

By Education of Head of Household
All Households

25,100

38,400

100.0

100.0

No High School Degree
High School Degree
Four Years of College

20,700
27,500
38,500

20,800
35,600
53,400

48.6
40.1
11.3

11.5
58.1
30.4

SOURCE:

Congressional Budget Office tabulations using the 1960 Census and the 1990 Current Population Survey.




CHAPTER TWO

ARE BABY BOOMERS BETTER OFF THAN THEIR PARENTS WERE?

for 16 percent of all households in 1989, up
from 6 percent in 1959.
Married couples with children made up 76
percent of all households in the 25-34 age
group in 1959, but accounted for just 40 per­
cent of all households in this age group in
1989. The median household composed of a
married couple with or without children in
this age group had real income in 1989 about
$13,000 above the median income of such a
household in 1959.
Early boomers with or without children and
married or not have made even greater gains
in income over their parents' generation at a
similar age than have late boomers. For
households headed by someone age 35 to 44, in
every case the median household income in
1989 was more than two-thirds higher than
that in 1959 (see Table 2). Despite the very
rapid growth in households headed by unmar­
ried individuals without children, median in­
come for these households grew about 71 per­
cent. Even larger gains were seen in married
households both with and without children.

More Women in the Labor Force
A significant rise in labor force participation
for married women and women with children
raises household incomes and also helps to ac­
count for some of the rapid rise in household
incomes at the upper end of the income distri­
bution. In 1960, only one-third of married
women of all ages were in the labor force, and
only one-fifth of those with children under six
years of age (see Table B-l in Appendix B). By
1990, about three-fifths of married women and
of married women with children under age six
were in the labor force. Since 1960, the pro­
portions of married women ages 25 to 34 and
35 to 44 in the labor force have doubled to 70
percent and 74 percent in 1990, respectively.
The earnings of working wives have proved
to be especially important to families since the
economic slowdown that began in the mid1970s. For households of all ages, married




11

couples in which the wife is in the paid labor
force reveal the highest median income in
1990, almost $47,000, as compared with about
$30,000 for families in which the wife is not in
the paid labor force (see Table B-2). Of course,
these differences would be less dramatic if the
value of in-kind income produced by stay-athome mothers were measured. Moreover, the
only family group that shows real growth in
income since 1970 is the married-couple fam­
ily in which the wife is part of the paid labor
force. Median income of married-couple fam­
ilies with working wife is almost triple that of
families with a female householder and no
husband present.
The general pattern of weaker growth in in­
come for one-earner couples also applies to the
baby boomers, and especially to the late
boomers. For the 25-34 age group, real income
for the median married couple with one earner
grew just 28 percent between 1959 and 1989,
as their presence among all married house­
holds in this age group dropped from threefifths to about one-third. (Percentages of oneearner households in Table 2 refer to the share
of one-earner households among all house­
holds rather than among married households.)
By contrast, the median couple with two earn­
ers reported income that was 63 percent high­
er in 1989 than in 1959. Median household in­
come for one-earner married couples in the 3544 age group rose by more than one-half, as
their share of all married couples fell from
three-fifths in 1959 to less than one-third in
1989. The median income of two-earner cou­
ples rose sharply, standing 70 percent higher
in 1989 than in 1959.

More Higher Education
for Baby Boomers
Baby boomers have responded to the chal­
lenges of their changing environment by em­
bracing higher education and becoming one of
the best educated cohorts in history, boosting
incomes at the upper end of the income distri­
bution as a result. Among people ages 25 to 29
in 1960, for example, only three-fifths were

12 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

high school graduates and just over one-tenth
had completed four years of college.7 In 1990,
by contrast, more than four-fifths of those ages
25 to 29 were high school graduates and al­
most one-quarter had completed four years of
college.
Among households in the 25-34 age group,
educational attainment makes the difference
between losses and gains in real income com­
pared with the previous generation. Where
the head of household did not finish high
school, median household income fell from
$18,600 in 1959 to $16,300 in 1989. Two-fifths
of households with a head of household age 25
to 34 fell into this category in 1959. However,
just one-eighth of all households in the age
group were of this type in 1989. Households
headed by high school graduates had a median
income that was 21 percent higher in 1989
than similar households in 1959, indicating
that the value of a high school degree in the
workplace has changed over time. Households
headed by a person who has completed four
years of college had a median income that was
43 percent higher in 1989 than that of a simi­
lar household in 1959.8
Although the gains in real income apply to
the median household in each of the three edu­
cation classes among those ages 35 to 44, the
largest gains again belong to those households
in which the head completed four years of col­
lege (see Table 2). Median household income
for households headed by a person with four
years of college increased about 39 percent,
and their share of all households rose from 11
percent to 30 percent. Increased participation
in the labor force among spouses of highly edu­
cated men may account for a large part of
these gains in income. Those households

7.

Bureau of the Census, Statistical Abstract of the United
States: 1992 (1992), Table 219.

8.

This figure is consistent with Levy and Murnane’s result
that the ratio of earnings of males who work full time,
ages 25 to 34, with 16 years of schooling to those with 12
years of schooling rose from 1.22 in 1971 to 1.38 in 1987.
See Levy and Murnane, "U.S. Earnings Levels and
Earnings Inequality."




September 1993

headed by a person who did not finish high
school showed growth in real income of just 0.5
percent.

Wealth of Baby Boomers
and Their Parents as
Young Adults
Two primary factors determine how well peo­
ple live when retired: their own saving and
the level of transfers from people still work­
ing. The extent to which young adults have
been able to accumulate wealth, some or all of
which can be used to finance consumption dur­
ing retirement, is measured by the level of
wealth and by the ratio of household wealth to
household income.
Data on wealth in this study come from the
Survey of Consumer Finances for 1962 and
1989 and include liquid as well as illiquid fi­
nancial assets such as individual retirement
accounts (IRAs) or Keogh plans; the value that
can be borrowed against employer-provided
pension accounts; the value of any housing,
land, and automobiles owned less the debt
owed on them; less other nonhousing liabili­
ties such as credit-card debt. The Survey of
Consumer Finances reports neither the value
of future Social Security benefits nor the
illiquid portion of pension accounts.
In general, the survey data indicate that
most households in the age groups from 25 to
34 and 35 to 44 had higher wealth-to-income
ratios in 1989 than comparable households in
1962. However, certain types of households
show more improvement than others accord­
ing to this measure.
The median ratio of wealth to income for
households with a head of household age 25 to
34 has risen from 0.25 in 1962 to 0.42 in 1989
(see Table 3). For households with a head age
35 to 44, the median ratio has increased
slightly from 1.19 to 1.23. This rise suggests
that the typical young adult household has

CHAPTER TWO

ARE BABY BOOMERS BETTER OFF THAN THEIR PARENTS WERE?

Table 3.
Wealth-to-lncome Ratios and Wealth Within Income Quintiles in 1962 and 1989,
Head of Household Age 25 to 44
Median Ratio of
Wealth to Income
1962
1989

Median Wealth
(1989 dollars)
1962
1989

Head of Household Age 25 to 34
All Households
Lowest income quintile
Second income quintile
Middle income quintile
Fourth income quintile
Highest income quintile
Median

0.02
0.14
0.32
0.57
0.63
0.25

0.02
0.21
0.45
0.43
1.07
0.42

300
2,500
7,300
17,400
25,500
6,100

200
3,000
10,900
16,600
73,600
9,000

Unmarried Head of Household3
Lowest income third
Middle income third
Highest income third
Median

0
0.05
0.86
0.05

0
0.19
0.45
0.18

0
700
24,200
400

0
2,200
13,900
1,800

Married Head of Household
Lowest income quintile
Second income quintile
Middle income quintile
Fourth income quintile
Highest income quintile
Median

0.03
0.14
0.40
0.57
0.65
0.31

0.38
0.47
0.44
0.45
1.47
0.67

300
2,800
9,000
17,300
28,800
7,900

2,300
10,900
11,700
19,100
90,900
17,300

Head of Household Age 35 to 44
All Households
Lowest income quintile
Second income quintile
Middle income quintile
Fourth income quintile
Highest income quintile
Median

0.17
0.72
1.19
1.64
1.61
1.19

0.17
0.84
1.73
1.32
2.08
1.23

1,900
11,600
31,200
57,600
81,000
29,300

1,000
23,000
64,400
69,900
167,500
54,200

Unmarried Head of Household3
Lowest income third
Middle income third
Highest income third
Median

0
0.72
0.94
0.56

0
0.70
1.64
0.62

0
10,300
23,700
6,300

0
17,900
80,000
16,700

Married Head of Household
Lowest income quintile
Second income quintile
Middle income quintile
Fourth income quintile
Highest income quintile
Median

0.54
1.14
1.05
1.78
1.59
1.28

0.30
1.74
1.28
1.80
1.84
1.49

7,700
23,200
29,300
61,900
85,800
36,500

6,300
53,100
61,000
102,700
185,100
70,100

SOURCE:
a.

Congressional Budget Office tabulations using the Survey of Consumer Finances in 1962 and 1989.

The sample size for unmarried people in this age group was too small in 1962 to calculate quintiles.




13

14 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

been able to squirrel away assets more readily
in the 1980s than was true in the 1950s.
A look at the accumulation of wealth across
the income distribution shows that poorer
households have not become wealthier during
the last three decades. For households in the
age bracket of 25 to 34, the median value of
wealth within the lowest income quintile
shows a slight decline from 1962 to 1989, and
the median ratio of wealth to income shows no
change (see Table 3). These patterns are also
true of households ages 35 to 44 in the lowest
income quintile.
If one separates households headed by un­
married people from those headed by married
people, substantial differences are notable in
the accumulation of wealth. Households head­
ed by unmarried people show much lower ra­
tios of wealth to income and lower wealth than
do those of married couples. Among those
households headed by unmarried people ages
25 to 34, the median ratio of wealth to income
has more than tripled from 1962 to 1989, but
remains less than one-third that of married
couples. However, within the top third of the
income distribution of singles, both the medi­
an ratio of wealth to income and the median
value of wealth have declined. By contrast,
the median wealth-to-income ratio of house­
holds with a married head of household age 25
to 34 within the highest income quintile has
more than doubled. The median ratio for all
married couples has more than doubled as
well.
Among households in the age bracket of 35
to 44, those headed by married or unmarried
individuals in the top tier of the income dis­
tribution show modest to substantial growth
in the median ratio of wealth to income from
1962 to 1989. The median ratio for singles in­
creased 11 percent, and that for married cou­
ples increased 16 percent. Median wealth for
single people in 1989 was about one-fourth
that of married couples, up from one-sixth in
1962.
The amount of wealth not tied up in housing
also varies widely between single people and




September 1993

married couples. In 1989, the median amount
of nonhousing wealth held by single people in
the 25-34 age group was just $1,100, and that
held by married couples was $7,800 (see Table
4). For households in the 35-44 age group, sin­
gle people held $4,000, and married couples
held $23,400.
Role of Home Ownership. Home ownership
is an important factor in accounting for the ac­
cumulation of wealth in the 1980s, reflecting
not only gains in housing assets but also the
higher incomes and saving preferences of
homeowners. Those young households who
are homeowners show relatively higher
wealth-to-income ratios in 1989 than in 1962,
and those who do not own their homes show
stagnant or lower wealth-to-income ratios.
The median ratio for households with heads of
household ages 25 to 34 who were not home­
owners stood at 0.08 in 1962 and at 0.12 in
1989, showing little change in magnitude.
Nonhomeowners ages 35 to 44 showed a ratio
of 0.29 in 1962, and this ratio dropped to 0.15
in 1989.
Conversely, the wealth-to-income ratios of
homeowners show considerable improvement.
For homeowning households in the 25-34 age
group, the median ratio increased from 0.7 to
1.1. For those in the 35-44 age group, the me­
dian ratio increased from 1.6 to 1.9. An analy­
sis of the composition of wealth suggests that
the share of housing assets in total wealth has
not changed much for most household types
since 1962 but has increased for wealthier
households in the 25-34 age group.
Role of Marital Status and Children. A
breakdown of young adult households by co­
hort, marital status, and the presence of chil­
dren points to further disparities in the accu­
mulation of wealth. Almost nine-tenths of un­
married households with heads of household
ages 25 to 34 with children had less wealth
than income both in 1962 and in 1989 (see
Table C-l in Appendix C). Among marriedcouple families ages 35 to 44 with or without
children, however, less than one-half had less
wealth than income in 1962, and by 1989 few­
er than two-fifths reported less wealth than

CHAPTER TWO

ARE BABY BOOMERS BETTER OFF THAN THEIR PARENTS WERE?

income. Being older and married implies
more wealth relative to income, and this dif­
ference has grown over the last three decades.
The value of nonhousing wealth relative to
income has not changed much over time for
most household types, whether married or not
and whether they have children or not. If one
compares the percentage of households with
nonhousing wealth equal to less than one-half
of their income in 1989 with that in 1962, only
two types of households show a sizable change.
Households headed by an unmarried person
age 35 to 44 without children show a substan-

15

tial decline in the proportion of households
with nonhousing wealth equal to less than
one-half of income, meaning that these baby
boomers have accumulated more nonhousing
wealth relative to their income than did their
parents. The same is true for married house­
holds ages 25 to 34 without children.
One- Versus Two-Earner Families. When
wives enter the labor force, families accumu­
late wealth more readily. Families with mar­
ried couples with one earner in 1989 had less
than half the median nonhousing wealth of
two-earner families (see Table C-2). The me-

Table 4.
Wealth and Income of Households in 1962 and 1989, by Age (25 to 44)
and Marital Status of Household Head (In 1989 dollars)
1962
All Households
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half of income
Unmarried Head of Household
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half of income
Married Head of Household
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half of income
SOURCE:

Aoe 25 to 34
1989

1962

1989

22,300
6,100
2,400

30,000
9,000
4,200

25,100
29,300
12,200

38,400
54,200
17,400

77

69

47

42

77

72

51

55

13,000
400
300

21,900
1,800
1,100

14,200
6,300
1,900

25,300
16,700
4,000

79

82

61

59

80

77

60

65

23,300
7,900
3,200

36,700
17,300
7,800

26,700
36,500
15,800

46,800
70,100
23,400

77

61

45

35

77

69

49

50

Aae 35 to 44

Congressional Budget Office tabulations using the 1962 and 1989 Survey of Consumer Finances. Data on median incomes
come from the 1960 Census and the 1990 Current Population Survey.




16 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

dian value of total wealth was lower for these
one-earner families as well. In addition, oneearner families in 1989 seem to be slipping
behind their comparable group in 1962. The
proportion of those households ages 35 to 44
with nonhousing wealth equal to less than
one-half of income rose from 47 percent to 64
percent between 1962 and 1989. For those
ages 25 to 34, the proportion was approxi­
mately unchanged.
In most cases in 1962, single-earner fam­
ilies had higher median levels of wealth and
nonhousing wealth than did two-earner fam­
ilies. In 1989, however, wealth and nonhous­
ing wealth were greater for two-earner fam­
ilies. An explanation may be that wives who
worked in 1962 did so because their families
needed the second income so that they could
save more, whereas wives work today for other
reasons as well.
Education. Over the past three decades,
higher education has become both more acces­
sible to students and more important to em­
ployers. That trend has had implications for
both the growth in incomes and the accumula­
tion of wealth.
Those households with a head of household
who completed four years of college report not
only much higher incomes and wealth than
less educated households in the same year, but
also bigger increases in income and wealth be­
tween 1962 and 1989 (see Table C-3). At the
same time, households in which the head has
no high school degree are falling further be­
hind their better-educated peers. For exam­
ple, the college-educated head of household
age 35 to 44 in 1989 shows median wealth of
about $103,000. In comparable households
where the head has a high school degree, me­
dian wealth is about $46,000. When the head
has no high school degree, median wealth is
only $6,000.
Median wealth rose about 50 percent be­
tween 1962 and 1989 for the college-educated




September 1993

household age 35 to 44. But it rose only slight­
ly for those with high school degrees and fell
by about 56 percent for those without a high
school diploma.

Composition of Assets
and Liabilities
How have baby boomers shifted the composi­
tion of assets and liabilities relative to that of
their parents? For example, if most of the in­
crease in wealth comes from capital gains on
housing assets, baby boomers need to be espe­
cially wary of a sharp decline in housing pric­
es. Housing assets have not changed much as
a share of total wealth, but they have more
than doubled in real dollar terms for the medi­
an household age 35 to 44 (see Table C-4). On
the liabilities side, consumer debt has also in­
creased in dollar terms but not as a fraction of
wealth.

Composition of Assets
Median values in real terms of liquid financial
assets-such as checking accounts, money
market accounts, and certificates of depositincreased about 2.5 times for both age groups
from 1962 to 1989. At the same time, the
amount held in other financial assets-such as
savings bonds or corporate bonds and stockshas declined.
The median value of housing assets was
zero for households ages 25 to 34 in both 1962
and 1989 because just 39 percent of these
households were homeowners in 1962 and
only 43 percent in 1989. For the 35-44 age
group, however, the median household re­
ported $23,300 in housing assets (including
both principal residence and vacation homes)
in 1962, and this value more than doubled to
$50,000 in 1989.

