CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

CBO

STUDY

NOVEMBER 2003

Baby Boomers’

Retirement

Prospects:

An Overview

JupiterImages

CBO

A

S T U D Y

Baby Boomers’ Retirement Prospects:

An Overview

November 2003

The Congress of the United States # Congressional Budget Office 

PREFACE

Over the past 15 years, the retirement prospects of the baby-boom generation (people born from 1946 to 1964) have become a source of public concern. Some experts contend that low saving by boomers could limit economic growth in the United States and

compound the financial pressures that face government programs such as Social Security

and Medicare. This Congressional Budget Office (CBO) study—prepared at the request 

of the Chairman of the Senate Budget Committee—updates and expands on a 1993 CBO

report on the retirement preparedness of boomers. It places the baby-boom retirement issue

in historical and policy context, describes the methodologies used to analyze that issue, reviews numerous studies of retirement preparedness that have been published since 1993, and

draws general conclusions from their findings.

Robert Shackleton of CBO’s Macroeconomic Analysis Division wrote this study. Paul

Burnham, Paul Cullinan, Robert Dennis, Philip Ellis, Tracy Foertsch, Peter Fontaine,

Douglas Hamilton, Arlene Holen, David Koitz, Kim Kowalewski, Mark Lasky, Benjamin

Page, Amrita Palriwala, Kathy Ruffing, John Sabelhaus, Kurt Seibert, Ralph Smith, John

Sturrock, David Weiner, Roberton Williams, and Thomas Woodward of CBO provided

valuable comments and assistance, as did James Poterba of the Massachusetts Institute of

Technology and Sharmila Choudhury of the Social Security Administration. Many authors

of the studies reviewed or cited in this report also provided helpful comments, including

John Ameriks, Alan Auerbach, B. Douglas Bernheim, Richard Easterlin, William Gale, 

John Gist, Alan Gustman, Laurence Kotlikoff, Joyce Manchester, Charles Manski, Olivia

Mitchell, Catherine Montalto, Peter Svensson, Christian Weller, and Edward Wolff.

Christian Spoor edited the study, and Christine Bogusz proofread it. Maureen Costantino

produced the cover, Lenny Skutnik printed the initial copies of the report, and Annette

Kalicki prepared the electronic versions for CBO’s Web site (www.cbo.gov).

Douglas Holtz-Eakin

Director

November 2003

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5

CONTENTS

Summary and Introduction 1

The U.S. Retirement System and the 

Baby-Boom Generation 3

Government Retirement and Health Programs 3

Pensions and Other Sources of Retirement Income 6

Baby Boomers and the Decline in Saving 9

Methodologies for Analyzing Retirement

Preparedness 13

Standard of Preparedness 13

Comprehensiveness 15

Cohorts 16

Sampling 16

Demographic and Socioeconomic Detail 20

Major Recent Studies of Retirement Preparedness 21

Studies That Compare Baby Boomers with

Preceding Generations 21

Studies That Compare Boomers’ and Preboomers’

Saving with “Needed” Saving 22

Studies That Compare Preboomers’ Wealth

at Different Times 31

Studies That Account for Impending Difficulties

in Public Benefit Programs 31

Conclusions 32

Bibliography 35
vi BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Table

1. Major Studies of Retirement Preparedness 

Published in the Past Decade 24

Figures

1. Life Expectancy of 65-Year-Olds 4

2. Ratio of Population Ages 20 to 64

to Population Ages 65 and Over 5

3. Saving Rates 10

Box

1. The Effect of Retirement Age on the Need

for Saving 18
1

Summary and Introduction

Having enjoyed historically high incomes over

their working years, baby boomers (people born from

1946 to 1964) make up one of the most prosperous

generations in U.S. history. In the past 15 years, however, their finances have become a source of concern 

in policy circles and in the press as doubts have arisen

about whether boomers are accumulating enough

wealth to maintain their current or expected standards

of living after they retire.1

 One worry is that low saving by boomers could hurt the economy by limiting

the growth of investment, productivity, and wages.

Such curbs on economic activity could compound the

budgetary pressures that the federal government will

face as increasing numbers of boomers become eligible

for benefits from Social Security and Medicare.

At the request of the Congress, the Congressional

Budget Office (CBO) examined the issue of baby

boomers’ retirement prospects a decade ago (when the

oldest boomers were 47).2

 It found that members of

that generation typically were earning more than their

parents had at the same age and were accumulating

wealth at largely the same pace or faster—indicating

that boomers were generally likely to be better off in

retirement than preceding generations had been. That

study did not attempt to estimate baby boomers’

probable retirement incomes, however, nor did it address whether those incomes would be adequate to

meet boomers’ retirement goals.

This report updates and expands on CBO’s 1993

study by presenting an overview of the boomer retirement issue and summarizing the research that has

been conducted in the past decade on the retirement

prospects of aging Americans. That research has employed various approaches to analyze retirement prospects, including different sources of data, methodologies, and measures of income adequacy. In particular,

there is no generally agreed-upon standard of what

constitutes an adequate or appropriate level of retirement income or consumption. Retirement preparations are a matter of choice, and households may

freely decide to finance a prosperous retirement by

saving a large share of their income during their working years, or they may choose to spend more while

working and less once they retire. In the absence of a

widely accepted standard, researchers have adopted

several very different standards to assess the adequacy

of boomers’ retirement preparations and expected incomes. Differences in those standards help account for

differences in the studies’ conclusions.