CHAPTER TWO

ARE BABY BOOMERS BETTER OFF THAN THEIR PARENTS WERE?

At the same time, tangible nonhousing
assets--such as cars and real estate bought for
investment purposes-rose substantially for
both age groups. Excluding autos from both
assets and liabilities reduces the median value
of wealth by about $2,200 for those ages 25 to
34 and by about $1,800 for those ages 35 to 44
in 1962. In 1989, the median value of wealth
is reduced by about $3,400 for the 25-34 age
group and by $4,800 for the 35-44 age group.
The median amount that could be borrowed
against retirement and profit-sharing ac­
counts was reported to be zero in both 1962
and 1989. Similarly, the median value of in­
dividual retirement accounts or Keogh ac­
counts was zero in both years.

Composition of Liabilities
The real value of liabilities rose substantially
for households in the 35-44 age group, but in­
creased much more modestly for those ages 25
to 34. In 1989, 66 percent of early boomers
were homeowners; the reported median mort­
gage value for all households was $12,000. In
1962, about 57 percent of households in this
age group were homeowners, and the median
value of housing liabilities among all house­
holds ages 35 to 44 was zero.
Nonhousing liabilities, primarily consumer
debt such as credit cards and auto loans,
showed a modest rise for late boomers but a
more significant increase for early boomers.
As a percentage of total wealth, however, the
positions of either group of households in 1962
and in 1989 change little. The median ratio of
consumer debt to wealth is 7 percent for
households in the 25-34 age group in 1962,
and it drops to 5 percent in 1989. For house­
holds in the 35-44 age group, the median ratio
remains at 4 percent both in 1962 and in 1989.
Changes in the mean ratio of consumer debt to
wealth are similarly small. Nonhousing
liabilities are slightly higher than consumer
debt because they include loans secured by in­
surance or other assets and debt on invest­
ment real estate in addition to consumer debt.




17

Composition by Home
Owner Status
A comparable breakdown of assets and liabili­
ties for nonhomeowners and homeowners
sheds more light on disparities in the accu­
mulation of wealth. The median value of
wealth for nonhomeowners was stagnant or
declined between 1962 and 1989 (see Table
C-4). Early boomers who do not own their
home show a sharp decline in the median val­
ue of financial assets and a modest increase in
consumer debt. Those late boomers who do not
own a home show somewhat higher financial
assets and little change in consumer debt; the
median value of their total wealth increased
slightly.
The picture is quite different for homeown­
ers. Both age groups show substantial in­
creases in the median value of liquid financial
assets and a rise in both housing assets and in
nonhousing tangible assets. The rise in the
value of housing is especially large for home­
owners in the 35-44 age group. Median mort­
gage values, reported as housing liabilities,
increase about 20 percent for homeowners in
the younger group and about 63 percent for
homeowners in the older group. Consumer
debt more than doubles for late boomers and
more than triples for the older group. Again,
however, consumer debt as a percentage of
wealth changes little. The median ratio re­
mains at 5 percent for early boomers who are
homeowners and at 8 percent for late boomers.
Despite the dramatic rise in the price of
housing relative to other prices during the
1970s and 1980s, the share of housing equity
in total wealth has not changed much for most
homeowners between 1962 and 1989. For
households in the 35-44 age group who own
their home, the mean value of housing equity
as a share of total wealth remained at about
37 percent and the median ratio hovered
around 62 percent. Within the bottom, mid­
dle, and top thirds of the wealth distribution,
the shares have remained stable as well. For
homeowners in the 25-34 age group, wealthy
households held a higher proportion of their

18 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

wealth in housing in 1989 than in 1962, but
less wealthy households held a lower propor­
tion in housing. The median ratio of housing
equity to wealth declined, and the mean ratio
increased. For those in the middle third of the
wealth distribution, however, the mean ratio
remained at about 70 percent.

Conclusions
In most cases, baby boomers are financially
better off than their parents were as young
adults, as measured by household incomes and
ratios of wealth to income. However, survey
data reveal some important qualifications.
First, early boomers are relatively better off
compared with their parents' generation than
are late boomers. Those born between 1955
and 1964 tend to be struggling more than
those born 10 years earlier, though this situa­
tion may change as late boomers advance in
their careers. Second, postsecondary educa­
tion has big payoffs in today's economy.




September 1993

Young adults with only a high school degree
or less are not making big gains in income or
wealth compared with their parents. Third,
married couples with only one earner are slip­
ping behind those households with two earn­
ers. And finally, home ownership seems to
play an important role in the accumulation of
wealth.
A few surprises have emerged from this
analysis. Widespread concern exists that baby
boomers are not doing as well as their parents,
but the strong economic growth before the ear­
ly 1970s and the weak but positive growth
since then has produced growth in real income
for most individuals. More advanced educa­
tional attainment also plays a role. Many
households are doing far better than their par­
ents with the help of a working spouse, though
the improvement would be smaller if the value
of household production were known and could
be included in the analysis. Households that
own their homes have enjoyed sizable capital
gains, but nonhousing wealth has not in­
creased as a percentage of income since the
early 1960s for most households.

Chapter Three

What Factors Have Influenced
the Financial Well-Being of
Current Retirees?

or the most part, the financial health
of retirees today is good. Several im­
portant factors are responsible for this
healthy condition.

F

For those who started their working life in
the 1950s, strong growth in productivity in the
economy through the 1960s and into the early
1970s meant strong growth in real wages. Al­
though growth in productivity has not been so
strong since then, those workers built a solid
financial foundation with which to buy a
house, start a family, and save for future
needs. Social Security benefits are also quite
generous compared with those paid to earlier
generations, and private pensions have be­
come more widespread and are providing a
greater share of retirement income. In addi­
tion, gains from home ownership have ex­
ceeded the expectations of most, and the gov­
ernment is picking up a large share of medical
expenses.
Unfortunately, certain types of older adults
do not face such a secure financial position in
retirement despite the optimistic outlook for
the group as a whole.1 Those who are strug­
gling tend to be unmarried and not working
before normal retirement age, or have less

1.

Angus Maddison, "Growth and Slowdown in Advanced
Capitalist Economies: Techniques of Quantitative As­
sessment," Journal of Economic Literature (June 1987),
p. 649.

Incomes of Older Adults
Older adults who are now close to retirement
age began their working lives during the
"post-war golden age, which ended in 1973."2
As noted in Chapter 2, real disposable income
for each full-time-equivalent worker increased
by 2.5 percent a year from 1947 to 1973, but
only by 0.7 percent a year from 1973 to 1988.
Being part of the labor force during the 1950s
and 1960s meant that incomes rose faster than
had been expected, perhaps leading to more
savings as well as more consumption.
One indication of rapid income growth in
the early postwar period comes from tracking
median individual incomes of men ages 45 to
54 who worked year-round and full time from
1948 to 1988.3 Median income, adjusted to in­
clude employer contributions for both private
fringe benefits and social insurance, doubled
from $17,000 in 1948 to $34,074 in 1973, in
1988 dollars. Between 1973 and 1988, the in­
crease was much more modest, rising to just
$35,943 in 1988.

A recently released survey contains more detailed in­
formation on income and wealth by race and health sta­
tus for those ages 51 to 61 in 1992. See F. Thomas Juster
and others, Health and Retirement Study (National In­
stitute on Aging, June 1993).

2.

than a high school education. Older unmar­
ried women in particular are a high-risk
group. In addition, home ownership makes a
big difference in the accumulation of wealth.




3.

Frank Levy and Richard J. Murnane, "U.S. Earnings
Levels and Earnings Inequality: A Review of Recent
Trends and Proposed Explanations," Journal o f Eco­
nomic Literature (September 1992), p. 1,337.

20 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

Survey Data on Incomes
The 1990 Current Population Survey reports
the median income of households headed by a
person age 55 to 64 to be $32,300 in 1989, but
this figure masks substantial variation within
the group (see Table 5). A good part of the
variation is associated with the marital status
of the head of household. Some of the vari­
ation occurs because the group contains both

Table 5.
Distribution of Income in 1989,
by Age (55 to 74) and Marital Status
of Household Head (In 1989 dollars)
Age
55 to 64

Age
65 to 74

All Households
20th percentile
40th percentile
60th percentile
80th percentile
Median

13,900
25.600
39,400
60.600
32,300

9,500
16,100
24,800
39,500
20,300

Ratio of 80th to
20th Percentile

4.36

4.16

Unmarried Head
of Household
20th percentile
40th percentile
60th percentile
80th percentile
Median

7,200
14,500
23,400
37,200
18,900

6,500
10,400
15,600
26,100
12,800

Ratio of 80th to
20th Percentile

5.17

4.02

Married Head
of Household
20th percentile
40th percentile
60th percentile
80th percentile
Median

22,000
34,900
49.200
71.200
41,400

15,800
23,400
32.700
49,100
27.700

Ratio of 80th to
20th Percentile

3.24

3.11

SOURCE:

September 1993

households with no current earnings and
households with at least one earner still em­
ployed full time. The labor force participation
rate for men ages 55 to 64 was 67 percent in
1989, down from 87 percent in I960.4 The la­
bor force participation rate for women ages 55
to 64 has risen, however, from 37 percent in
1960 to 45 percent in 1989.
Households headed by someone age 65 to 74
report median income of $20,300, with vari­
ation that is similar to but slightly smaller
than that in the 55-64 age group. The vari­
ation may be smaller for two reasons. Support
programs for people age 65 and older in the
low end of the income distribution help them
to maintain a modest level of income, and few­
er members of households in the upper end
continue to participate in the labor force. In
1989, the participation rate of people age 65
and over in the labor force was just 17 percent
for men and only 8 percent for women.
Marital status, the number of earners in the
household, and educational attainment play
important roles in determining incomes of old­
er people and in explaining variations in
household income, just as they did for the baby
boomers.
Marital Status. Among those ages 55 to 64,
the median income of households headed by
unmarried individuals is about $19,000, and
that of households headed by married in­
dividuals is about $41,000. About 63 percent
of households in this age group are married
couples.
The distribution of household incomes is es­
pecially skewed among households headed by
unmarried people in the 55-64 age group (see
Table 5). For these households, the income of
the household at the 80th percentile is 5.2
times the income of the household at the 20th
percentile. At the 20th percentile, the income
of households headed by unmarried people is
less than one-third that of married couples.

Congressional Budget Office tabulations using the
1990 Current Population Survey.

NOTE: Values apply to the household at the 20th percentile,
40th percentile, and so on.




4.

House Committee on Ways and Means, Overview o f
Entitlement Programs: 1992 Green Book, WMCP: 102-44
(May 15,1992), Table 5, p. 1,238.

CHAPTER THREE

FACTORS IN THE FINANCIAL WELL-BEING OF CURRENT RETIREES

Among those ages 65 to 74, the median in­
come of households headed by unmarried peo­
ple is $12,800, and that of households headed
by married individuals is $27,700. The in­
come of households headed by unmarried peo­
ple is about half that of households headed by
married people at the median and at each
quintile (see Table 5). Of households in the
65-74 cohort, 50 percent are married couples.
Relatively low divorce rates have helped to
keep household incomes at a comfortable level
for many older adults, particularly for women.
Low divorce rates lead to higher incomes in re­
tirement because many wives receive Social
Security benefits under their husband's work
history and some receive private pension
benefits under his coverage as well. Divorce
in many cases leads to lower incomes for older
women than does the death of a spouse. For
example, divorced women do not receive
spousal or survivorship benefits under Social
Security unless they were married for more
than 10 years before the divorce.
Older people who are no longer married are
more likely to have lost a spouse through
death than through divorce. This situation
may be less true for baby boomers when they
reach retirement age. The median age of
women at the time of divorce has not changed
much in recent decades, rising from 30 in 1970
to 33 in 1988.5 But the divorce rate per 1,000
population has grown from 2.2 in 1960 to 3.5
in 1970 and 5.2 in 1980, with some retrench­
ment to 4.7 in 1990.6
Number of Earners. The number of earners
in the household has a bigger influence on the
median income of households in the 55-64 age
group than it does for the older cohort.7 For
households in which the head is 55 to 64 years
of age and not married, participation in the
5.

Bureau of the Census, Statistical Abstract of the United
States: 2992(1992), Table 132.

6.

Ibid., Table 80. The stock of divorced women has risen
by less than the increase in the rate of divorce because
the rate of remarriage has increased.

7.

A person qualifies to be an earner if he or she reports at
least one hour per week in the paid labor force.




21

labor force implies a median income of $24,900
as compared with $11,100 when no adult in
the household is working (see Table 6). For
households in the same age group with hus­
band and wife, the median income rises from
$24,900 if neither spouse is an earner to
$39,100 for one earner to $53,300 for two
earners.
Participation in the labor force matters
somewhat less for the median household in­
come of adults in the 65-74 age group, perhaps
because many of those who work are doing so
only part time. Alternatively, only those who
need the additional income are still in the
labor force. For example, the difference in me­
dian incomes is only $6,800 between having
no earners and one earner for households
headed by an unmarried person in this older
age bracket (see Table 6).
More wives in the younger cohort of retirees
contributed to the financial position of the
household during their working years. Par­
ticipation of wives in the labor force grew sig­
nificantly throughout the 1960s, 1970s, and
1980s, particularly among women who earned
relatively high incomes. If one follows the co­
hort age 25 to 34 in 1960, rapid changes take
place in the typical role of women in the fam­
ily from housewife to working woman. Par­
ticipation in the labor force of married women
ages 25 to 34 stood at 29 percent in I960.8
This same cohort in 1970, then ages 35 to 44,
reported participation rates of 47 percent. By
1990, the participation rate for married wom­
en ages 45 to 64 was 57 percent.
Educational Attainment. Differences in
educational attainment and the strong educa­
tion premium explain a large part of the vari­
ation in household incomes as well. One-fifth
of the heads of households in the 55-64 age
group had completed four years of college in
1989 and reported median income of $58,100.
This income compares with $33,800 for those
with a high school degree and $20,100 for
those who did not finish high school. The
8.

Bureau of the Census, Statistical Abstract 1992, Table
618.

September 1993

22 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

Table 6.
Household Income in 1989, Head of Household Age 55 to 74
Aae 55 to 64
Percentage of
Median Income
(1989 dollars)
Households

Aqe 65 to 74
Median Income
Percentage of
(1989 dollars)
Households

Marital Status
Not married
Married
All households

18,900
41,400
32,300

37.1
62.9
100.0

12,800
27,700
20,300

47.7
52.3
100.0

Number of Earners
Unmarried households
No earners
One earner
All households

11,100
24,900
18,900

45.0
55.0
100.0

11,700
18,500
12,800

84.0
16.0
100.0

Married households
No earners
One earner
Two earners
All households

24,900
39,100
53,300
41,400

20.9
37.9
41.2
100.0

24,400
33,800
47,200
27,700

66.2
25.0
8.9
100.0

Education of Head
No high school degree
High school degree
Four years of college

20,100
33,800
58,100

28.9
51.3
19.8

14,100
21,900
38,600

37.3
48.1
14.6

All Households

32,300

100.0

20,300

100.0

SOURCE:

Congressional Budget Office tabulations using the 1990 Current Population Survey.

households in the 65-74 age group with a head
of household who completed four years of col­
lege report median income of $38,600. Those
with a high school degree or less show median
incomes that are one-third to three-fifths as
large.
Men and women with four years of college
who work full time have earned between 30
percent and 55 percent more than those with
high school diplomas since at least 1971.9 For
example, the ratio of earnings of males ages 35
to 44 with 16 years of schooling to those with
12 years of schooling was 1.50 in 1971. The
corresponding ratio for females was 1.47. The
same education premiums applied to males
and females ages 45 to 54 in 1987.

9.

Levy and Murnane, "U.S. Earnings Levels and Earnings
Inequality," p. 1,355.




The earnings premium associated with age
is another factor explaining strong income
growth during the working years of older
adults. In 1971, men ages 45 to 54 with four
years of college earned 36 percent more than
those ages 25 to 34. This age premium grew to
45 percent in 1987. The corresponding premi­
ums for males with 12 years of schooling were
8 percent and 33 percent. The age premiums
for women were smaller and grew less rapidly,
varying from 2 percent in 1971 for high school
graduates to 10 percent in 1987 for those with
four years of college.

The Role of Social
Security
Social Security is the largest single component
of incomes for the elderly, representing almost
two-fifths of the total income of the population

FACTORS IN THE FINANCIAL WELL-BEING OF CURRENT RETIREES

CHAPTER THREE

age 65 or older in 1990 (see Figure 2).10 In­
come from assets provides 25 percent, and pen­
sion income and earnings each account for 18
percent of the total.

Figure 2.
Shares of Total Income of Households
Age 65 or Older, 1990
Percent

50 |
-----------------------------------------------------------------------

Social
Security

SOURCE:

Asset
Income

Pensions

Earnmgs

Public
Assistance

Congressional Budget Office using data from
Susan Grad, Income of the Population 55 or Older,
1990 (Office of Research and Statistics, Social Secu­
rity Administration, April 1992).

Social Security receives a significant por­
tion of the credit for increasing the incomes of
the elderly to a standard roughly equivalent
to the rest of the population. About 95 percent
of all households age 65 or older in 1990 re­
ceived Social Security benefits, up from about
70 percent of the corresponding group in the
early 1960s. Although Social Security pro­
vides 40 percent of total income for all those 65
or older, its importance is much greater for
those in the lower portions of the income dis­
tribution. Those elderly households with in­
come below the poverty threshold in 1990 re­
ceived 71 percent of their total income from
Social Security, whereas those with income at
least three times the poverty threshold de­
rived only 25 percent of their income from this
source.11

23

Social Security's benefit structure reflects
two policy objectives: to provide an income
floor loosely tied to lifetime earnings, and to
supply relatively more in benefits to those
with greater perceived needs. For someone
who always earned the average wage and re­
tired at age 65, Social Security benefits re­
place about 40 percent to 45 percent of aver­
age earnings. However, because benefits are
calculated using a three-tier formula designed
to replace relatively more of earnings for low
earners than for higher earners, this so-called
replacement ratio is higher for people with
lower lifetime earnings and lower for higher
earners.12 In addition, spouses may also re­
ceive benefits based on the worker's earnings
record, reflecting greater income require­
ments for couples than for singles.
When comparing the Social Security income
of the elderly population in 1990 with that in
other years, some consideration should be giv­
en to particular factors that bolstered their
benefits relative to cohorts born both before
and after them. When the indexation of Social
Security was introduced in 1972, the method
used for adjusting benefits for future retirees
overindexed benefits for inflation. Although
the indexing method was corrected in the So­
cial Security Amendments of 1977, retirees
born from 1911 to 1916 (and to a lesser extent,
those born from 1917 to 1921) continued to
benefit from the flawed indexing method.
A more general problem associated with the
indexation of entitlement benefits during the
late 1970s and early 1980s concerns the con­
struction of the consumer price index (CPI),
particularly the housing component of the in­
dex. The CPI in the 1970s tried to reflect

Susan Grad, Income of the Population 55 or Older, 1990
(Office of Research and Statistics, Social Security Ad­
ministration, April 1992).




House Committee on Ways and Means, 1992 Green
Book, Table 10, p. 1,244. The poverty threshold is
based on Census (M
Orshanky,f) poverty levels. For ex­
ample, the poverty threshold for a family of two with
head age 65 or older was $7,905 in 1990. For a single
person age 65 or older, the poverty threshold in 1990
was $6,268. See the 1992 Green Book, Table 1, p. 1272.

12.
10.

11.

The replacement rate in 1993 is about three-fifths for
those with low preretirement earnings and is about
one-fourth for those with maximum preretirement
earnings.

24 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

home purchase costs for the proportion of the
population that bought a new home each year.
The rapidly rising housing costs during this
period resulted in an overstatement in the
CPI, which was the basis for the annual bene­
fit adjustments in Social Security as well as in
other indexed cash-benefit programs. The in­
dex was changed in 1983 to reflect the rental
equivalent for owner-occupied housing. The
rental equivalence method moves around less
during periods of sharp increases in the price
of housing and during periods of large move­
ments in interest rates.
Current retirees need not worry about insol­
vency in the Old Age and Survivors Insurance
(OASI) Trust Fund, but some trouble may ap­
pear in the next 10 to 15 years in other parts of
the program. The 1993 Social Security trust­
ees' report claims that the OASI trust fund
will have surplus income through 2015 but is
projected to be exhausted in 2044 under the
midrange assumptions.13 However, the Dis­
ability Insurance Trust Fund is projected to
become insolvent in 1995, and the balance be­
tween income and outgo of the Hospital Insur­
ance part of Medicare is projected to become
increasingly negative if no changes are made.

The Role of Pension
Income
Pension income in retirement has become
more widespread over the last 30 years, both
in terms of the number of households receiv­
ing such income and in terms of the share of
total income coming from this source. The
proportion of households receiving income
from all types of pensions was 44 percent in
1990.14 Pension income accounted for 18 per-

13. Board of Trustees, Federal Old-Age and Survivors Insur­
ance and Disability Insurance Trust Fund, The 1993 An­
nual Report, House Document 103-63 (April 7, 1993),
Table HF.19.
14. House Committee on Ways and Means, 1992 Green Book,
Table 9, p. 1,243.




September 1993

cent of all income for households with mem­
bers age 65 or older.
Both private and government pensions have
increased in importance for elderly households
over the last 30 years. Whereas only 9 percent
of households age 65 or older received income
from private pensions in 1962, 29 percent re­
ported such income in 1988.15 The proportion
of older households receiving income from government-employee pensions has risen as wellfrom 5 percent in 1962 to 14 percent in 1988.
From 1975 to 1987, total private pension pay­
ments increased from less than one-third to
almost two-thirds of the amount of Social
Security OASI payments.16
However, the percentage of households that
receive pensions varies considerably with
marital status, sex, race, and income. In 1988,
40 percent of married couples age 65 or older
received private pension income, but only 28
percent of unmarried men and 19 percent of
unmarried women did. The rate was 31 per­
cent for whites but only 17 percent for blacks.
In addition, 18 percent of married couples, 12
percent of unmarried men, and 11 percent of
unmarried women received governmentemployee pensions.
Differences among rates are most striking
when looking at variations by income, since
pensions raise incomes. Just 4 percent of
households with income under $5,000 received
private pension income, and only 2 percent
received government-employee pensions. In
households with income of $20,000 or more, 44

15. As cited in John A. Turner and Daniel J. Beller, eds.,
Trends in Pensions 1992 (Department of Labor, Pension
and Welfare Benefits Administration, 1992). Data for
1962 come from Susan Grad, "Income of the Population
Aged 60 and Older, 1971," Staff Report No. 26, HEW
Publication No. (SSA) 77-11851 (Department of Health,
Education, and Welfare, Social Security Administration,
Office of Research and Statistics, April 1977), Table 10.
Data for 1988 come from Susan Grad, "Income of the
Population 55 and Older, 1988," SSA Publication No. 1311871 (Department of Health and Human Services, So­
cial Security Administration, Office of Policy, Office of
Research and Statistics, June 1990), Table 1.
16. Yung Ping Chen, "The Role of Private Pensions in the
Income of Older Americans," in Turner and Beller, eds.,
Trends in Pensions 1992.

CHAPTER THREE

FACTORS IN THE FINANCIAL WELL-BEING OF CURRENT RETIREES

percent received private pensions and 28 per­
cent received government-employee pensions.
The share of income for those 65 and older
provided by private pensions has increased
over the last three decades, but the share of in­
come from government-employee pensions has
not changed. Private pensions provided 8 per­
cent of total income in 1988, up from 5 percent
in 1958 and 1967.
Again, the most dramatic variations in this
share of income show up at different levels of
total income. Of the group with income less
than $5,000, 1 percent comes from private
pensions; that share is 4 percent for those with
income between $5,000 and $10,000. The
share of income from private pensions was 9
percent to 10 percent of total income for the
group earning more than $10,000. Govern­
ment-employee pensions accounted for 9 per­
cent of income in 1988, the same share as in
1958.

The Role of In-Kind
Income for Health
Expenditures
For many older Americans, the financial cir­
cumstances of their retirement years depend
heavily on their ability to manage their health
care costs. Almost all older adults have health
insurance. Because of Medicare and Medicaid,
only 1 percent of those 65 and older were unin­
sured in 1990. About 10 percent of men and
13 percent of women between the ages of 55
and 64 did not have insurance.17 By contrast,
almost 14 percent of the total population is un­
insured.

17. Congressional Budget Office, Selected Options for
Expanding Health Insurance Coverage (July 1991), p. 10.




25

Health Benefits for Those
Age 65 and Older
The Medicare program, which covers virtually
everyone 65 years of age and older, plays an
extremely large role in providing acute health
care for elderly adults.18 In 1987, about 94
percent of people age 65 and older incurred
medical expenses, excluding costs of long-term
care, at an average annual total expense of
about $4,600.19 Medicare paid for 48 percent
of these expenses, and another 14 percent
came from Medicaid and other public pro­
grams. The share paid by private insurance
was 16 percent, and 21 percent was paid out of
pocket.
The Medicare program is financed by a com­
bination of payroll taxes, general federal gov­
ernment revenues, and premiums. It consists
of two parts. Coverage under Hospital Insur­
ance (Hl)-which includes inpatient hospital
care, limited nursing home services, and some
home health services-is earned through pay­
ment of a payroll tax during one's working
years or through marriage. Coverage under
Supplementary Medical Insurance (SM I)which includes physician and other ambula­
tory services as well as durable medical equipment-is voluntarily obtained through pay­
ment of a premium once eligibility for Medi­
care is established.20

18. Only about 300,000 elderly people were uninsured in
1992, as reported in the statement of Robert D.
Reischauer, Director, Congressional Budget Office, be­
fore the House Committee on the Budget, February 17,
1993. For more information about the Medicare system,
see Nancy De Lew, George Greenberg, and Kraig
Kinchen, "A Layman's Guide to the U.S. Health Care
System,” Health Care Financing Review (Fall 1992).
19. Beth Hahn and Doris Cadigan Lefkowitz, "Annual Ex­
penses and Sources of Payment for Health Care Ser­
vices," National Medical Expenditure Survey Research
Findings 14, AHCPR Pub. No. 93-0007 (Public Health
Service, Agency for Health Care Policy and Research,
November 1992).
20. Those who have reached age 65 and those who have been
eligible for disability benefits for two years under the So­
cial Security program are eligible for Medicare. Those
with end-stage renal disease, who may or may not be dis­
abled, are eligible for SMI coverage as well.

26 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

Medicare is an intergenerational transfer
program primarily funded by taxes from work­
ing people to provide services to aged benefi­
ciaries. However, expenses are increasing
more swiftly than revenues, leading to a possi­
ble overhaul of the program or new sources of
funding in the next few years.21
Current Medicare enrollees receive a sub­
stantial subsidy under HI and SMI. The Con­
gressional Budget Office estimates that for the
cohort of people who became 65 in 1992, Medi­
care will pay at least 60 percent more per per­
son for HI benefits over their lifetimes than
the value of their contributions and those
made by their employers.22 In 1992 dollars,
this amount represents an annual subsidy of
about $2,000 per enrollee.23 An even more
generous subsidy accrues to recipients of SMI
benefits. Premiums cover only about 25 per­
cent of the program’s cost, and general federal
revenues pick up the remaining 75 percent.
Premiums for enrollees were $36.60 a month
in 1993.
Despite these subsidies, Medicare covers
less than one-half of the total medical care ex­
penses of the elderly, if the costs of long-term
care are included. Medicare is oriented to­
ward acute care; services such as long-term
nursing home care, most preventive care, and
outpatient prescription drugs are not covered.
Moreover, Medicare patients must also pay coinsurance and deductibles.24 To pay for Medi­
care coinsurance and deductibles and, in some

21. See Board of Trustees, The 1993 Annual Report, Table

September 1993

cases, uncovered benefits, more than threequarters of Medicare beneficiaries have some
form of supplemental coverage either through
private insurance or Medicaid.25

Health Benefits for Those
Ages 55 to 64
Compared with the group age 65 and older,
adults ages 55 to 64 incur somewhat lower
average annual expenses. Among those ages
55 to 64 in 1987, 85 percent had some medical
expenses, excluding costs of long-term care,
with the average annual total expense being
about $2,350.26 Private insurance paid for 48
percent of costs, and 23 percent came from outof-pocket expenditures. Medicaid, Medicare,
and other public programs made up another
24 percent of the payments, and other sources
such as workers' compensation and private
charity accounted for the remaining 5 percent.
Among those who are retired in the age
group from 55 to 64, employment-related
health insurance is crucial. In 1987, about 70
percent of retirees ages 55 to 64 held employment-related coverage.27 Eleven percent had
other private coverage only, and 16 percent
had no private coverage whatsoever. Of those
with no private health insurance, 28 percent
were covered by Medicaid.

Wealth

m.A.2.
22. CBO testimony before the House Committee on the Bud­
get, February 17,1993.
23. Virtually all employed individuals pay the HI payroll
tax. The payroll tax is 1.45 percent of payroll for both
the employer and the employee (for a total of 2.9 percent)
up to a maximum of $135,000 of income in 1993. This
maximum was raised in 1990 from $51,300. Under the
1993 reconciliation act, all income will be subject to the
tax.

The amount of wealth that households accu­
mulate during their working lives is an impor­
tant factor in determining financial well­
being in old age. Assets provide a store of
wealth that can be tapped if necessary, and

25. Ibid., p. 262.
24. Medicare coinsurance and deductibles account for an
average of 17 percent of the costs of services covered by
Medicare and consume an average of 6 percent of per
capita income of those covered by Medicare, as reported
in the House Committee on Ways and Means, 1992
Green Book, p. 254.




26. Hahn and Lefkowitz, "Annual Expenses and Sources of
Payment for Health Care Services."
27. Tabulations by CBO from the 1987 National Medical Ex­
penditure Survey.

CHAPTER THREE

FACTORS IN THE FINANCIAL WELL-BEING OF CURRENT RETIREES

27

Table 7.

Wealth-to-lncome Ratios and Wealth Within Income Quintiles
for Older Households (Age 55 to 74) in 1989
Median Ratio of
Wealth to Income
Age
Age
55 to 64
65 to 74

Median Wealth
(1989 dollars)
Age
Age
55 to 64
65 to 74

All Older Households
Lowest income quintile
Second income quintile
Middle income quintile
Fourth income quintile
Highest income quintile
Median

0.55
3.70
3.67
2.88
3.62
3.07

1.84
5.23
6.36
4.15
6.00
4.83

8,100
50,000
98,200
109,300
331,200
97,200

10,400
51,000
96,700
108,300
333,200
81,500

Unmarried Head of Household
Lowest income quintile
Second income quintile
Middle income quintile
Fourth income quintile
Highest income quintile
Median

0
2.58
2.48
3.92
2.92
2.58

0.94
2.60
5.92
5.75
7.19
3.99

0
19,200
46,100
97,200
182,000
43,100

3,700
20,900
60,600
79,600
228,400
50,800

Married Head of Household
Lowest income quintile
Second income quintile
Middle income quintile
Fourth income quintile
Highest income quintile
Median

3.90
3.83
3.18
2.76
4.86
3.51

3.95
6.36
2.89
4.67
6.83
5.23

39,900
97,700
116,200
162,900
425,000
119,500

44,500
88,000
67,800
158,200
491,000
130,200

SOURCE:

Congressional Budget Office tabulations using the Survey of Consumer Finances in 1989.

the single most important asset for most
households-their home-provides housing ser­
vices as well. In addition, income from assets
is second only to Social Security income as a
share of total income for households age 65
and older, providing about 25 percent of total
income in 1990.28 For households in the low­
est income quintile, the share of income from
assets was 4 percent. The share of income
from assets for households in the top income
quintile was 33 percent.

households hold. This disparity indicates that
some older households are unable or lack the
desire to prepare for retirement by saving.
The ratio for the median household with head
of household age 55 to 64 in 1989 is 3.1, and
the median value of wealth is $97,200. Within
the lowest income quintile of households head­
ed by unmarried people, median wealth is zero
(see Table 7). Within the highest income
quintile of households headed by married peo­
ple, the median ratio of wealth to income is
4.9. Median wealth in this group is $425,000.

Survey Data on Wealth

For the older group (ages 65 to 74), the
range is even wider. The median ratio of
wealth to income is 4.8, and median wealth is
$81,500. The median ratio is 0.9 for house­
holds headed by unmarried people in the low­
est income quintile. For households headed by
married people within the highest income

A large disparity exists in wealth-to-income
ratios and in the amount of wealth older
28. Grad, Income of the Population 55 or Older, 1990.




28 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

quintile, the median ratio is 6.8.
wealth for this group is $491,000.