1. For typical treatments in the press, see Peter Svensson, “Boomers Are Good at Saving, but Not Good Enough,” Associated

Press, April 8, 2003; and Jonathan Clements, “Boomer Bummer: Retirement May Get Ugly for Generation,” Wall Street

Journal, July 9, 2003, p. D1. A full-page advertisement that

appeared on the back page of Roll Call on September 15, 2003,

claimed that a “New Survey Shows Americans Falling Short in

Planning and Saving for Retirement.”

2. See Congressional Budget Office, Baby Boomers in Retirement:

An Early Perspective (September 1993). 

CHAPTER
2 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

# Studies (like the 1993 CBO report) that compare

baby boomers’ current and projected finances

with those of previous generations at the same age

suggest that boomers are generally in better financial shape than their predecessors were at the same

age. Broadly speaking, they have higher per capita

income than their parents’ generation did; they are

preparing for retirement at largely the same pace;

and they have accumulated more wealth. As a general rule, the more types of wealth that such studies account for, the larger the share of the babyboom generation that appears prepared for retirement.

# Studies that compare boomers’ expected retirement income with an absolute standard, such as

the official poverty level, have concluded that

fewer boomers are likely to live in poverty than is

the case with current retirees.

# Most studies measure boomers’ financial behavior

against the goal of maintaining roughly the same

standard of living through their working lives 

and their retirement (on the principle that people

generally try to avoid sharp swings in their wellbeing). Most of those studies suggest that about

half of boomer households are on track to accumulate enough retirement wealth to maintain

their working-age standard of living after they retire as planned. The other half of households are

likely to face a drop in their living standard at retirement, especially if they retire when they now

intend to. In many cases, the shortfall will be

modest and can be made up through a few additional years of work. However, a substantial fraction of low-income boomer households are accumulating very few assets, and net worth among

families whose earners did not graduate from 

high school appears to have declined during part

of the 1980s and 1990s. If current trends continue, many of those baby boomers are likely not

only to face a lower standard of living when they

retire but also to find themselves largely dependent on government benefits.

Studies reach varying conclusions about the retirement

preparedness of boomers not only because of differences in methodology but also because researchers

must depend on samples of the population, which

may differ from study to study. Conclusions also vary

because boomers’ retirement incomes depend on future economic developments that are difficult to predict with any accuracy—developments such as future

earnings and savings, returns on assets, retirement

dates, life expectancy, changes in status (such as divorce, widowhood, and illness), pension incomes, the

likelihood of and size of government benefits, and

households’ responses to changing circumstances.

Nearly all of the studies reviewed in this report assume

that Social Security and other government benefits

will be paid as prescribed by current law. However,

budgetary pressures could result in lower benefit levels

in the future. Because many baby boomers are likely to

depend heavily on government benefits for the bulk of

their income in retirement, their prospects may be less

rosy than recent studies imply. Furthermore, people’s

saving behavior is influenced by their expectations

about future benefits. To the extent that boomers believe that they will receive all of the government benefits to which they would be entitled under current law,

that expectation may induce them to save less than

they would otherwise. Conversely, to the extent that

they recognize the looming difficulties in funding

those programs, they may increase their saving or 

retire at a later age than they had originally planned.
2

The U.S. Retirement System

and the Baby-Boom Generation

Households may save for a variety of reasons:

as a precaution against emergencies or periods of 

unemployment, to accumulate down payments on

homes and other large purchases, to finance education

for themselves and their children, to provide bequests,

and to build up assets that will produce income in retirement. As incomes and life expectancies have risen

substantially over the past century, people have tended

to stop working earlier and spend longer periods in

retirement than they did in the past. That trend has

increased the relative importance of retirement income

as a motivation for saving as well as the importance of

income-security programs for the elderly.

As the baby-boom generation grows older, the number

of people in the United States ages 65 and over is expected to roughly double by 2030. Moreover, that age

group is forecast to grow from about 13 percent of the

total population in 2000 to 20 percent in 2030 and to

remain above 20 percent for at least several decades

thereafter.1

 With life expectancies continuing to rise,

typical boomers are projected to live about two years

longer than their parents did (see Figure 1) and thus

could spend more time in retirement. Meanwhile, the

labor force is expected to grow much more slowly

than the population of retirees, resulting in many

fewer workers per retiree. Whereas there were 4.8

people ages 20 to 64 in 2000 for each person age 65 or

older, that number is expected to decline to around

2.9 by 2030 (see Figure 2).

To the extent that baby boomers intend to provide for

their own retirement, they must decide how much to

save during their working years and how to invest

those savings to provide income in the future. But

boomers need not set aside enough resources to cover

all of their anticipated needs in retirement. Some portion of those needs is likely to be covered by pensions

and, more importantly, by government benefits.2

Government Retirement and 

Health Programs

The Social Security, Medicare, and Medicaid programs partially replace retirees’ working-age incomes

and finance a large share of their health care expenses.

Those programs are mainly funded on a pay-as-you-go

basis through taxes on workers’ wages and salaries. In

the past 40 years, spending for Social Security and

1. Bureau of the Census, “National Population Projections—

Annual Projections of the Resident Population by Age, Sex,

Race, and Hispanic Origin: Lowest, Middle, Highest Series

and Zero International Migration Series, 1999 to 2100,” 

middle-series data, available at www.census.gov/population/

www/projections/natdet-D1A.html.

2. Some observers also note the importance of transfers between

family members, such as bequests from parents to their children to help them establish a financial base and caretaking of

elderly parents by their children.

CHAPTER
4 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Figure 1.

Life Expectancy of 65-Year-Olds

(Years)

Source: Congressional Budget Office based on Social Security Administration, The 2003 Annual Report of the Board of Trustees of

the Federal Old-Age and Survivors Insurance and Disability

Insurance Trust Funds (March 17, 2003), p. 86, available at

www.ssa.gov/OACT/TR/TR03/tr03.pdf.

Medicare (the two programs that focus most heavily

on the elderly) has risen from 2.5 percent of the nation’s gross domestic product to 6.9 percent.

Today’s retirees are heavily dependent on benefits

from those programs. Overall, Social Security payments make up about 40 percent of the total income

of people ages 65 and over. However, about twothirds of those people receive at least half of their income from Social Security, and one-third receive at

least 90 percent. Annual Social Security benefits are

projected to average $10,740 this year.3

 According to

one estimate, a two-earner couple who retired in 2000

at age 65 (one earning an average wage and the other a

low wage) will receive a total of $570,000 in Social

Security and Medicare benefits over their lifetime.4

Yet even with benefits of that size, about 10 percent of

the elderly fall below the official poverty level.5

If current trends persist, Social Security benefits will

continue to rise along with wages, and expenditures

per elderly Medicare or Medicaid beneficiary will also

keep growing. Thus, baby-boomer households are

expected—under current law—to receive a significant

portion of their retirement income from Social Security and to have a large share of their medical and

long-term care expenses paid by Medicare and Medicaid. If the two-earner couple described above retires at

age 65 in 2030, they will receive an estimated total of

$960,000 in Social Security and Medicare benefits

during their lifetime, under current law.6

Present trends are unlikely to persist indefinitely, however, because total payments to retirees are expected to

grow much faster under current law than either the

total incomes of workers who pay Social Security and

Medicare taxes or the revenues earmarked for those

programs.7

 That widening gap will place increasing

3. Social Security Administration, Fast Facts and Figures About

Social Security, SSA Publication No. 13-11785 (June 2003),

available at www.ssa.gov/policy/docs/chartbooks/fast_facts/

2003/ff2003.pdf.

4. That dollar amount represents the present value of the benefits

in 2000. See Eugene Steuerle and Adam Carasso, Lifetime

Social Security and Medicare Benefits, Straight Talk on Social

Security and Retirement Policy Series No. 36 (Washington,

D.C.: Urban Institute, March 2003), available at www.urban.

org/url.cfm?ID=310667.

5. In 2002, the official poverty level for an elderly two-person

household was just under $11,000 of income. See Social

Security Administration, Fast Facts and Figures About Social

Security.

6. That amount represents the present value of the benefits in

2030. The calculation assumes that the couple has the same

relative income level in 2030 as the couple that retired in

2000. See Steuerle and Carasso, Lifetime Social Security and

Medicare Benefits. 

7. The Social Security Administration projects that by 2018, its

trust funds will need to begin redeeming bonds to cover some

currently prescribed benefits, requiring the Treasury to find

resources to redeem the bonds. It further projects that the trust

funds will be exhausted by 2042, at which time projected revenues would be enough to cover only 73 percent of currently

projected benefits. See Social Security Administration, The

2003 Annual Report of the Board of Trustees of the Federal OldAge and Survivors Insurance and Disability Insurance Trust

Funds (March 17, 2003), p. 8, available at www.ssa.gov/

OACT/TR/TR03/tr03.pdf.

1940 1960 1980 2000 2020 2040 2060 2080

0

75

80

85

90 Actual Projected

Women

Men
CHAPTER TWO THE U.S. RETIREMENT SYSTEM AND THE BABY-BOOM GENERATION 5

Figure 2.

Ratio of Population Ages 20 to 64

to Population Ages 65 and Over

Source: Congressional Budget Office based on Social Security Administration, The 2003 Annual Report of the Board of Trustees of

the Federal Old-Age and Survivors Insurance and Disability

Insurance Trust Funds (March 17, 2003), p. 82, available at

www.ssa.gov/OACT/TR/TR03/tr03.pdf. (The values shown here

are the inverses of the dependency ratios given in that report.)

stress on both programs. Narrowing the gap could involve slowing the future growth of benefits.

Because the existence of government benefits plays

such an important role in households’ future wellbeing, it probably influences those households’ propensity to save for retirement. A 1998 CBO study

concluded that “each dollar of Social Security wealth 

. . . reduces private wealth by between zero and 50

cents.”8

 At the same time, however, looming budgetary pressures leave current workers increasingly uncertain about how secure their future benefits are. A

recent study of expectations about the future of Social

Security found that many people question whether

they will receive the payments prescribed under

current law.9

 That uncertainty could induce them to

increase their saving to offset possible reductions in

future benefits. (However, the study did not provide

any evidence that people who are less confident about

receiving Social Security tend to save more.)