Median

Marital Status. Wealth of elderly households
is related even more to marital status than is
income. The median wealth of households
headed by a person who is 55 to 64 or 65 to 74
and not married is less than two-fifths that of
married couples in the same age group (see
Table 8). Median wealth for married couples
ages 55 to 64 is about $120,000, and that for
married couples in the older group is
$130,000.
Marital status is also correlated with the
amount of nonhousing wealth that households
accumulate. Median nonhousing wealth for
households headed by single older adults who
are 55 to 64 is less than one-seventh that of
married couples. For those ages 65 to 74,
households headed by single people show
about one-fourth as much nonhousing wealth
as married couples.
Participation in the Labor Force. Among
those ages 55 to 64, the decision to remain in
the labor force means substantially higher
median levels of wealth as well as income. For
example, median wealth for married couples
rises from about $100,000 for those with no
earners to about $140,000 for two-earner cou­
ples (see Table C-7).
Financial need may play a large role in the
decision of husbands and wives ages 65 to 74
to participate in the labor force. Both partners
may decide to work when the couple does not
have sufficient income from assets to allow a
comfortable lifestyle without current earn­
ings. As was seen previously, the total income
of married couples in this age group does not
vary much with the number of earners. How­
ever, both total wealth and nonhousing
wealth are much smaller for those with two
earners than for those with no earners or one
earner. Moreover, 23 percent of married cou­
ples with two wage earners have less wealth
than income, more than three times the pro­
portion of those with one or no earners.




September 1993

Educational Attainment. Educational at­
tainment is associated with wide variation in
the amount of wealth accumulated over the
working years. Households with a head of

Table 8.
Wealth and Income of Households in 1989,
by Age (55 to 74) and Marital Status of
Household Head (In 1989 dollars)
Age
55 to 64
All Households
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth
is less than onehalf of income
Unmarried Head
of Household
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth
is less than onehalf of Income
Married Head
of Household
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth
is less than onehalf of income
SOURCE:

Age
65 to 74

32,300
97,200

20,300
81,500

28,500

23,500

19

16

38

28

18,900
43,100

12,800
50,800

6,600

11,800

32

25

52

37

41,400
119,500

27,700
130,200

47,400

42,100

10

8

28

20

Congressional Budget Office tabulations using the
1989 Survey of Consumer Finances. Median in­
comes come from the 1990 Current Population Sur­
vey.

CHAPTER THREE

FACTORS IN THE FINANCIAL WELL-BEING OF CURRENT RETIREES

household age 55 to 64 and without a high
school diploma show about one-fifth the
amount of total wealth and less than onetwentieth the amount of nonhousing wealth of
households with a head of household who com­
pleted four years of college (see Table C-8).
Even larger differences apply to those ages 65
to 74.
Housing Wealth. Older adults have bene­
fited tremendously from the run-up in housing
values during the 1970s and part of the 1980s.
Housing wealth accounts for more than half of
all wealth for the median household in both
age groups (see Table C-9). In fact, the median
ratio of housing assets to total wealth for all
households ages 55 to 64 is about 60 percent.
For households ages 65 to 74, the comparable
figure is 55 percent.
The share of wealth in housing assets for
older households in the early 1960s was sig­
nificantly smaller than was found in the 1989
survey. In the 1962 Survey of Consumer Fi­
nances (SCF), the median ratio of housing as­
sets to total wealth for households ages 55 to
64 and 65 to 74 was about 40 percent. The lev­
el of median housing assets, adjusted for in­
flation, has more than doubled over this time
period.
The current cohort of older adults has bene­
fited both from real increases in the value of
housing and from higher rates of home owner­
ship. Relative to the gross national product
(GNP) deflator, the quality-adjusted price of a
new home in 1990 was more than 20 percent
higher than in the early 1960s.29 Although
there is no long-term study of sales prices of
existing houses, several studies of repeat sales
in various metropolitan areas yield informa­
tion that is consistent with this result.30 In
addition, more older people own homes. About
81 percent of households with a head of house­

29. Bureau of the Census, as cited in James M. Poterba,
’’House Price Dynamics: The Role of Tax Policy and De­
mography," Brookings Papers on Economic Activity, no.
2 (1991), p. 146.
30. Poterba, "House Price Dynamics," cites several studies
and also conducts new analysis.




29

hold age 55 to 74 were homeowners in the
1989 SCF compared with about 64 percent in
1962.
Balance Sheets of Homeowners Versus
Nonhomeowners. Separating nonhomeown­
ers from homeowners shows wide differences
in household balance sheets. Homeowners
generally have higher lifetime earnings as
well as financial gains from home ownership,
so the correlation between income and wealth
may be driving the relationship between home
ownership and wealth. The median value of
financial assets for nonhomeowners is less
than 5 percent of the median value for home­
owners, and the median value of nonhousing
assets such as cars is less than 20 percent of
that for homeowners (see Table C-9). Median
wealth of nonhomeowners is less than 2 per­
cent of median wealth of those who own their
home. Among homeowners, the median ratio
of housing assets to total wealth is about twothirds for those ages 55 to 64 and for those
ages 65 to 74.
Older homeowners have gained not only
from the increase in the real price of housing
during the 1970s but also from the prevalence
of fixed-rate mortgages and subsequent unan­
ticipated inflation during their years of bor­
rowing to finance home ownership. Many of
these households obtained 30-year fixed-rate
mortgages at 5 percent or 6 percent. During
the 1970s and early 1980s, the combination of
relatively high inflation and deductibility of
mortgage interest frequently meant that the
real after-tax cost of mortgage borrowing was
negative. Households saw their mortgage
payments dwindle in real terms, while house
values climbed steadily upward. Wealth rose
at the same time that more resources became
available for increased saving, higher con­
sumption, or the purchase of larger homes.
Comparison of Characteristics of Baby
Boomers and Their Parents' Generation.
Several of the characteristics exhibited by old­
er people with high incomes and substantial
wealth in 1989 will be even more prevalent
among the baby boomers as they approach re­
tirement. More of the baby boomers will have

30 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

a high school or college degree and more will
be part of two-earner households. A higher
proportion of them are likely to receive pen­
sion income given the recent changes in vest­
ing provisions and government guarantees of
private pension benefits. These factors in­
crease the likelihood of higher incomes and
substantial wealth in retirement.
However, several factors work against high­
er incomes and greater wealth for the baby
boomers in retirement. More of the baby
boomers will be single or divorced, and more
may be paying for children or college educa­
tions during their older years. If current
trends continue, fewer will be homeowners.
These factors will probably reduce the finan­
cial well-being of baby boomers in retirement
to some degree.

Saving Rates and Rates
of Return on Assets
One explanation for the relatively small share
of wealth in nonhousing assets is that older
people saw capital gains on housing as a sub­
stitute for financial wealth. In addition, they
may have correctly anticipated relatively gen­
erous transfers in retirement both from public
and private pensions and hence needed less
private saving to finance a comfortable retire­
ment. In response to these events, they re­
duced their saving in financial assets.
Some support for this view comes from
household survey results on saving rates by
households of different ages in 1963, 19721973, and 1983-1985.31 These results show a
significant drop in saving rates in the middle
1980s by households with a head of household
age 45 to 64, the same cohort that is close to or
just past retirement age today. Saving rates

31. Barry Bosworth, Gary Burtless, and John Sabelhaus,
"The Decline in Saving: Evidence from Household Sur­
veys,” Brookings Papers on Economic Activity, no. 1
(1991).




September 1993

fell between 4 and 7 percentage points for
these older households.32
Increases in wealth arising from gains in
housing assets and increases in expected re­
tirement benefits probably explain at least
part of this decline in saving. The majority of
these older households were homeowners dur­
ing the housing boom of the 1970s. They
reaped sizable capital gains on their housing
assets at the same time that their real mort­
gage borrowing costs were dropping. Provided
that they viewed their housing wealth as ac­
cessible, it was an offset to financial wealth.33
In addition, they could foresee indexed bene­
fits from Social Security so that the fear of ero­
sion of benefits by inflation was reduced, and
Medicare was established so that medical
costs did not impose such a burden.
Aside from housing investment, assets com­
monly found in household portfolios did not
show particularly strong returns from the
1950s through the 1980s. After adjusting for
inflation, returns on investments in Treasury
bills and government bonds were only slightly
positive or even negative during the 1960s
and 1970s (see Table 9). Stocks proved to be a
lucrative investment during the 1950s, 1960s,
and 1980s, but were a disappointment during
the 1970s.
People who invested in stocks have done
nicely over the last 40 years; other financial
investments have done poorly, at least until
the 1980s. The excellent returns on investing
in the stock market in the 1950s came when
parents of baby boomers were in their twen­
ties and thirties, when few families can afford
to save much. For those investors who were
sophisticated enough to put savings into the

32. For example, Bosworth, Burtless, and Sabelhaus report
that saving as a percentage of disposable income for
those ages 45 to 54 fell from 16.8 percent to 10.5 percent
between 1972 and 1985 based on the Consumer Expen­
diture Survey. For those ages 55 to 64, the saving rate
fell from 22.9 percent to 15.8 percent.
33. Considerable debate takes place about whether older
households are willing to reduce their housing equity to
finance retirement expenses. See the discussion in
Chapter 4 of this study.

CHAPTER THREE

FACTORS IN THE FINANCIAL WELL-BEING OF CURRENT RETIREES

Table 9.
Annual Real Rates of Return
on Selected Assets (In percent)
U.S. Gov­
ernment
Bonds

Stock
Market

-0.4
1.3
-1.1
8.9

-2.2
-0.9
-1.7
8.4

15.9
5.5
-1.8
11.9

1950-1959
1960-1969
1970-1979
1980-1989
SOURCE:

Conclusions

Treasury
Bills

Decade

Congressional Budget Office using data from Roger
G. Ibbotsen and Gary P. Brinson, Investment Mar­
kets: Gaining the Performance Advantage (New
York: McGraw-Hill, 1987), and additional data from
Ibbotsen Associates.

stock market in the 1960s, the 5.5 percent an­
nual return was good. In fact, only during the
1980s have investments in bonds and stocks
been more lucrative.




31

Most current retirees enjoy considerable fi­
nancial well-being. A number of fortunate oc­
currences have contributed to this state:
strong growth in real wages in the 1950s and
1960s, higher Social Security benefits, higher
rates of private pension coverage, government
coverage of a large proportion of medical ex­
penses, and appreciation of housing assets.
Those older people who are not doing so well
financially include unmarried people who may
be involuntarily without a job and do not yet
receive Social Security payments, those who
have less than 12 years of schooling, and those
who did not buy a home and therefore did not
receive the financial benefits of home owner­
ship during the years of real appreciation and
low borrowing costs.




Chapter Four

The Outlook for the Financial
Well-Being of Baby Boomers
in Retirement

ased on information that is available
now, the incomes and wealth of baby
boomers in retirement are expected to
be higher than those of their parents.1 How­
ever, some demographic groups will undoubt­
edly fare better than others, and unexpected
expenses-such as health care costs--could
threaten the financial well-being of many re­
tirees.

B

Two types of factors will be critical to the fi­
nancial well-being of the baby boomers in re­
tirement. The first type is economic, such as
the rate of wage growth, the rate of saving, the
rate of return on assets, and the performance
of the economy. The second type is demogra­
phic, such as life expectancy, the ratio of work­
ers to retirees, and household living patterns.
For some programs, such as Social Security,
the interaction of these two types of factors
will play an important role in determining
benefits for retired baby boomers.
Baby boomers have control over some of
these factors, but they have little or no control
over other critical events. How much they
save during their working years, how long
they work, and whether they stay married or
get divorced will prove to be important in their
elderly years (see Box 2). But also critical will
be circumstances beyond their control, such as

1.

Other analysis also reaches the conclusion that baby
boomers will be better off in retirement than their par­
ents. For example, see Richard A. Easterlin, Christine
M. Schaeffer, and Diane J. Macunovich, "Will the Baby
Boomers Be Less Well Off Than Their Parents: Income,
Wealth, and Family Circumstances over the Life Cycle"
(working paper, University of Southern California, May
1993).




the performance of the economy in general,
the generosity of Social Security and pension
provisions, real capital gains experienced on
housing, the rate of return on financial assets,
and the state of the health care system.

How Wage Growth
and Labor Force
Participation Affect
the Baby Boomers
The outlook for the growth in real income from
employment is probably the largest single fac­
tor determining the financial circumstances of
the boomers' retirement. As long as real wage
rates grow, and the recent upward trend in
participation is not reversed, the outlook is
promising.

Real Wage Growth
The growth in real wage rates has a large
bearing on the amount of wealth that can be
accrued before retirement, as well as on the
size of Social Security benefits and pension
benefits that individuals can expect to receive
after reaching retirement age.
The Congressional Budget Office expects
the growth of real wages to be positive on
average during the next 20 to 40 years, but
not as large as occurred during the 1950s and
1960s. Two distinct periods of real wage

34 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

growth have occurred in the post-World War II
economy-fast growth before 1973 and slow
growth since. These periods reflect differences
in the growth of the major factor determining
the increase in real wages-average labor pro­
ductivity. Output per hour of all people in the
nonfarm business sector grew 2.4 percent a
year on average during the 1960s, whereas it
slowed to 0.8 percent a year on average during

Box 2.
How Much Must Boomers Save
to Attain Their Parents’ Wealth?
To illustrate how much baby boomers need to
save to reach the wealth their parents1 gen­
eration now holds, the Congressional Budget
Office calculated the annual savings boomers
need to reach the median wealth of those who
were ages 55 to 64 in 1989. If the average
real rate of interest earned on all assets over
the next 30 years is 2.5 percent a year, the
median late boomer household (with a head of
household age 25 to 34) in 1989 needs to save
$1,700 a year for 30 years to attain the medi­
an wealth of households ages 55 to 64 in 1989.
Annual savings would have to be greater the
longer the baby boomers postpone saving.
The median early boomer household (with a
head age 35 to 44) needs to save much less,
only $300 a year for 20 years, to reach the
same wealth.
Even if the value of housing assets does not
increase at all in real terms, baby boomers
who already own their homes need to save
even less to attain the degree of wealth of cur­
rent older homeowners. If nonhousing assets
increase at a rate of 2.5 percent a year in real
terms but the real value of housing assets
does not change, homeowners now ages 25 to
34 would have to save $1,200 a year for 30
years to reach the level of wealth of home­
owners now ages 55 to 64. Homeowners ages
35 to 44 would need to save only a trivial
amount, $100 a year for 20 years.
These calculations do not reflect either
large expenditures, such as paying for chil­
dren’s education, or bequests from baby
boomers’ parents.

1.

Median household wealth of boomers and their
parents is reported in Chapters 2 and 3 of this study.




September 1993

the 1980s. Based on current trends in capital
investment and technological change, a return
to the rates of growth in real wages of the
1950s and 1960s is unlikely.
Nevertheless, a positive rate of real wage
growth when compounded over the remainder
of the working years of baby boomers implies
better financial circumstances in retirement.
It means more resources to allocate to con­
sumption as well as to saving during the work­
ing years that remain, as well as higher bene­
fit levels of Social Security and private pen­
sions in retirement. Growth in real wages of 2
percent a year for the next 30 years would im­
ply incomes that are 56 percent higher at the
end of the working years of baby boomers than
if real wage growth were only 0.5 percent a
year for the next 30 years.2

Rates of Participation in the
Labor Force
The rate of participation in the labor force, to­
gether with age at retirement, will also help to
determine the income of baby boomers in re­
tirement. The participation of men in the
labor force has declined over the past few dec­
ades as more generous benefits have become
available in retirement (see Table 10). How­
ever, older women are remaining in the labor
force longer or are joining the labor force as
opportunities outside the home have become
more appealing or as perceived needs for in­
come have become greater.
In recent decades, participation in the labor
force has increased for married or widowed
women in particular, and this trend portends
increased benefits for many of them after they
retire. Today, many women receive spouses'
benefits under their husband's Social Secu­
rity. However, as more women build their
own employment records, a rising percentage
will receive more generous benefits in retire-

2.

The majority of baby boomers will retire between 2010
and 2030, with the implication that between 17 and 37
working years currently remain for this cohort.

CHAPTER FOUR

THE FINANCIAL WELL-BEING OF BABY BOOMERS IN RETIREMENT 35

Table 10.
Labor Force Participation of Men and Women Age 45 and Older (In percent)
Male Participation Rate______
Age
Age
45 to 64
65 and Older

_____ Female Participation Rate
Age
Age
45 to 64
65 and Older

Single
1970
1980
1990

75.7
66.9
67.1

25.2
16.8
15.7

73.0
65.6
66.1

19.7
13.9
12.2

Married
1970
1980
1990

91.2
84.3
82.5

29.9
20.5
17.6

44.0
46.9
56.5

7.3
7.3
8.5

Other3
1970
1980
1990

78.5
73.3
74.6

19.3
13.7
12.0

61.9
60.2
65.0

10.0
8.2
8.5

SOURCE:
a.

Bureau of the Census, Statistical Abstract of the United States: 1992 (1992), p. 387, Table 618.

Widowed, divorced, or married without a spouse present.

ment on the basis of their own work than on
their husband's.3 More women may become
eligible to receive their own pension benefits
as well.
The trend toward greater participation in
the labor force by older married women is
striking. Whereas only 44 percent of married
women ages 45 to 64 earned income outside
the home in 1970, that proportion increased to
almost 57 percent in 1990. In addition, par­
ticipation in the labor force of women who are
widowed, divorced, or married without a
spouse present has also increased in recent
years.
Female baby boomers are likely to surpass
the rate of labor force participation now ob­
served for older women based on the behavior
of young and middle-aged women to date. For
example, 70 percent of wives ages 25 to 34

3.