If changes to the Social Security program were made

unexpectedly, households nearing retirement would be

less well prepared. But given sufficient time to adjust,

households could increase their work effort and saving

to offset such changes. The extent to which baby

boomers are providing for their own retirement—and

have time to react to policy changes—is thus an important consideration in evaluating proposals to reform the Social Security and Medicare programs.10

8. Congressional Budget Office, Social Security and Private Saving: A Review of the Empirical Evidence (July 1998), pp. 10-11.

Not only is expected Social Security income likely to reduce

saving for retirement, but it almost certainly reduces work

effort by encouraging early retirement. Furthermore, to the

extent that expected Social Security benefits lessen the incentive to save, they decrease the amount of capital available per

worker and thus workers’ wages and productivity—the source

of Social Security and Medicare tax revenues.

9. See Jeff Dominitz, Charles F. Manski, and Jordan Heinz, ‘Will

Social Security Be There for You?’: How Americans Perceive Their

Benefits, Working Paper No. 9798 (Cambridge, Mass.: National Bureau of Economic Research, June 2003), available at

www.nber.org/papers/w9798. The study concluded that

younger people tend to be much less confident than older

people that the Social Security system will still exist when they

reach retirement age. The median 40-year-old thinks there is

only a 50 percent chance that he or she will be eligible to receive Social Security benefits upon retirement. Younger people

also tend to have a much wider range of beliefs about the likely

size of future benefits than older people do. On average, however, they believe that if the system does continue to exist, their

benefits will be roughly similar to or slightly lower than current benefits.

10. Various CBO publications provide more information about

the challenges facing Social Security and Medicare. See Social

Security: A Primer (September 2001); A 125-Year Picture of the

Federal Government’s Share of the Economy, 1950 to 2075,

Long-Range Fiscal Policy Brief No. 1 (revised July 3, 2002);

The Looming Budgetary Impact of Society’s Aging, Long-Range

Fiscal Policy Brief No. 2 (July 3, 2002); Social Security and the

Federal Budget: The Necessity of Maintaining a Comprehensive

Long-Range Perspective, Long-Range Fiscal Policy Brief No. 3

(August 1, 2002); The Impact of Social Security and Medicare

on the Federal Budget, Long-Range Fiscal Policy Brief No. 6

(November 14, 2002); The Future Growth of Social Security: It’s

Not Just Society’s Aging, Long-Range Fiscal Policy Brief No. 9

(July 1, 2003); and Comparing Budgetary and Trust Fund

Measures of the Outlook for Social Security and Medicare, LongRange Fiscal Policy Brief No. 10 (October 10, 2003).

1960 1980 2000 2020 2040 2060 2080

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1

2

3

4

5

6

Actual Projected
6 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Pensions and Other Sources 

of Retirement Income

Some degree of structural change is already occurring

in several other areas—such as pensions, bequests, and

marital status—that have a bearing on living standards

in retirement.

In the area of pensions, a declining proportion of the

workforce is covered by defined-benefit plans, in

which pension benefits are based primarily on salary

levels and years of service.11 Moreover, a growing share

of defined-benefit plans have been converted from

traditional plans to cash-balance plans, in which benefits are defined by employers’ contributions and

guaranteed rates of return on those contributions. In

addition, more workers are being covered by definedcontribution plans, whose benefits depend on workers’

and employers’ contributions and on uncertain returns

on those savings. Thus, to some extent, definedcontribution plans conflate personal saving and

pension saving.

Those trends in pension-plan coverage have several

effects.12 Both cash-balance plans and defined-contribution plans more clearly establish the relationship

between contributions and the accumulation of assets

than traditional defined-benefit plans do. They also

make it easier for workers to preserve their retirement

assets while changing jobs in a rapidly evolving economy. Some evidence suggests that shifting to cashbalance plans has mixed effects: tending to benefit

workers near the bottom of the distribution of defined-benefit wealth but harming those near the top.13

Defined-contribution plans give workers greater

responsibility for their retirement planning. And although such plans tend to expose workers rather than

plans to the risks of investing, some evidence suggests

that many workers could end up with larger retirement benefits under a typical defined-contribution

plan than under a defined-benefit plan.14

Bequests are another source of uncertainty about how

well baby boomers are preparing for retirement. Many

observers note that boomers’ parents accumulated a

great deal of wealth and may be in a position to leave

substantial bequests to their children. However, some

researchers question whether bequests from older

generations will significantly benefit the majority of

boomers in retirement.15

Finally, many baby boomers’ living arrangements

differ from those of their parents in ways that could

affect their financial status during retirement. Elderly

11. See Alicia H. Munnell and Annika Sundén, “Private Pensions:

Coverage and Benefit Trends” (paper prepared for the Pension

Rights Center conference “Conversation on Coverage,” Washington, D.C., July 24-25, 2001), available at www.pension

coverage.net/PDFs/ConversationPaper.pdf.

12. The consequences of the shift from defined-benefit to definedcontribution plans—particularly tax consequences—are discussed in Congressional Budget Office, Utilization of Tax Incentives for Retirement Saving (August 2003).

13. See Richard W. Johnson and Cori Uccello, Can Cash Balance

Pension Plans Improve Retirement Security for Today’s Workers?