Married women receive the greater of their own benefit
or about one-half of their husband’s benefit. When the
husband dies, the wife receives the greater of her own
benefit or 100 percent of the husband’s benefit. Thus,
women of the baby boom are less likely to receive higher
benefits as widows than are women today.




worked outside the home in 1990 compared
with 59 percent in 1980 and 39 percent in
1970.4
At the same time, fewer older single women
have been in the labor force in recent years.
Unless these women have other sources of in­
come, this trend does not bode well for their re­
tirement income.
Several factors may push both men and
women to work longer. First, normal retire­
ment age will increase gradually under cur­
rent law from age 65 to age 67 beginning in
the year 2000. Those born in 1937 will be the
last group with normal retirement age set at
65. Those born in 1960 will be the first group
with normal retirement age set at 67. In addi­
tion, the value of Social Security benefits that
can be claimed by those who retire at age 62
will decrease gradually from 80 percent to 70
percent of the full benefit level.

4.

Bureau of the Census, Statistical Abstract of the United
States: 1992 (1992), p. 387, Table 618.

36 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

Second, the earnings test for Social Security
has been liberalized in recent years, meaning
that older people will not have to give up as
much of their Social Security benefits if they
continue to work beyond retirement age. In
1993, Social Security beneficiaries age 65 or
older may earn up to $10,560 before any re­
duction in benefits occurs. For each $3 of
earnings above this limit, the reduction in
monthly benefits is $1.5
Third, changes in the labor market may
also encourage more older people to remain in
the labor force. The number of people em­
ployed part time in the U.S. economy in­
creased from 14 percent to 18 percent between
1959 and 1992, and older people may be more
attracted to part-time jobs than to full-time
jobs. In addition, many jobs have become less
demanding physically. For example, the
share of people employed in manufacturing
has declined from 26 percent in 1959 to 15 per­
cent in 1992.6

Promised Benefits from
the Social Security
System
Although pressures will be felt, the Social Se­
curity system is vital to the financial well­
being of so many retirees that changes are
likely to be made to ensure its continued fi­
nancial health in the coming years. Adjust­
ments in the benefit structure or revenue
sources may be necessary as the bulk of baby
boomers reach retirement age, but Social
5.

6.

The reduction for beneficiaries who have not yet reached
age 65 is $1 for each $2 of earnings above $7,680. For a
history of the earnings test, see Department of Health
and Human Services, Social Security Administration,
Annual Statistical Supplement to the Social Security
Bulletin, 1992 (January 1993), Table 2.A29.
Other factors may work toward reversing the trend in
earlier retirement as well. See Phillip B. Levine and
Olivia S. Mitchell, "Expected Changes in the Workforce
and Implications for Labor Markets," Pension Research
Council Working Paper Series 91-2 (Wharton School of
the University of Pennsylvania, June 1991).




September 1993

Security will probably continue to be the sin­
gle largest source of income for retirees.? At
present, using the trustees' midrange assump­
tions on economic growth and demographic
trends and assuming no changes in benefits or
revenues, the Old-Age and Survivors Insur­
ance Trust Fund is not likely to be exhausted
until 2044.
The likely demographic pressures on the
system are already evident. Under the Social
Security trustees' midrange projections, the
ratio of the population age 65 and older to the
population ages 20 to 64, known as the "aged
dependency ratio," will increase 31 percent be­
tween 1990 and 2020. By 2030, it will be
about 70 percent above its 1990 value. Ex­
pressed differently, the number of people ages
20 to 64 who can support retirees age 65 and
older will drop from 4.8 per retiree in 1990 to
3.6 in 2020 and will fall further to 2.8 in 2030.
Focusing on the aged dependency ratio
alone, however, can be misleading. The in­
crease in that ratio would imply a significant
increase in the burden on younger workers to
maintain the promised benefits to baby
boomers in retirement under current financ­
ing arrangements. But the total dependency
ratio, defined as the population 65 and older
plus those under 20 divided by the population
ages 20 to 64, does not show such large in­
creases. This total ratio remains at about the
same level in 2020 as in 1990 and increases
only 12 percent by 2030. Thus, although gov­
ernment budgets will be under pressurebecause government support for the elderly
generally exceeds that for children-the over­
all burden on workers may not rise very
much.8

7.

For simulation results on retirement income of the baby
boomers, see Emily S. Andrews and Deborah Chollet,
"Future Sources of Retirement Income: Whither the Ba­
by Boom," in Susan M. Wachter, ed., Social Security and
Private Pensions (Lexington, Mass.: Lexington Books,
1988).

8.

Board of Trustees, Federal Old-Age and Survivors Insur­
ance and Disability Insurance Trust Fund, The 1993
Annual Report, House Document 103-63 (April 7, 1993),
p. 152.

CHAPTER FOUR

THE FINANCIAL WELL-BEING OF BABY BOOMERS IN RETIREMENT 37

Table 11.
Estimated Average Social Security Benefit Payable to Retired Workers at Normal
Retirement Age, by Preretirement Earnings Level, Based on Midrange Assumptions
Benefit Amount in
Constant 1992 Dollars
Low
Average
Maximum
Earnings
Earnings
Earnings

Year

5,967
7,495
8,369

1993
2020
2030
SOURCE:

9,853
12,399
13,867

13,570
19,651
21,942

Benefit as a
Percentage of Earninqs
Maximum
Low
Average
Earnings
Earnings
Earnings
59
56
56

44
42
42

25
28
28

Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund, The 1993 Annual Report,
House Document 103-63 (April 7, 1993), Table III.B.5, p. 189.

NOTE: Normal retirement age in 1993 is 65, in 2020 rises to 66 and 2 months, and by 2030 has reached 67. Those with low earnings
have 45 percent of the average wage; those with maximum earnings earn at least the contribution and benefit maximum,
equal to $57,600 in 1993. The average wage in 1991 was $21,812.

Social Security, designed as a progressive
social insurance system, does not provide
equal benefits to all. Benefits are based on
past earnings, but, relative to high-income
workers, those with lower incomes receive a
higher percentage of their annual earnings
after they retire. In 1993, Social Security
benefits replaced about 44 percent of average
earnings ($21,812 in 1991) for those who re­
tired at 65. For low-wage recipients, whose
earnings were about 45 percent of the average
during their working years, the replacement
ratio was about 59 percent. For high-wage re­
cipients, who earned at least the maximum
contribution amount ($57,600 in 1993), the re­
placement ratio was about 25 percent or lower.
Under the midrange assumptions, similar
ratios for replacements are likely to hold for
baby boomers who retire in 2020 at what will
then be the normal retirement age of 66 and 2
months (see Table 11).
Real benefit levels are projected to rise fast­
er for high-income than for low-income work­
ers over the next few decades. The inflationadjusted level of benefits is expected to rise
about 26 percent for low and average wage
earners from 1993 to 2020, and about 45 per­
cent for the earner at the contribution and
benefit maximum ($57,600 in 1993).9




Benefit amounts and replacement ratios
will decline, under current law, for those who
retire before the age of eligibility for full bene­
fits. For example, benefits for workers retir­
ing in 2022 at the earliest allowable age (62)
will be reduced from 80 percent of those avail­
able at the normal retirement age, as is the
case today, to 70 percent.10 To the extent that
some workers accept Social Security benefits
early because their employment options are
limited either by poor health or lack of job op­
portunities, they will probably be among the
most economically disadvantaged baby-boom
retirees. However, many may do so by choice
rather than for economic necessity, and they
will probably span the range of financial well­
being.
9.

The after-tax replacement ratio is expected to rise less as
a result of the nominal cap on the level of total income
that triggers partial taxation of Social Security income.
Under current law, up to one-half of Social Security in­
come is taxable income for single people with income of
$25,000 or more and for married couples with $32,000 or
more. To calculate income for this purpose, the tax filer
or tax unit must include adjusted gross income, taxexempt interest, and one-half of Social Security benefits
received. These thresholds are not adjusted for inflation,
so more Social Security income becomes taxable each
year. Under the 1993 reconciliation act, up to 85 percent
of Social Security income is taxable income for single
people with income of $34,000 or more and for married
couples with $44,000 or more.

10. This reduction is calculated to be actuarially fair.

38 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

Trends in Private
Pensions
Income from private pensions is likely to
remain an important source of retirement in­
come, particularly for upper-income baby
boomers, and will gain in importance for wom­
en. Pension coverage of younger workers
seems to have fallen somewhat in the past dec­
ade. But shorter vesting mandates, increased
participation in the labor force by women, and
a hike in coverage rates in the future imply
that somewhat higher proportions of baby
boomers will receive pension income than is
the case for current retirees.
Between 1950 and 1979, the proportion of
U.S. private-sector wage and salary workers
covered by pensions more than doubled. Dur­
ing the 1980s, however, the upward trend in
pension coverage stalled and may have been
reversed. One study reports that the propor­
tion of all male workers covered by employeror union-sponsored pension plans fell 9 per­
centage points between 1979 and 1988.11 The
reported fall was concentrated among less
educated young males. For males ages 25 to
34 with less than 12 years of schooling, pen­
sion participation fell from 49 percent to 23
percent. The decline for all female workers
was just 1 percentage point. The study attrib­
utes some part of the decline in pension cov­
erage for young males to declines in real earn­
ings and the lesser role of labor unions. Other
studies, however, find a smaller decline, or no
decline at all, in coverage.
In contrast, eligibility for pensions has been
increased by a mandated reduction in the
number of years required for complete vesting
in a pension plan. The Tax Reform Act of 1986
established five-year cliff vesting (meaning
that workers are fully eligible for pensions
after five years on the job) or seven-year
11. David E. Bloom and Richard B. Freeman, 'The Fall in
Private Pension Coverage in the U.S.," Working Paper
No. 3973 (National Bureau of Economic Research, Cam­
bridge, Mass., January 1992).




September 1993

graduated vesting. This standard replaces the
10-year vesting of the Employee Retirement
Income Security Act of 1974 and increases eli­
gibility for pensions among workers who
change jobs more often or who move in and out
of the labor force more frequently. In particu­
lar, relatively more women will become eligi­
ble to receive pensions with the shortened
vesting periods since they typically have
shorter careers in paid employment than men.
Women in full-time, private-sector jobs are
increasingly likely to be covered by pension
plans, but their benefits may not be as gener­
ous as those for men. Between 1972 and 1988,
coverage among women rose from 38 percent
to 43 percent, a contrast to the decline in cov­
erage among men from 54 percent to 49 per­
cent.12 Older women shared in the general
improvement, but differences in coverage be­
tween men and women are highest among old­
er workers. Among workers ages 55 to 59, 48
percent of women and 63 percent of men were
covered in 1988.
However, the gender gap in pension bene­
fits widened between 1977 and 1988. In 1977,
the median benefit for women was 47 percent
of that for men.13 In 1988, the median benefit
for women had declined to 37 percent. This
change occurred in part because the expansion
of benefits received by women has been pri­
marily at the low end of the distribution of
benefits.
Most of the recent expansion in pension cov­
erage is occurring through new defined-contribution plans, and these plans carry less cer­
tain returns (see Box 3). Although the growth
in coverage under defined-contribution plans
stems in part from their replacing definedbenefit plans, more of the increase is attrib­
uted to the addition of supplemental defined12. Sophie M. Korczyk, "Gender and Pension Coverage," in
John A. Turner and Daniel J. Beller, eds., Trends in Pen­
sions 1992 (Department of Labor, Pension and Welfare
Benefits Administration, 1992).
13. Daniel Beller and David McCarthy, "Private Pension
Benefit Amounts," in Turner and Beller, eds., Trends in
Pensions 1992, Table 10.18.

CHAPTER FOUR

THE FINANCIAL WELL-BEING OF BABY BOOMERS IN RETIREMENT 39

Box 3.
Risks Associated with Various Types of Pension Plans
A significant shift is under way in the type
of pensions that employers are providing.
This shift is changing the risks that work­
ers will face in using pensions to support
themselves in retirement.
The shift is from pensions based on sal­
ary to pensions based on accumulated sav­
ings. The traditional pension, called a
defined-benefit pension, replaces a fraction
of final salary at the firm. The fraction in­
creases with the number of years a person
works for the firm. The other type of pen­
sion, called a defined-contribution pension,
contributes a fraction of annual salary to a
savings account. The size of the pension
annuity in retirement depends on how
much is in the account when retirement
begins.
The newest variation of the definedcontribution pension is the most rapidly
growing. The 401(k) plan, named after a
section of the Internal Revenue Code, was
first enacted in 1978 and by 1989 covered
at least 17 million workers. Under a
401(k) plan, workers decide what fraction
of their salary, within limits, they would
like to have deducted and deposited in
their pension savings account. Employers
offer matching contributions in many
plans. The 401(k) plan spread first as a
supplement to traditional defined-benefit
plans but more recently is being adopted as
the only plan by firms that did not provide
another pension.
The traditional pension provided the
least risk for people who could count on
working for a single employer for several
decades before retirement. Many pensions
were designed to provide such workers
with a combined replacement rate from
pension and Social Security of 50 percent to
60 percent of their final pay. The tradi­
tional pension was much less generous to




workers who had to change employers even
a few times before retirement. The pension
amount was based on the salary at the
time the worker stopped working for that
firm. Inflation in the intervening years
would erode the value of the pension sub­
stantially even before retirement began.
As long-term employment for a single firm
is becoming less common, the risks of
defined-benefit plans are rising.
The defined-contribution pension
avoids the losses inherent in definedbenefit plans for those who change jobs be­
fore retirement. Amounts deposited in the
worker's savings account continue to grow
in value, assuming reasonable invest­
ments, whether the worker continues with
the same firm or moves to another. The
size of the pension that these savings will
be able to support in retirement, however,
depends in part on the investment returns
that the contributions earn. These returns
are uncertain, and the worker bears this
risk in a defined-contribution pension.
Further risk is inherent in the 401(k)
plans. Contributions are voluntary, so
that if workers do not foresee accurately
what they will need for retirement, they
could well end up with much less than they
would like.
None of these pension plans, whether
defined-contribution or defined-benefit
plans, are a complete guarantee of retire­
ment income when workers can change
jobs. Employees can choose to receive a
lump-sum payout of their pension savings
when they leave a firm, and then face the
further choice of rolling over the payout
into another savings plan (such as an in­
dividual retirement account) or spending
it. Even though spending the payout
makes it taxable, some choose to do so and
thus are more likely to find themselves
with inadequate funds for retirement.

40 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

contribution plans in firms that already have
a defined-benefit p l a n . 14 Much of the growth
in defined-contribution plans is in 401(k)
plans, first established in 1978.15 Benefit
amounts from these defined-contribution
plans are uncertain because they depend on
the rates of return earned on the assets in
which the plan is invested.

The Role of Wealth
from Housing
The role that wealth from housing will play in
financing the retirement of baby boomers re­
mains uncertain. As noted in Chapter 3,
wealth from housing today accounts for more
than half of total wealth for those households
close to or just past retirement age. But baby
boomers may not receive the handsome rates
of return on their housing investments en­
joyed by their parents, and home ownership
rates have fallen for younger households in re­
cent years. Moreover, the controversy is con­
siderable over whether households are willing
or able to spend their housing wealth on con­
sumption or medical needs during retirement.

Gains on Investment in Housing
Returns to housing investment stem from two
sources-real capital gains as housing assets
appreciate over time and financial gains on
borrowing to buy the house. During the 1970s
and the early 1980s, real capital gains on
housing assets were substantial as a result of
the interaction of the tax code with inflation,
the pressure of baby boomers in the housing

September 1993

market, and speculation that kept housing
prices going up.
Such real capital gains are not expected
again soon since these conditions are unlikely
to reemerge in the next few decades. But few
analysts expect a sharp decline in the real
price of housing. One widely cited paper pub­
lished in 1989 claims that the lack of demogra­
phic pressures on the housing market during
the 1990s and 2000s will lead to a 47 percent
real decline in the price of houses.16 However,
problems in that analysis cast doubt on the
magnitude of this prediction. Although a
model driven primarily by demographic move­
ments may have explained changes in housing
prices for some periods in the past, there is no
guarantee that demographic changes will con­
tinue to be most important for home prices in
coming years.17
Mortgage borrowing has also become less
likely to yield financial gains. When parents
of baby boomers obtained mortgages, they
were 30-year mortgages with a fixed nominal
rate. As inflation rates increased faster than
expected during the late 1950s, 1960s, and
1970s, the real after-tax cost of borrowing
through a mortgage became tiny and actually
turned negative in some cases. This develop­
ment put extra purchasing power into the
hands of families with existing fixed-rate
mortgages, but sadly it eroded the value of the
financial assets held by older people at mort­
gage lending institutions such as savings and
loans.
Baby boomers may also enjoy fewer gains
from mortgage borrowing because about 40
percent of home mortgages closed from 1983 to
1992 have been adjustable-rate mortgages.
Although this form of mortgage also lowers
payments when expected inflation falls, the
possibility of making substantial real gains

14. See Daniel Beller and Helen Lawrence, "Trends in Pri­
vate Pension Plan Coverage," in Turner and Beller, eds.,
Trends in Pensions 1992.
15. See Emily S. Andrews, "The Growth and Distribution of
401(k) Plans," in Turner and Beller, eds., Trends in Pen­
sions 1992; or James M. Poterba, Steven F. Venti, and
David A. Wise, "401(k) Plans and Tax Deferred Saving,”
Working Paper No. 4181 (National Bureau of Economic
Research, Cambridge, Mass., October 1992).




16. N. Gregory Mankiw and David N. Weil, "The Baby
Boom, the Baby Bust, and the Housing Market," R e­
gional Science and Urban Economics (May 1989).
17. See Patric H. Hendershott, "Are Real House Prices Like­
ly to Decline by 47 Percent?" Regional Science and Ur­
ban Economics (December 1991).

CHAPTER FOUR

THE FINANCIAL WELL-BEING OF BABY BOOMERS IN RETIREMENT 41

from the mortgage borrowing is slim. Higher
inflation simply boosts the mortgage rate, and
hence the monthly payments on existing
adjustable-rate mortgages.
Increased availability of home-equity loans
in recent years may mean that baby boomers
will have less equity in their homes when re­
tirement approaches. Home-equity loans pro­
vide a source of credit to be used for college
education of children, home improvement, un­
expected medical payments, or Caribbean
cruises.18 Whereas households of previous
generations might have saved in advance for
these expenditures, baby boomers may rely on
home equity to pay the bills and later find that
fewer resources are available for retirement.
A final concern related to gains from hous­
ing investment is the decline in the home own­
ership rate among younger households in re­
cent years. Although baby boomers have
higher rates of home ownership than their
parents, those rates among households headed
by someone under 50 have fallen since 1982,
when the Bureau of the Census first reported
home ownership rates by age of householder.
For example, the home ownership rate among
married-couple families headed by someone
age 30 to 34 fell from 71.9 percent in 1982 to
66.6 percent in 1991. Late boomers could be
delaying their home purchase rather than for­
going it. But some analysts argue that home
ownership instills financial discipline that
helps households accumulate other assets. If
so, and if lower home ownership rates con­
tinue to follow the late boomers throughout
their lives, those boomers may fall short also
on their nonhousing investments.

Are Households Willing or Able
to Consume Housing Equity?
Since such a large proportion of total wealth
held by older households is in the form of hous-

18. For an analysis of who uses home-equity loans and for
what purposes, see Joyce M. Manchester and James M.
Poterba, "Second Mortgages and Household Saving," Re­
gional Science and Urban Economics (May 1989), pp.
325-346.




ing equity, it is only natural to ask whether
this asset is available to finance living ex­
penses in retirement or whether it will become
part of an inheritance. Although some ana­
lysts argue that older households have not
shown a willingness to consume their housing
equity, others have found a decline in housing
wealth among older people, particularly in the
year or two before death.
Whether or not one includes the value of
housing equity in counting the assets avail­
able for consumption in retirement makes a
big difference to the issue of adequacy of sav­
ings.19 As noted in Chapter 3, the median ra­
tio of housing equity to wealth is about twothirds for homeowning households with heads
of household ages 55 to 64 and 65 to 74. As­
suming that housing wealth will not be used
to finance retirement reduces available re­
sources by a factor of three at the median.
Whether housing equity should be included
in retirement resources remains an open ques­
tion, but there is little doubt that housing eq­
uity forms part of household wealth. The view
that the typical elderly family does not want
to reduce housing equity to finance other con­
sumption is based on evidence showing that
even the elderly who move from one home to
another are as likely to increase as to decrease
housing equity. 20 Yet some analysts would
interpret these results as saying that elderly
households do not want to reduce housing con­
sumption, not that they do not want to extract
housing equity.
More recent work shows that average levels
of home ownership and housing wealth decline

19. Mixed evidence on how capital gains from housing affect
consumption is presented in Jonathan Skinner, "Hous­
ing Wealth and Aggregate Saving," Regional Science
and Urban Economics (May 1989), pp. 305-324; and in
Skinner, "Housing and Saving in the United States,"
Working Paper No. 3874 (National Bureau of Economic
Research, Cambridge, Mass., October 1991).
20. Steven F. Venti and David A. Wise, "Aging, Moving, and
Housing Wealth," in David Wise, ed., The Economics of
Aging (Chicago: University of Chicago Press, 1989); or
Venti and Wise, "But They Don’t Want to Reduce Hous­
ing Equity," in David Wise, ed., Issues in the Economics
of Aging (Chicago: University of Chicago Press, 1990).

42 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

significantly with age, particularly when a
spouse dies.21 Also, a strong tendency exists
among households to reduce home ownership
in the few years before the death of the house­
holder, and the value of houses sold by elderly
people tends not to remain in their portfolios
after the house is sold.
In theory, several mortgage instruments
could be used to tap housing equity while al­
lowing the elderly household to continue liv­
ing in the home. Home-equity loans became
popular during the 1980s, though many retir­
ees find such loans difficult to obtain because
lenders impose monthly payment-to-income
ratios to determine eligibility. Reverse mort­
gages pay a monthly sum or set up an open
line of credit to the homeowner in return for
the bank's taking possession of the house
when the household members die. Scattered
lenders in 43 states provide reverse mortgage
loans insured by the Federal Housing Admin­
istration, and a major financial services com­
pany has just entered the field as well.22 How
popular these loans will prove to be remains
uncertain, in part because lenders cannot en­
force upkeep of the property and borrowers
have more information about their life expec­
tancy than lenders.
When their parents die, some baby boomers
will receive considerable bequests arising
from the rapid appreciation of housing assets
during the 1970s and 1980s. Whether or not
this happens will depend to some extent on the
regulations concerning eligibility for public
assistance for health care. Under present reg­
ulations, older people must divest themselves
of their assets before they are eligible to re­
ceive full benefits from government programs
for long-term care. If this remains the case,
the size of bequests received by baby boomers
may depend in part on the health of their par­
ents in old age.

September 1993

Savings
Income from private wealth will be critical to
maintaining a comfortable lifestyle in retire­
ment for the majority of baby boomers. In­
come from assets currently is second only to
Social Security income as a share of total in­
come for households age 65 and older, provid­
ing 25 percent. Savings of baby boomers
throughout their working years, together with
the rate of return on assets both now and in
the future, will determine how much is actu­
ally available from this source. Inheritances
will also boost the retirement incomes of the
baby boomers.

Personal Saving
Several recent studies suggest that many
Americans, including baby boomers and par­
ticularly those without a college education,
save too little for their needs in retirement. If
this is true, many households may find them­
selves with fewer resources than they would
like during retirement unless saving rates rise
in the future.
One study suggests creating and expanding
private pension plans as a remedy to the low
saving rate of low-income households.23 Be­
cause these households do not respond to tax
incentives to save, employer-sponsored pen­
sions can increase total saving since they tend
not to displace personal saving of low-income
households. For high-income households, tax
incentives for saving are probably no more ef­
fective in raising saving rates than in influ­
encing other types of behavior, but pensions
tend to substitute for nonpension saving.
Another study claims that relatively low
wealth for less educated households is related
to the importance of eligibility rules for public

21. Louise Sheiner and David N. Weil, "The Housing Wealth
of the Aged," Working Paper No. 4115 (National Bureau
of Economic Research, Cambridge, Mass., July 1992).
22. For more information on these lenders, see Jane Bryant
Quinn, "Major Lender Enters Reverse Mortgages Are­
na," The Washington Post, March 21,1993, p. H3.




23. B. Douglas Bernheim and John Karl Scholz, "Private
Saving and Public Policy" (working paper, Princeton
University, October 1992).

CHAPTER FOUR

THE FINANCIAL WELL-BEING OF BABY BOOMERS IN RETIREMENT 43

assistance p r o g r a m s . 24 The interaction of un­
certainty and the asset-based means testing of
certain public assistance programs may help
to explain differences in wealth of different
groups.
Perhaps the most controversial study of sav­
ing by baby boomers concludes that the aver­
age household with a head age 35 to 44 is ac­
cumulating assets at only 34 percent of the de­
sired rate when housing assets are excluded.25
The study compares actual savings with simu­
lated target savings required to maintain con­
sumption levels in retirement. The difference
between actual and targeted savings is re­
flected in the study’s index of adequacy of
savings.
The study finds that the index of the ade­
quacy of savings varies widely among differ­
ent types of households. The index is gener­
ally higher for low-income households and is
higher for couples than for single individuals,
reflecting the higher replacement rates of So­
cial Security for low-income households and
for couples.
In addition, those households who are cov­
ered by a private pension are closer to their
target savings than those who are not. For ex­
ample, married couples with heads of house­
hold ages 35 to 45 with pension coverage and
income between $20,000 and $40,000 show an
adequacy of savings index of 49 percent (ex­
cluding housing assets), and those with pen­
sion coverage and income over $100,000 have
an index of 28 percent. Single women with
pension coverage and income between $20,000
and $40,000 have an index of 31 percent, and
those in the same income bracket but without
pension coverage have an index of 24 percent.
The study suffers, however, from a number
of problems. The analysis may understate

24. R. Glenn Hubbard, Jonathan Skinner, and Stephen P.
Zeldes, "Precautionary Saving and Social Insurance"
(working paper, Columbia University, October 1992).
25. B. Douglas Bernheim, Is the Baby Boom Generation Preparing Adequately for Retirement? Summary Report
(Princeton, N.J.: Merrill Lynch, January 1993).




how much a household needs to save by ignor­
ing purposes other than retirement for accu­
mulating wealth. For example, it does not rec­
ognize the desire to save for college education,
unexpected medical bills, or long-term nurs­
ing care. But it may overstate consumption
goals for many households who expect to re­
duce their expenditures in retirement.
In addition, the study's assumption that
households do not view housing assets as
available for financing retirement needs is
critical. When housing wealth is included in
the analysis, the index of adequacy of savings
increases to 84 percent.2® The ability and
willingness of baby boomers to extract money
for retirement from their homes through trad­
ing down or through various types of mortgage
contracts could be important to their incomes
in retirement. At the very least, home owner­
ship means more discretionary income in re­
tirement since the household need not pay
rent and many households have paid off the
mortgage.
Like any results based on simulations and
survey data, the study on the adequacy of sav­
ings relies heavily on the assumptions under­
lying the model and on the accuracy of the sur­
vey responses. Households are assumed to
want to maintain the same level of consump­
tion in retirement as throughout their work­
ing lives, and leisure is not considered to be a
substitute for other goods. Yet many retirees
derive a great deal of pleasure from having
more leisure time, perhaps reducing their con­
sumption of expensive vacations and restau­
rant meals as a result.
Moreover, in the study, household members
are assumed not to delay retirement in re­
sponse to low levels of wealth, even though a
later retirement would allow them to build up
more savings and would reduce the period for
which they rely on savings. Finally, one
might question the accuracy of the savings re______________
26. B. Douglas Bernheim, "Is the Baby Boom Generation
Preparing Adequately for Retirement? Technical Report" (working paper, Princeton University, September
1992).

44 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

ported by baby boomers for the study on ade­
quacy of savings since responses to telephone
surveys often underestimate actual wealth.
In any case, the adequacy of savings study
asks a different question than that posed by
this study. Although it may be true that baby
boomers need to increase their saving rates if
they want to consume the same amount in re­
tirement as in their working years, the in­
comes of most baby boomers in retirement are
still likely to exceed those of their parents by
quite a large margin as long as real wages
grow on average.

September 1993

Relative to the current wealth of babyboomer households, an inheritance of this size
would be substantial. Since the median
wealth of unmarried people ages 35 to 44 is
about $17,000, receiving $30,000 would al­
most triple their wealth. The median wealth
of households with a married head of house­
hold age 35 to 44 in 1989 was about $70,000,
so an inheritance of $60,000 would almost
double the current wealth of those baby
boomers. Even if inheritances are not received
until the recipient is 55 to 64, the additional
$60,000 in wealth would increase the median
wealth of current married couples in the 55-64
age group by about one-half.28

Inheritances
Some baby boomers will inherit substantial
wealth before or during their retirement
years. Although little direct evidence is avail­
able on age of inheritors or amount received,
indirect evidence suggests that the median
baby-boomer household could receive a large
amount of wealth relative to its current
wealth.
As reported in Chapter 3, median wealth for
all households with heads of household ages
65 to 74 was $81,500 in 1989, and median
wealth for all married couples in this age
group was $130,200. Although the evidence
on whether households accumulate or
decumulate wealth during the retirement
years is mixed, assuming no change in wealth
during retirement is not far from the truth for
most households.27 If the surviving spouse of
the median elderly couple holds $100,000 at
the time of death and each elderly couple has
three children, then the median amount in­
herited per child would be about $30,000.
Married-couple households would inherit
$60,000.
27. For evidence on this poin t, see N ancy Ammon
Jianakoplos, Paul L. Menchik, and F. Owen Irvine,
’’Using Panel Data to Assess the Bias in Cross-sectional
Inferences of Life-Cycle Changes in the Level and
Composition of Household Wealth,” in Robert E. Lipsey
and Helen Stone Tice, eds., The Measurement of Saving,
Investment, and Wealth (Chicago: University of Chicago
Press, 1989).




Baby Boomers at Risk in
Retirement
Several groups are at particular risk to have
lower incomes in retirement than their par­
ents' generation. These groups include the
poorly educated, the single, and those who
were unable to buy a house. In addition, be­
cause of growing medical care costs, education
costs, and longer life, all boomers face the pos­
sibility that their needs for wealth will exceed
those of their parents.

Groups Most at Risk
Those households headed by a person age 25 to
34 with less than a high school degree re­
ported lower median incomes in 1989 than in
1959, after adjustment for inflation (see Chap­
ter 2). These households had relatively little
wealth as well, with about 80 percent report­
ing less wealth than income. They are also
less likely to have employer pensions. Unless

28. A simulation model developed to explain overall wealth
changes over the 1962-1983 period in the United States
suggests that most inheritances go to households in their
fifties and sixties. See Daphne T. Greenwood and
Edward N. Wolff, "Changes in Wealth in the United
States, 1962-1983," Journal of Population Economics
(October 1992), pp. 261-288.

CHAPTER FOUR

THE FINANCIAL WELL-BEING OF BABY BOOMERS IN RETIREMENT 45

these people can find lucrative jobs so that
they are able to save in anticipation of retire­
ment, they may have to rely heavily on Social
Security and even public assistance during
their retirement years.
Households composed of single adults ages
25 to 34 with children also appear to be strug­
gling. Since 1959, the proportion of house­
holds in the "unmarried with children" cate­
gory has almost tripled. Their median house­
hold income is about one-third the size of that
for married couples with children in the same
age group in 1989, and almost 90 percent of
these households report less wealth than in­
come. These single-parent households, usu­
ally headed by women, may find it more diffi­
cult to accumulate wealth for many years.
Households composed of married couples accu­
mulate wealth more rapidly than singles in
part because there can be two earners, but also
because living costs such as housing can be
shared. Moreover, many single women do not
have the option of receiving Social Security
benefits under a husband's usually more ex­
tensive and more highly paid work history.
Young people who do not own a home may
also have trouble accumulating sufficient
wealth to finance a style of living that is com­
parable with that of their parents' generation.
Although home ownership by itself does not
necessarily generate additional wealth, it does
require a sufficiently high level of earnings
throughout one's lifetime to keep up with
mortgage payments, property taxes, and home
maintenance. Moreover, homeowners prob­
ably save more because they have to pay off a
mortgage, and they end up with a substantial
asset. The median value of wealth for
nonhomeowners ages 55 to 64 in 1989 was
about $800 compared with $115,000 for home­
owners. It is difficult to imagine starting re­
tirement with just $800 in assets.

system are being considered, but it is unclear
what will happen or when. Changes that are
made over the next few decades could make a
great deal of difference to the rate of increase
of medical expenditures, who pays the bill,
and the range of services covered by govern­
ment programs such as Medicare and Medi­
caid (or their successors).
Over the past 25 years, the health sector's
share of the U.S. economy has more than dou­
bled, to about 14 percent of gross domestic
product in 1992.29 Assuming that current
government policies remain in force and that
medical practice and private health insurance
trends continue, the Congressional Budget Of­
fice projects that national health spending will
reach 19 percent of gross domestic product by
the year 2 0 0 0 .3 0 And under current policies,
no sure end to this rate of increase is in sight.
Such rapid increase in health expenditures
has serious implications for consumers, busi­
nesses, and governments. The high cost of pri­
vate health insurance would shrink the pro­
portion of Americans who are privately cov­
ered and increase the number of people with
no insurance. Pension benefits might be cut to
cover increased cost of health insurance for re­
tirees, or private coverage of retirees might be
eliminated. Governments would be called on
to pay a larger fraction of U.S. health spend­
ing through the Medicare and Medicaid pro­
grams. But higher government spending on
health would preempt resources from other
government programs as well as make deficit
reduction more difficult.
The increasing cost of health benefits has
contributed to the slow growth in wages and
salaries that many U.S. workers have exper­
ienced in recent years, and most likely it will
continue to be a drag on wage growth in the

Uncertain Medical Expenses

29. Congressional Budget Office, Projections o f National
Health Expenditures (October 1992).

Baby boomers face much uncertainty regard­
ing health care expenditures in the future.
Many proposals for changing the health care

30. Statement of Robert D. Reischauer, Director, Congres­
sional Budget Office, before the Subcommittee on
Health, House Committee on Ways and Means, March 2,
1993.