Retirement Project Brief No. 14 (Washington, D.C.: Urban

Institute, November 2002), available at www.urban.org/url.

cfm?ID=310576.

14. See Andrew A. Samwick and Jonathan Skinner, How Will

Defined Contribution Pension Plans Affect Retirement Income?

Working Paper No. 6645 (Cambridge, Mass.: National Bureau of Economic Research, July 1998), available at www.nber.

org/papers/w6645.

15. Although baby boomers’ parents have accumulated a historically large quantity of wealth, they also appear likely to live

longer—and therefore spend more of their retirement wealth

—than was previously expected of them. In addition, much of

their wealth is in the form of expected Social Security payments rather than financial assets and thus is less likely to be

passed on as bequests (though it may be passed on through

gifts while the parents are alive). Bequests tend to be highly

concentrated, benefiting relatively few inheritors; and the

baby-boom generation is large, with more people to spread bequests among. Those issues are examined in Jagadeesh Gokhale

and Laurence J. Kotlikoff, The Baby Boomers’ Mega-Inheritance—Myth or Reality? Economic Commentary Series (Cleveland, Ohio: Federal Reserve Bank of Cleveland, October 1,

2000), available at www.clev.frb.org/Research/com2000/

1001.pdf.
CHAPTER TWO THE U.S. RETIREMENT SYSTEM AND THE BABY-BOOM GENERATION 7

boomers are more likely than elderly members of previous generations to be divorced or never to have married.16 Historically, unmarried people tend not to live

as long as married people and so require less retirement wealth.17 However, they also tend to have higher

living expenses and are more likely to be poor. If those

historical patterns continue to hold true, an increasing

share of the future elderly may find their finances adversely affected by the trends in marital status.

16. 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 in the United States,” Population and

Development Review, vol. 19, no. 3 (September 1993), p. 513.

17. See Yuanreng Hu and Norren Goldman, “Mortality Differentials by Marital Status: An International Comparison” Demography, vol. 27, no. 2 (May 1990), pp. 233-250; and Robert A.

Hummer, Richard G. Rogers, and Isaac W. Eberstein, “Sociodemographic Differentials in Adult Mortality: A Review of

Analytic Approaches,” Population and Development Review, vol.

24, no. 3 (September 1998), pp. 553-578.

3

Baby Boomers and the

Decline in Saving

For nearly two decades, the total personal saving

rate of U.S. households (as measured by the government’s national income and product accounts, or

NIPAs) has been falling (see Figure 3). Many observers

associate that decline with the baby-boom generation,

but such an association is inaccurate. The NIPA measure of personal saving is an aggregate that covers

boomers and nonboomers alike, as well as the activities of nonprofit organizations. Moreover, it accounts

for only a portion of total private saving, excluding

households’ purchases of durable goods, saving by private corporations, adjustments for inflation, and many

forms of capital gains. Broader measures of overall

private saving (which are adjusted for investment in

durable goods, inflation, tax accruals in retirement

accounts, and corporate saving) have shown a smaller

decline since the mid-1990s.1

Because the NIPA personal saving rate is an aggregate

measure of saving as well as an incomplete one, it does

not provide much useful information for judging the

extent to which households in any given cohort of the

population are preparing for retirement. Nevertheless,

declines in many measures of private saving may reflect a decrease in people’s willingness to save, which

could constrain the long-term growth of labor productivity and hamper the economy’s ability to meet the

retirement needs of the baby-boom generation.

Other sources of information—research studies published in the past 10 years—suggest that the financial

behavior of baby boomers is broadly similar to that of

previous generations: 

# The Congressional Budget Office’s 1993 study

found that in the late 1980s, boomer households

had median wealth-to-income ratios that were

roughly the same as or higher than those of households at the same age 30 years earlier.2

 Only a few

groups of households (notably, those who had low

education levels or did not own a home) were accumulating less wealth than their parents.

# Another study from the mid-1990s found that

boomer households, taken as a group, were saving

at largely the pace that their parents had at the

same age and did not appear to be a significant 1. Even broader measures of saving that include capital gains

show much stronger swings than the measures mentioned

above. By raising asset values, capital gains can increase a

household’s wealth even if it does not undertake any conventional saving. Taking capital gains into account, the household

saving rate reached its highest level of the past four decades in

1999, although it has fallen precipitously in the past three

years.

2. Congressional Budget Office, Baby Boomers in Retirement: An

Early Perspective (September 1993), p. xi.

CHAPTER
10 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Figure 3.

Saving Rates

(As a percentage of gross domestic product)

Source: Congressional Budget Office based on data from the national income and product accounts (NIPAs) and the Federal Reserve Board’s flow-of-funds

accounts.

Note: Adjusted private saving is personal and corporate saving with adjustments for inflation (the product of the percentage change in the gross domestic product

deflator and the private sector’s holdings of credit-market debt) and for accrued taxes (equal to 20 percent of the saving in pension and individual retirement accounts, which is the estimated deferred tax liability).

source of the decline in personal saving.3 Rather,

the study concluded, the decline in overall saving

mainly resulted from an increase in consumption

by the elderly.

# A later study found that as of 1995, baby-boomer

households seemed to have slightly lower rates of

financial saving than their parents but larger contributions to retirement accounts and probably

higher capital gains on their investments.4

 It

found only a modest decline in the boomer cohort’s saving rate compared with that of its predecessors. 