46 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

future.31 Without significant changes in pub­
lic policy and private behavior, rising spend­
ing on health care will continue to limit wage
and salary gains as private employers pour
money into higher health insurance premiums
for employees rather than into pay raises.
Households will have fewer resources avail­
able for saving than they otherwise would dur­
ing their working years as well as lower bene­
fits in retirement from Social Security and
pensions.

Education Costs and Increased
Life Expectancy
The tendency of some baby boomers to have
their children later in life may lead to high de­
mands on their wealth to pay educational ex­
penses just before retirement. For those par­
ents who are 35 years old when their child is
born, for example, college bills will have to be
paid during their mid- to late fifties- normally
the time when many people are accumulating
wealth for r e t i r e m e n t .3 2 Because college tu­
ition costs have increased 66 percent relative
to the general price level since statistics were
first collected in 1978, the situation may only
grow worse. Unless these older parents plan
ahead, they could find that their retirement
assets are smaller than they would have liked.
Increases in life expectancy over the last
few decades also imply the need for more fi­
nancial planning. Middle-aged people now
look forward to about three more years of re­
tirement living than their parents did, assum­
ing no change in age at retirement. At age 40,
men born in 1925 had an estimated life expec­
tancy of 74 years, and those born in 1950 had
an estimated life expectancy of 77 y e a r s . 33
For women born in 1925 who lived to age 40,
estimated life expectancy was about 81 years,
but it increased to 83 years for those born in
1950.
31. See Congressional Budget Office, Economic Implications
of Rising Health Care Costs (October 1992).
32. If older parents have sizable incomes and assets, they
may qualify for less federal aid than otherwise identical
couples who had children at a younger age.




September 1993

Although employer pensions and Social
Security continue to pay full benefits until
death-though generally with some erosion of
real private pension benefits from inflationhousehold wealth could easily be spent before
the end of life. Unless baby boomers plan to
save more to finance more years of retirement
or decide to retire later, they could find them­
selves with scant resources when they are
very old.

Conclusions
Most baby boomers are likely to enjoy higher
real incomes in retirement than their parents
currently do. The exceptions to this good for­
tune may be the poorly educated, single wom­
en, and divorced individuals who are not eli­
gible for pension and Social Security benefits
and do not have substantial income from as­
sets.
A few caveats are in order, however. It is
much too early in the lives of baby boomers to
predict their financial well-being in retire­
ment with much accuracy. Baby boomers
themselves already recognize the uncertain­
ties concerning Social Security and health ex­
penditures, but other unanticipated events
could dampen this optimistic outlook as well.
The rapidity with which the federal budget
deficit is brought down will affect the growth
rate of the economy, the level of taxes, and the
ability of the federal government to provide
social services for the baby boomers and others
in the coming years. Wars and other types of
pestilence could have dire consequences for
prosperity. Not least, the actions taken now
by the baby boomers themselves could have a
large bearing on their well-being in retire­
ment.

33. See cohort life tables in Felicitie C. Bell, Alice H. Wade,
and Stephen C. Goss, “Life Tables for the United States
Social Security Area 1900-2080,” Actuarial Study No.
107 (Department of Health and Human Services, August
1992).




Appendixes




_____________ A ppendix A ______________

Description of the Data

his appendix describes some of the im­
portant features of the household sur­
veys used in this study. It also dis­
cusses some methodological issues.

T

The 1960 Decennial
Census and the 1990
Current Population
Survey
The Congressional Budget Office (CBO) used
income data from the 1960 Census and the
1990 Current Population Survey (CPS) be­
cause they are the most comprehensive sourc­
es of data on household income for these time
periods.1 The 1960 Census covers the entire
population, including the military and those
living abroad. The 1990 CPS is based on the
civilian noninstitutional population of the
United States and also includes military per­
sonnel not living in barracks. The one in
1,000 sample of the 1960 Census contains in­
come data for 1959 on 52,993 households, and
the 1990 CPS contains income data for 1989
on 59,920 households.

The Survey of
Consumer Finances
CBO prepared estimates of wealth and the ra­
tio of wealth to income in this study using the

1.

The 1990 Census is not yet available for public use.




1962 Survey of Financial Characteristics of
Consumers and 1989 Survey of Consumer Fi­
nances. Both contain information on wealth
in the year of the survey. The 1962 and 1989
surveys have similar characteristics, so the
abbreviation SCF will be used to refer to both.
The SCF is a household survey conducted by
the Survey Research Center of the University
of Michigan and supported by the Federal
Reserve Board. The SCF provides detailed
financial and demographic data at the house­
hold level. CBO focused on reconciling concep­
tual differences between the 1962 and 1989
surveys so that estimated changes are mean­
ingful.
The 1962 and 1989 SCFs surveyed 2,557
and 3,143 households, respectively, in order to
achieve a sample of U.S. households of suffi­
cient size to generate unbiased estimates of
the population as a whole. In both surveys,
about 75 percent of the sample came from ran­
domly selected households, and tax data were
used to select the final 25 percent. The group
selected from tax data was deliberately com­
posed of wealthier households. The oversampling of wealthier families was necessary
because the distributions of wealth and in­
come are highly skewed. By oversampling
these wealthy households, a representative
sample is obtained without increasing the size
of the entire survey. The oversampling is cor­
rected before analysis of the data begins by
weighting wealthier households less heavily.
The concept of household used in the SCF is
a bit more limiting than that used in the Cen­
sus and CPS. Whereas the Census and CPS
include all people living within a dwelling
unit as members of the household, the SCF
does not. For example, boarders are included
in the household in the Census and CPS but
not in the SCF.

50 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Making the 1962 and
1989 Data Sources
Comparable

How the Choice of Price
Deflators Affects
Income Growth

In preparing the SCF data for analysis and
comparison, CBO occasionally found it neces­
sary to convert the data from one form to an­
other. Since the 1962 and 1989 SCFs were dif­
ferent on a variety of levels including detail
and definition, data were often totaled into
broader aggregates to make the numbers com­
parable over time. Among the most important
tasks was the preparation of income data for
use in the wealth-to-income ratios in the two
surveys. The 1989 SCF asked respondents to
report their total income from all sources in
the previous year (1988). The 1962 SCF asked
for current-year (1962) income from specific
components including wages and salaries,
business income, interest, capital gains, Social
Security, and stock dividends.

CBO used the PCE deflator to make 1959
income comparable with 1989 income. The
choice of deflator is important because
changes in incomes over three decades can
vary considerably using different price
indices.

In order to make these income data compa­
rable, transformations were performed on
both the 1989 and 1962 surveys. The 1988 in­
comes were converted to 1989 dollars using
the growth rate of nominal personal income
between 1988 and 1989. The 1962 income
data were first totaled and then inflated to
1989 dollars with the implicit Personal Con­
sumption Expenditures (PCE) deflator.
In general, the patterns of changes in
household incomes found in the 1962 and 1989
SCFs were similar to those found in the 1960
Census and 1990 CPS. CBO reported income
data from the Census and CPS rather than
from the SCFs because the much larger sam­
ple sizes for specific household types increase
the reliability of the data on income.




The implicit PCE deflator captures changes
in the cost of living over time. It allows the
mix of goods and services purchased to change
over time rather than assuming that house­
holds in 1989 consume the same items as
households did in previous years. Another
commonly used price index, the consumer
price index for all urban consumers (CPI-U),
measures changes in the price of a fixed bas­
ket of goods over time. The basket of goods
used currently is based on consumption pat­
terns during the 1982-1984 period, but it is
typically revised every decade or so. A third
choice, the fixed-weight PCE price index,
shows changes in the cost of living assuming
that people consume the same mix of goods
and services in all years as that consumed in
1987.
Because they have increased more slowly
than the implicit PCE deflator, using the CPIU or fixed-weight PCE price index would in­
crease the measured growth of incomes be­
tween 1962 and 1989. For example, median
income in 1959 for households with head of
household age 25 to 34 is found to be $22,300
in 1989 dollars using the implicit PCE deflator
employed in this study. Median income for
these households in 1989 is $30,000. Using

APPENDIX A

the fixed-weight PCE price index reduces the
1959 value to $19,800. The CPI-U index
yields $21,400 in 1959.

Household
Characteristics
Much of this study's analysis of wealth and in­
come data examined groups of households that
were delineated by certain demographic and
household characteristics: age, educational
attainment, children, marital status, number
of wage earners, and home ownership. In gen­
eral, households were placed in categories that
reflect the status of the household as a whole.
However, the age and education categories ap­
ply only to the head of the household. In the
SCF, the male is considered to be the head of
the household by convention.
CBO used two definitions to determine the
number of wage earners per household. For
the analysis of married households with a
head of household age 25 to 44, a household is
considered to contain two wage earners if both
the head and the spouse worked for pay during
the survey year. All other households are con­
sidered one-wage-eamer households. The im­
plicit assumption is that in this age group the
head of household cannot retire, but only be­
comes temporarily unemployed. Since the
goal of this breakdown was to track the emer­
gence of households in which both husband
and wife were working, the difference between
zero- and one-earner households is less impor­
tant. However, the 55-74 age group has three
earner categories: zero, one, and two. In this
way, retirees can be separated from those in
the age group who are still working.




DESCRIPTION OF THE DATA

51

Medians and Sample
Sizes
In Chapter 2 of this study, median values of
income from the 1960 Census and median val­
ues of wealth from the 1962 SCF were often
compared with those of the 1990 CPS and
1989 SCF in order to gauge the financial situ­
ation of baby boomers compared with their
parents. CBO chose to report median values of
wealth and income rather than mean values
because the median usually better represents
the situation of the typical household in the
survey. Outlying observations can heavily in­
fluence the mean, but all observations uni­
formly affect the median, which is simply the
value with equal numbers of observations
above and below it. Thus, the use of medians
prevents a few very wealthy households from
making a group seem relatively well-off in
comparison with the actual financial situation
of most of the households. In addition, the use
of medians lessens the variation of estimates
compared with means.
When making inferences about characteris­
tics of a population from a survey rather than
a census of that population, the sample size is
a crucial factor in determining the confidence
one can place in these inferences. A small
sample is vulnerable to bias from observations
that do not represent the population as a
whole. Sample sizes for specific household
types from the 1960 Census and 1990 CPS
were generally large enough so that the data
on income are quite reliable (see Tables A-l
and A-2.).
Sample sizes for the Survey of Consumer Fi­
nances were not so large, however. Exact val­
ues of wealth and of the ratio of wealth to in­
come should be interpreted with some caution.
Sample sizes for specific household types
range from 22 to 685 (see Tables A-3 and A-4).

52 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Table A-1.
Sample Sizes for Income Data in 1959 and 1989, Head of Household Age 25 to 44
Age
25 to 34

1959

Age
35 to 44

1989
Age
25 to 34

Age
35 to 44

Marital Status
All Households

9,708

11,763

12,768

13,604

Unmarried
No children
With children

742
578

1,064
824

3,737
2,025

3,008
2,038

Married
No children
With children

1,058
7,330

1,361
8,514

1,744
5,262

1,524
7,034

4,060
7,703

7,308
5,460

4,732
8,872

5,716
4,712
1,335

1,790
7,838
3,140

1,672
7,851
4,081

7,006
2,410
4,596

8,558
2,646
5,912

Home Ownership
Nonhomeowners
Homeowners

4,881
4,827
Education

No High School Degree
High School Degree
Four Years of College

4,084
4,196
1,428

Number of Wage Earners in Married Households
All Married Households
One Earner
Two Earners
SOURCE:

8,388
5,127
3,261

9,875
5,986
3,889

Congressional Budget Office tabulations using the 1 in 1,000 sample of the 1960 Census and the 1990 Current Population
Survey.




DESCRIPTION OF THE DATA

APPENDIX A




Table A-2.
Sample Sizes for Income Data in 1989,
Head of Household Age 55 to 74
Age
55 to 64

1989
Age
65 to 74

Marital Status
All Households

7,900

7,615

Unmarried
Married

2,911
4,989

3,605
4,010

Home Ownership
Nonhomeowner
Homeowner

1,597
6,303

1,553
6,062

Education
No High School Degree
High School Degree
Four Years of College

2,374
4,030
1,496

2,863
3,663
1,089

Number of Wage Earners
in Household
Unmarried Head
No earners
One earner

1,296
1,615

3,022
583

Married Head
No earners
One earner
Two earners

1,044
1,906
2,039

2,643
1,011
356

SOURCE:

Congressional Budget Office tabulations using the
1990 Current Population Survey.

53

September 1993

54 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

Table A-3.
Sample Sizes for Data on Wealth and Wealth-to-lncome Ratios
in 1962 and 1989, Head of Household Age 25 to 44
1962
Age
25 to 34

1989
Age
35 to 44

Age
25 to 34

Age
35 to 44

Marital Status
All Households

362

522

452

685

Unmarried
No children
With children

36
22

35
31

104
50

109
76

Married
No children
With children

32
272

53
403

64
234

88
412

169
353

226
226

175
510

177
203
142

64
255
133

80
319
286

114
184

151
349

Homeownership
Nonhomeowners
Homeowners

202
160
Education

No High School Degree
High School Degree
Four Years of College

119
151
92

Number of Wage Earners in Married Households
One Earner
Two Earners
SOURCE:

185
119

321
135

Congressional Budget Office tabulations using the 1962 and 1989 Survey of Consumer Finances.




APPENDIX A




DESCRIPTION OF THE DATA

Table A-4.
Sample Sizes for Data on Wealth and
Wealth-to-lncome Ratios in 1989,
Head of Household Age 55 to 74
1989
Age
55 to 64

Age
65 to 74

Marital Status
All Households

569

449

Unmarried
Married

154
415

160
289

Home Ownership
Nonhomeowner
Homeowner

72
497

66
383

Education
No High School Degree
High School Degree
Four Years of College

140
193
233

138
164
144

Number of Wage Earners
in Household
Unmarried Head
No earners
One earner
Married Head
No earners
One earner
Two earners
SOURCE:

76
77

116
44

60
169
186

148
102
39

Congressional Budget Office tabulations using the
1989 Survey of Consumer Finances.

55




Appendix B

Changes in Household Structure,
1960 to 1990
number of changes affected the struc­
ture of households over the past three
decades. Among the most important
were the growing number of women in the
labor force, the increase in nontraditional
households, and the reduction in family size.

A

that percentage dropped to only 56 percent in
1990 (see Table B-4). Only 26 percent of all
households consisted of a married couple with
children under 18. Female-headed family
households grew from 8 percent of all house­
holds in 1960 to almost 12 percent in 1990.

For married women and for women with
children, rates of participation in the labor
force increased particularly rapidly (see Table
B-l). The earnings of married women made a
big difference to household income in 1990 as
compared with 1960 (see Table B-2).

Nonfamily households doubled as a percent­
age of all households, rising from 15 percent to
almost 30 percent. The majority of these
households were composed of one person, and
their share of the total rose from 13 percent to
25 percent.

Although the number of households in the
United States grew from about 53 million to
about 93 million between 1960 and 1990, the
mix of household types shifted away from the
traditional. Nonfamily and female-headed
family households grew rapidly at the same
time that the average size of households
dropped from 3.3 people in 1960 to 2.6 in 1990.
About half of the increase in all household
types was in family households, which are
composed of two or more related individuals
(see Table B-3). The other half came from
nonfamily households, which more than tri­
pled in number over those 30 years, with the
largest percentage increase in nonfamily
households headed by males. The number of
family households headed by females more
than doubled, while the number of family
households with a married couple present in­
creased by less than half.

Higher divorce rates in recent years have
contributed to an increase in households of
single parents and single individuals. The
divorce rate per 1,000 individuals more than
doubled from 2.2 in 1960 to 4.7 in 1990, with
the rate reaching 5.3 in 1979 and 1981.1 Be­
cause the median age of women at the time of
divorce is about 30 years of age, many young
adult households have been clearly affected by
divorce.2

These trends have important implications
for changes in the structure of households
from 1960 to 1990. Whereas family house­
holds with a married couple present made up
about 74 percent of all households in 1960,




In recent years, families were less likely to
have children and those with children were
more likely to have only one or two. The aver­
age size of families fell from 3.7 to 3.2 between
1960 and 1990 (see Table B-5). The percent­
age of families with no children under 18 rose
from 43 percent to 51 percent, while the per­
centage with three or more children fell from
21 percent to 10 percent.

1.

Bureau of the Census, Statistical Abstract of the United
States: 1992 (1992), Table 80.

2.

Ibid., Table 132.

58 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Table B-1.
Labor Force Participation Rates for Married Women and
for Women with Children in 1960,1970,1980, and 1990 (In percent)
1960

1970

1980

1990

Married Women
16 to 19 years
20 to 24 years
25 to 34 years
35 to 44 years
45 to 64 years
65 and over

31.9
27.2
31.7
28.8
37.2
36.0
6.7

40.5
37.8
47.9
38.8
46.8
44.0
7.3

49.8
49.3
61.4
58.8
61.8
46.9
7.3

58.4
50.0
66.5
69.8
74.0
56.5
8.5

Women with Children Under Age 18
Married
Single

27.6
n.a.

39.7
n.a.

54.1
52.0

66.3
55.2

Women with Children Under Age 6
Married
Single

18.6
n.a.

30.3
n.a.

45.1
44.1

58.9
48.7

SOURCE:

Congressional Budget Office based on data from Bureau of the Census, Statistical Abstract of the United States: 1992
(1992), Table 618 (for married women) and Table 620 (for women with children).

NOTE: n.a. = not available.




APPENDIX B

CHANGES IN HOUSEHOLD STRUCTURE, 1960 TO 1990 59

Table B-2.
Median Money Income of Different Types of Households in 1960,1970,1980, and 1990 (In 1990 dollars)
1960

1970

1980

1990

Family Households
Married couple
Wife in paid labor force
Wife not in paid labor force
Male householder3
Female householder3

25,933
30,469
24,375
21,461
13,105

35,424
41,352
31,341
30,357
17,156

36,705
42,635
30,093
27,788
16,509

39,895
46,777
30,265
29,046
16,932

Nonfamily Households
Male
Female

10,950
6,080

15,293
8,364

17,351
10,577

17,927
12,450

SOURCE:

a.

Congressional Budget Office based on data from Bureau of the Census, Statistical Abstract of the United States: 1992
(1992), Table 709, and Statistical Abstract of the United States: 1982-1983, Table 717 (using factor of 1.587 to convert 1980
dollars to 1990 dollars).

No spouse present.




60 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Table B-3.
Number of Households by Type in 1960,1970,1980, and 1990 (In millions)
Percentage Change
1960197019801970
1980
1990

1960

1970

1980

1990

All Households
Average size

52.8
3.3

63.4
3.1

80.8
2.8

93.3
2.6

20
n.a.

27
n.a.

16
n.a.

Family Households
Married couple
Male householder9
Female householder3

44.9
39.3
1.2
4.4

51.5
44.7
1.2
5.5

59.6
49.1
1.7
8.7

66.1
52.3
2.9
10.9

15
14
0
25

16
10
41
58

11
7
66
25

7.9
2.7
5.2
6.9

11.9
4.1
7.9
10.9

21.2
8.8
12.4
18.3

27.3
11.6
15.7
23.0

51
52
52
58

78
117
58
69

28
32
26
26

Nonfamily Households
Male householder
Female householder
One person
SOURCE:

Congressional Budget Office based on data from Bureau of the Census, Statistical Abstract of the United States: 1992
(1992), Table 56.

NOTE: n.a. = not available.
a.

No spouse present.




APPENDIX B

CHANGES IN HOUSEHOLD STRUCTURE, 1960 TO 1990 61

Table B-4.
Percentage of Households by Type in 1960,1970,1980, and 1990
1960

1970

1980

1990

100.0

100.0

100.0

100.0

Family Households
Married couple
With children under 18
Without children under 18
Male householder3
Female householder3

85.0
74.4
n.a.
n.a.
2.3
8.4

81.2
70.5
40.3
30.2
1.9
8.7

73.8
60.8
30.9
29.9
2.1
10.8

70.8
56.1
26.3
29.8
3.1
11.7

Nonfamily Households
Male householder
Female householder
One person

15.0
5.1
9.8
13.1

18.8
6.5
12.5
17.2

26.2
10.9
15.3
22.6

29.3
12.4
16.8
24.7

All Households

SOURCE:

Congressional Budget Office tabulations using data obtained from Bureau of the Census, Statistical Abstract of the United
States: 1992 (1992), Tables 56 and 57.

NOTE: n.a. = not available.
a.

No spouse present.




62 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Table B-5.
Families by Number of Own Children Under 18
in 1960,1970,1980,1985, and 1990 (In percentage of families)
Number of Children Under 18
Year

Total

None

One

Two

Three
or More

Average
Size

1960
1970
1980
1985
1990

100
100
100
100
100

43
44
48
50
51

19
18
21
21
20

18
17
19
19
19

21
20
12
10
10

3.7
3.6
3.3
3.2
3.2

SOURCE:

Congressional Budget Office based on data from Bureau of the Census, Statistical Abstract of the United States: 1992
(1992), Table 66, and the Statistical Abstract of the United States: 1975 (1975), Tables 51 and 56.




Appendix C

Income and Wealth of the
Baby Boomers and Their Parents

hese tables supplement those found in Chapters 2 and 3. They provide more specific infor­
mation on the income and wealth owned by the baby boomers and their parents.




64 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Table C-1.
Wealth and Income of Households Ages 25 to 44 in 1962 and 1989,
by Marital Status With and Without Children (In 1989 dollars)
1962

Aae 25 to 34
1989

1962

Aqe 35 to 44
1989

Unmarried Head of Household
No Children
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
With Children
Median income
Median wealth
Median nonhousing wealth
Percentage f or wh ich:
Wealth is less than income
Nonhousing wealth is less
than one-half income

17,000
900
900

26,000
3,100
2,000

16,800
13,500
6900

28,700
17,700
7,000

73

79

61

61

76

72

43

60

8,100
0
0

13,300
700
0

10,900
1,900
700

20,900
7,900
1,900

88

88

61

55

88

89

72

75

Married Head of Household
No Children
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
With Children
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
SOURCE:

26,500
7,800
5,400

44,500
17,200
9,000

28,000
43,100
15,800

50,500
71,900
30,100

94

63

43

29

87

67

44

41

22,700
8,000
3,000

34,600
18,800
7,300

26,300
35,500
15,800

46,200
70,100
22,700

75

61

45

36

75

69

50

52

Congressional Budget Office tabulations using the 1962 and 1989 Survey of Consumer Finances. Median incomes come
from the 1960 Census and 1990 Current Population Survey.




APPENDIX C

INCOME AND WEALTH OF THE BABY BOOMERS AND THEIR PARENTS 65

Table C-2.
Wealth and Income of Married Couple Households Ages 25 to 44 in 1962 and 1989,
by Number of Wage Earners (In 1989 dollars)
Aqe35to44

1962
One Wage Earner
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
Two Wage Earners
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
SOURCE:

Aae 25 to 34
1989

1962

1989

21,900
12,600
3,700

28,100
8,100
4,000

24,700
40,700
13,700

38,500
53,400
10,000

68

65

39

43

70

74

47

64

25,500
5,600
2,400

41,500
28,300
11,300

29,600
34,600
19,900

50,400
92,400
29,100

89

59

55

31

88

66

53

44

Congressional Budget Office tabulations using the 1962 and 1989 Survey of Consumer Finances, Median incomes come
from the 1960 Census and 1990 Current Population Survey.




66 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Table C-3.
Wealth and Income of Households Ages 25 to 44 in 1962 and 1989, by Education (In 1989 dollars)
Aqe35to44

1962
No High School Degree
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
High School Degree
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
Four Years of College
Median income
Median wealth
Median nonhousing wealth
Percentage for which:
Wealth is less than income
Nonhousing wealth is less
than one-half income
SOURCE:

Aae 25 to 34
1989

1962

1989

18,600
800
0

16,300
1,600
700

20,700
13,900
4,000

20,800
6,100
1,500

84

80

58

59

87

83

65

80

23,900
8,600
3,400

29,000
8,300
3,600

27,500
43,200
23,600

35,600
45,600
13,700

71

71

40

47

74

72

42

60

29,200
23,100
10,700

41,800
28,300
12,400

38,500
68,400
38,100

53,400
102,700
37,200

75

57

31

29

63

65

27

36

Congressional Budget Office tabulations using the 1962 and 1989 Survey of Consumer Finances. Median incomes come
from the 1960 Census and 1990 Current Population Survey.




APPENDIX C

INCOME AND WEALTH OF THE BABY BOOMERS AND THEIR PARENTS 67

Table C-4.
Composition of Assets and Liabilities of Households Ages 25 to 44 in 1962 and 1989,
Median Values by Homeowner Status (In 1989 dollars)
1962

Aae 25 to 34
1989

1962

1989

Ail Households
Total wealth
Liquid financial assets
Other financial assets
Housing assets
Nonhousing tangible assets
Retirement accounts
Housing liabilities
Nonhousing liabilities
Consumer debt

6,100
500
600
0
3,100
0
0
2,300
2,300

9,000
1,300
200
0
5,000
0
0
3,100
3,000

29,300
1,600
4,700
23,300
3,900
0
0
2,100
1,600

54,200
4,000
3,000
50,000
8,000
0
12,000
5,000
4,100

Nonhomeowners
Total wealth
Liquid financial assets
Other financial assets
Housing assets
Nonhousing assets
Retirement accounts
Housing liabilities
Nonhousing liabilities
Consumer debt

1,400
300
100
0
2,300
0
0
2,100
2,100

1,700
700
0
0
2,300
0
0
2,000
2,000

6,400
700
1,800
0
2,100
0
0
1,200
1,200

1,500
900
0
0
2,000
0
0
2,000
2,000

Homeowners
Total wealth
Liquid financial assets
Other financial assets
Housing assets
Nonhousing assets
Retirement accounts
Housing liabilities
Nonhousing liabilities
Consumer debt

23,100
800
1,500
52,400
3,700
0
34,900
2,800
2,600

44,100
3,900
1,100
68,000
8,800
0
42,000
6,000
5,900

48,700
2,600
6,400
56,200
4,700
0
22,100
3,100
2,200

92,000
8,300
5,800
85,000
11,000
900
36,000
8,000
7,000

SOURCE:

A a e 35 to 44

Congressional Budget Office tabulations using the 1962 and 1989 Survey of Consumer Finances.

NOTE: Because the values in this table are medians, numbers do not add to totals.




68 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE

September 1993

Table C-5.
Median Wealth and Income of Households Ages 55 to 74 in 1989,
by Marital Status and Number of Wage Earners
Unmarried

Married

Age
55 to 64
No Wage Earners
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth is
less than onehalf income
One Wage Earner
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth is
less than onehalf income
Two Wage Earners
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth is
less than onehalf income
SOURCE:

Age
65 to 74

Age
55 to 64

Age
65 to 74

11,100
19,200

11,700
42,100

24,900
99,800

24,400
113,100

900

8,700

33,300

37,400

38

26

13

8

66

42

18

21

24,900
62,300

18,500
66,800

39,100
119,500

33,800
178,000

19,900

23,100

39,500

82,500

26

23

12

5

38

25

35

14

n.a.
n.a.

n.a.
n.a.

53,300
141,900

47,200
86,300

n.a.

n.a.

62,000

15,000

n.a.

n.a.

8

23

n.a.

n.a.

26

27

O
Congressional Budget < ffice tabulations using the 1989 Survey of Consumer Finances. Median income comes from the 1990
Current Population Survey.

NOTE: n.a. = not applicable.




APPENDIX C




INCOME AND WEALTH OF THE BABY BOOMERS AND THEIR PARENTS 69

Table C-6.
Wealth and Income of Households
Ages 55 to 74 in 1989, by Education
Age
55 to 64
No High School Degree
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth
is less than onehalf of income
High School Degree
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth
is less than onehalf of income
Four Years of College
Median income
Median wealth
Median nonhousing
wealth
Percentage for which:
Wealth is less
than income
Nonhousing wealth
is less than onehalf of income
SOURCE:

Age
65 to 74

20,100
46,100

14,100
45,000

5,600

6,700

28

26

56

46

38,800
96,300

21,900
86,000

27,800

32,800

18

12

36

16

58,100
210,900

38,600
314,000

126,000

210,000

3

4

7

12

Congressional Budget Office tabulations using the
1989 Survey of Consumer Finances. Median incomes come from the 1990 Current Population
Survey.

70 BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE




September 1993

Table C-7.
Composition of Assets and Liabilities
of Households Ages 55 to 74 in 1989,
Median Values by Homeowner Status
Age
55 to 64

Age
65 to 74

97,200
7,000
3,000
65,000

81,500
9,700
2,000
50,000

7,000
0
0
700
300

4,000
0
0
0
0

Nonhomeowners
Total wealth
Liquid financial assets
Other financial assets
Housing assets
Nonhousing assets
Retirement accounts
Housing liabilities
Nonhousing liabilities
Consumer debt

800
150
0
0
600
0
0
0
0

2,000
800
0
0
1,000
0
0
0
0

Homeowners
Total wealth
Liquid financial assets
Other financial assets
Housing assets
Nonhousing assets
Retirement accounts
Housing liabilities
Nonhousing liabilities
Consumer debt

115,000
12,000
5,000
80,000
8,000
0
0
1,100
500

108,300
15,000
3,000
60,000
5,000
0
0
0
0

All Households
Total wealth
Liquid financial assets
Other financial assets
Housing assets
Nonhousing
tangible assets
Retirement accounts
Housing liabilities
Nonhousing liabilities
Consumer debt

SOURCE:

Congressional Budget Office tabulations using the
1989 Survey of Consumer Finances.

NOTE: Because the values in this table are medians, numbers
do not add to totals.

* US. GOVERNMENT PRINTING OFFICE:

1993 - 343-277 - 814/96904




Figures for the median income for households headed by unmarried individuals were in­
correctly reported on page 8.

Table 1. WITH CORRECTIONS
Distribution of Income in 1959 and 1989, by Age (25 to 44) and
Marital Status of Household Head (In 1989 dollars)
1959
All Households
20th percentile
40th percentile
60th percentile
80th percentile
Median
Ratio of 80th to 20th percentile
Unmarried Head of Household
20th percentile
40th percentile
60th percentile
80th percentile
Median
Ratio of 80th to 20th percentile
Married Head of Household
20th percentile
40th percentile
60th percentile
80th percentile
Median
Ratio of 80th to 20th percentile

Aqe 25 to 34
1989

1959

13,400
19,800
24,700
32,000
22,300

14,900
25,000
35,100
49,900
30,000

14,200
21,900
28,400
38,100
25,100

19,700
32,200
45,400
63,100
38,400

2.39

3.35

2.68

3.20

4,900
10,100
16,200
24,300
13,000

9,500
17,800
26,100
38,500
21,900

5,300
11,300
17,200
25,500
14,200

11,400
20,500
30,100
44,900
25,300

4.96

4.05

4.81

3.94

15,400
20,700
25,500
32,400
23,300

21,900
32,100
42,100
55,900
36,700

17,000
23,900
30,000
38,700
26,700

29,000
40,800
53,100
71,200
46,800

2.10

2.55

2.34

2.46

Aqe 35 to 44

SOURCE: Congressional Budget Office tabulations using the 1960 Census and the 1990 Current Population Survey.
NOTE: Values apply to the household at the 20th percentile, 40th percentile, and soon.




1989




ERRATA
BABY BOOMERS IN RETIREMENT: AN EARLY PERSPECTIVE
September 1993

The explanation of the Hospital Insurance payroll tax in footnote 23 on page 26
should read as follows:
Virtually all employed individuals pay the HI payroll tax. The
payroll tax is 1.45 percent of payroll for both the employer and
the employee (for a total of 2.9 percent) up to a maximum of
$135,000 of earnings in 1993. This maximum was raised in
1990 from $51,300. Under the 1993 reconciliation act, all earn­
ings will be subject to the tax.

The annual real rate of return on Treasury bills during the 1980s was reported
incorrectly on page 31.

Table 9. WITH CORRECTION
Annual Real Rates of Return
on Selected Assets (In percent)
Treasury
Bills

Decade
1950-1959
1960-1969
1970-1979
1980-1989
SOURCE:

U.S. Gov­
ernment
Bonds

Stock
Market

-0.4
1.3
-1.1
3.8

22
-0.9
-1.7
8.4

15.9
55
-1.8
11.9

Congressional Budget Office using data from Roger
G. Ibbotsen and Gary P. Brinson, Investment Mar­
kets: Gaining the Performance Advantage (New
York: McGraw-Hill, 1987), and additional data from
Ibbotsen Associates.

CONGRESSIONAL
BUDGET OFFICE
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W ashington, D.C. 20515
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