# A survey of changes in wealth between 1984 and

1994 concluded that the median boomer household had noticeably lower wealth and income

than the median household of the same age a decade earlier, but it also noted that the comparison

excluded private pension assets, which appeared to

be trending upward over time.5

# Data from the triennial Survey of Consumer

Finances (which includes most components of

3. See Jagadeesh Gokhale, Laurence J. Kotlikoff, and John

Sabelhaus, “Understanding the Postwar Decline in U.S.

Saving: A Cohort Analysis,” Brookings Papers on Economic

Activity, no. 1 (1996), pp. 315-407.

4. O.P. Attanasio and M. Paiella, “Household Savings in the

U.S.A.,” Research in Economics, vol. 55, no. 1 (March 2001),

pp. 109-132.

5. Erik Hurst, Ming Ching Luoh, and Frank P. Stafford, “The

Wealth Dynamics of American Families, 1984-94,” Brookings

Papers on Economic Activity, no. 1 (1998).

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

0

2

4

6

8

10

12

NIPA Personal

Saving Rate

Adjusted Private

Saving Rate
CHAPTER THREE BABY BOOMERS AND THE DECLINE IN SAVING 11

wealth except private defined-benefit pensions and

expected Social Security payments) indicate that

the ratio of median wealth to median income of

households ages 35 to 54 was essentially the same

in 2001 as it had been in 1989.6

 That finding

suggests that boomers were accumulating wealth

relative to their income at about the same rate as

households 10 years older had at the same age.

With roughly the same ratio of wealth to income,

boomers appeared to be on track to finance about

the same proportion of their working-age income

in retirement as their predecessors.

# Another recent study painted a more pessimistic

picture of the finances of preboomer and older

boomer households. It reported a significant drop

in median wealth among households headed by

people ages 47 to 64 in 1998 compared with

households in the same age group in 1983. That

drop appears to be explained mainly by the study’s

projections of declining median lifetime earnings—projections that appear inconsistent with

historical data that show rising median income

(wage earnings plus income from other sources).

The study’s findings also result partly from 

changes in Social Security law that raised the retirement age and thus reduced expected lifetime

benefits. In addition, the study ignored potential

future contributions from defined-contribution

pension plans while apparently taking into

account some potential future contributions to

defined-benefit plans. Because a growing share of

the workforce is covered by defined-contribution

plans and a declining share is covered by definedbenefit plans, that approach tends to exclude an

increasing proportion of workers’ likely retirement

wealth.7

Taken together, those studies suggest relatively little

difference in the extent of wealth accumulation between boomer-age households and previous generations. However, the studies do suggest that capital

gains are playing an increasingly important role in that

accumulation. Because the most recent study relies on

data from 2001, none of that research takes into account the sizable changes in the value of housing and

the stock market that have occurred over the past two

years. In addition, those studies do not explicitly consider the implications for Social Security and Medicare

of the government’s looming budgetary pressures.

6. See Table 1 (income) and Table 3 (wealth) in the public data

tables from the survey, available at www.federalreserve.gov/

pubs/oss/oss2/2001/scf2001home.html.

7. Edward N. Wolff, Retirement Insecurity: The Income Shortfalls

Awaiting the Soon-to-Retire (Washington, D.C.: Economic Policy Institute, 2002), available at www.epinet.org.

4

Methodologies for Analyzing

Retirement Preparedness

Studies of how prepared people are for retirement have reached a range of conclusions, which in

some cases appear to contradict one another. The reason for the range is that those studies focus on different household characteristics, employ different sets of

data, and analyze them in differing ways. This chapter

outlines the various methodologies used to estimate

retirement preparedness. The main areas of difference

between studies are:

# The standard of preparedness or of future wellbeing considered adequate or appropriate,

# The comprehensiveness of the measure of resources used (income, saving, or wealth) and

whether it incorporates projections of the future as

well as current accumulations,

# The age cohorts included in the study,

# The data sample analyzed, and

# The degree of demographic and socioeconomic

detail included.

The next chapter describes the general conclusions

that can be drawn from recent studies despite their

differences in focus and approach.

Standard of Preparedness 

Studies vary a great deal in the standard of preparedness or adequacy against which they measure baby

boomers’ income, saving, or wealth. Some studies

simply compare the financial status of a sample of

boomers with that of a sample from the preceding

generation, either at the same age or at the same time.

An improvement on that approach is to project boomers’ financial status in retirement assuming that they

continue to save at their current rates. Those approaches illustrate how living standards have risen over

time and how many more resources boomers are likely

to have as they move into retirement than previous

generations did.

A more comprehensive method involves two steps: 

calculating the percentage of current income that representative households must save to achieve a level of

retirement income that meets some standard of adequacy, and then comparing that calculated rate with

households’ actual saving rates. Adequacy can be defined in terms of a standard of need, such as an official

poverty level, or in relation to consumption spending

during working years. Most of the studies reviewed in

this report use the second definition—that is, the

studies assume that people want to maintain a fairly

constant standard of living throughout their lives and

plan to replace some percentage of their preretirement 

CHAPTER
14 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

income after they stop working. In essence, that approach tries to determine whether people will be satisfied with the resources they have in retirement. 

A major problem with using that definition of adequacy is that little agreement exists about what replacement rate households require in order to maintain a constant standard of living. Financial planners

typically say that people can maintain their preretirement living standard by replacing only about 70 percent to 80 percent of their working-age income. The

reason they need not replace it all is that households

usually face lower expenses in retirement than they did

while working, for several reasons:

# They no longer have job-related expenditures,

such as commuting costs; 

# If they have accumulated enough wealth, they no

longer need to save much of any current income

they receive; 

# If they own a home, they have typically paid off

their mortgage; 

# They do not usually need to spend money on their

children; 

# If they cease working entirely, they are no longer

subject to payroll taxes;

# For most people, Social Security is largely untaxed, and with less taxable income, they may

drop into a lower tax bracket; and

# They have more leisure time, which means they

have opportunities to provide themselves with

services (such as cooking and home maintenance)

that they might have paid for earlier, as well as

opportunities for part-time work to earn extra 

income.1

Conversely, many retirees face substantial and growing

expenses for health care, not all of which are covered

by Medicare, Medicaid, or private insurance.2

 A study

by AARP projected that in 1999, out-of-pocket medical costs would average about $2,430 (or 19 percent of

income) for noninstitutionalized Medicare beneficiaries ages 65 and older.3

 For a quarter of those beneficiaries, AARP estimated, such costs would exceed

$3,000. Moreover, elderly retirees face the possibility

of developing disabilities that may leave them in need

of expensive long-term care, which can rapidly deplete

any retirement assets they have accumulated.

An extension of the replacement-rate approach compares people’s actual behavior with model simulations

in which saving behavior is programmed to be consistent with economic rationality. Such studies simulate a

representative sample of U.S. households that attempt

to “smooth” their standard of living over their lifetime

while facing typical uncertainties about wages, unem1. Households’ consumption spending typically declines at retirement, and researchers have studied that decline extensively to

determine whether it is planned or unexpected. A recent paper

suggests that in most cases, reductions in consumption at retirement are planned and apparently result mainly from lower

work-related expenses and from the substitution of home production for consumption spending (for instance, home-cooked

meals instead of restaurant meals); see Michael Hurd and

Susann Rohwedder, The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement, Working

Paper No. 9586 (Cambridge, Mass.: National Bureau of Economic Research, March 2003), available at www.nber.org/

papers/w9586.pdf. However, another recent paper suggests

that roughly 10 percent to 20 percent of households experience an unexpected decline in consumption at retirement

because they failed to anticipate their needs; see Erik Hurst,

“Grasshoppers, Ants, and Pre-Retirement Wealth: A Test of

Permanent Income Consumers” (draft, University of Chicago,

February 2003), available at http://gsbwww.uchicago.edu/fac/

erik.hurst/research/grasshopper_feb2003_harvard.pdf.

2. To some people, health care for the elderly is not a matter of

consumer choice (something to be paid for out of older households’ income in the same way as, for instance, housing or

food). Thus, it is not clear whether medical expenditures

should be considered when estimating whether elderly households’ assets are “sufficient” or not.

3. AARP Public Policy Institute, Out-of-Pocket Spending on

Health Care by Medicare Beneficiaries Age 65 and Older: 1999

Projections, Issue Brief No. 41 (Washington, D.C.: AARP,

December 1999), available at http://research.aarp.org/health/

ib41_hspend.pdf.
CHAPTER FOUR METHODOLOGIES FOR ANALYZING RETIREMENT PREPAREDNESS 15

ployment, and longevity.4 In that approach, if real

households with similar characteristics are saving less

(or more) than those simulated ones, the studies conclude that households are saving too little (or too

much).

Neither the replacement-rate approach nor the modelbased approach specifies an absolute standard of adequacy. As a result, either approach may conclude that

a working household living in poverty is saving adequately if its saving ensures that it will have an equally

low income in retirement. Conversely, those approaches may conclude that some households are

undersaving (according to a particular definition of an

adequate replacement rate or a particular degree of

consumption “smoothing”) even if the households’

saving rates are sufficient to keep them well above the

official poverty level in retirement.

Comprehensiveness

In analyzing retirement preparedness, the critical issue

is whether baby boomers have (or will acquire) enough

wealth to ensure an adequate stream of income in retirement. Current income and saving are important in

such analyses only because income is a source of saving, and saving is a source of wealth. In recognition of

those facts, most recent studies focus on measures of

wealth. However, some studies deal mainly with income because it is generally easier to measure than

wealth and it approximates households’ ability to accumulate wealth.

The most accurate measure of retirement preparedness

is one that accounts for how quickly households are

spending the wealth they are likely to have over their

lives. That measure is a complex concept that bears

little relation to conventional measures of current 

saving and that requires estimating future as well as

current income. 

Components of Wealth

For analyses of retirement preparedness, the relevant

measure of wealth is a broad one, which includes both

real assets (property) and financial assets, expected bequests and government benefits, and the value of retirees’ time. It also nets out liabilities, such as credit card

debt and mortgages.

Different studies measure different components of

wealth, and few studies include all components. Some

analysts argue that certain types of wealth should be

given less weight or not be counted at all. For instance, some analysts contend that it is inappropriate

to count all future Social Security or Medicare payments expected under current law as wealth, since

budgetary pressures over the long run could cause 

benefits to be cut. Some researchers also argue that

some or all housing wealth should not be counted as

part of a household’s assets for the purposes of gauging

retirement preparedness, because retired people who

own homes usually rely on them for housing and tend

to be reluctant to tap into housing wealth for other

purposes. Other analysts counter that elderly homeowners can gain access to their housing wealth

through reverse mortgages and often use that wealth to

finance serious needs late in life.5

As a general rule, the more types of wealth that a study

counts, the larger the share of the population that 

appears to be prepared for retirement. Although the

most recent studies typically include more components of wealth than older studies did, no research has

successfully incorporated all of the types of wealth discussed here, with due regard to the uncertainties surrounding future government benefits.

Projecting Future Resources

Including projections in an analysis also introduces a

great deal of uncertainty. Not only are future circumstances unclear, but so are baby boomers’ likely re4. Eric M. Engen, William G. Gale, and Cori E. Uccello, “The

Adequacy of Retirement Saving,” Brookings Papers on Economic Activity, no. 2 (1999).

5. See Louise Sheiner and David Weil, The Housing Wealth of the

Aged, Working Paper No. 4115 (Cambridge, Mass.: National

Bureau of Economic Research, July 1992), available at www.

nber.org/papers/w4115.
16 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

sponses to those circumstances. Thus, researchers must

make assumptions about such unknowns as:

# How much boomers will earn and save;

# When they will decide to retire and how long they

will live;

# What returns they will earn on their assets;

# How much income they will receive from

defined-benefit pensions;

# The likelihood and size of their government benefits; and

# Changes such as divorce, widowhood, and illness.

Differences in those assumptions contribute to differences in studies’ results. Assumptions about retirement

age are particularly important because people who 

retire early have a shorter working life over which to

accumulate wealth—and need to accumulate more—

than do people who retire at a later age.6

 Most studies

that attempt some sort of projection assume that people will retire at a set age, typically 62 or 65. However,

it may be more reasonable to assume that many people, finding their retirement assets inadequate at their

planned retirement age, will choose to work longer.7

A simple example illustrates the importance of such

assumptions: one study found that households who

are nearing retirement and who are in the middle of

their cohort’s wealth distribution may need a saving

rate of about 18 percent to maintain their working-age

consumption in retirement if they plan to retire at age

62—but only a 9 percent rate if they work until age

65.8 (For more-detailed examples, see Box 1 on pages 18-

19.) 

Cohorts

To determine whether economic developments have

disparately affected people born at different times,

nearly all studies that analyze the baby-boom generation break it down into at least two cohorts: people

born between 1946 and 1954 and those born between

1955 and 1964. Some studies subdivide that generation even further, and at least one study examines representative households born roughly 10 years apart between 1945 and 1965 (even though the first and last

cohorts fall slightly outside the baby-boom generation

as generally defined).

Most of the studies discussed in this report focus on

the retirement prospects of boomers, but several examine the outlook for broader groups that include boomers and other cohorts. Others look only at preboomer

cohorts that are or were recently approaching retirement. Because boomers’ financial behavior does not

appear to differ greatly from that of other generations,

those studies are likely to provide useful information

about boomers, too.

Sampling

Studies of income and wealth inevitably rely on limited samples of the population and use statistical techniques to draw inferences about the total population

from those samples. In most cases, the samples come

from one or more of the following surveys.

# The Survey of Income and Program Participation

(SIPP), which has been conducted by the Census

Bureau since 1984, is designed to measure the 

effectiveness, costs, and coverage of government

programs and to provide improved national statis6. However, early retirement at a low level of income may be

considered an individual choice to trade income for leisure

and, as such, may not necessarily be a cause for concern.

7. Labor force participation among men age 65 or older, which

was nearly 46 percent in 1950, dipped to less than 16 percent

in 1993. It has gradually risen since then, however, exceeding

18 percent during the first three quarters of 2003. (Part of that

increase results from changes in 1994 in the way the data are

collected.)

8. See James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Saving Adequacy,” in Olivia S. Mitchell, 

P. Brett Hammond, and Anna M. Rappaport, eds., Forecasting

Retirement Needs and Retirement Wealth (Philadelphia: University of Pennsylvania Press, 2000), pp. 68-94.
CHAPTER FOUR METHODOLOGIES FOR ANALYZING RETIREMENT PREPAREDNESS 17

tics on income distribution. The SIPP samples

tens of thousands of civilian U.S. households for

periods of up to four years and collects data on

their general demographic characteristics, sources

and amounts of income, and eligibility for and

participation in government programs.9

# The Survey of Consumer Finances (SCF), sponsored by the Federal Reserve Board and the 

Department of the Treasury, began in the early

1960s and has been conducted every three years

since 1983. It interviews a random sample of

about 4,500 families and collects highly detailed

information about their finances.10

# The Panel Study of Income Dynamics (PSID) has

been conducted by the University of Michigan’s

Institute for Social Research since 1968. It gathers

economic, demographic, and sociological data on

samples of U.S. individuals and families over long

periods. It has also collected data on savings and

assets, generally every five years. The sample size

grew from 4,800 families in 1968 to more than

7,000 families in 2001, and as of 2001, the PSID

had collected information about more than

62,000 people over as much as 34 years.11

# The Health and Retirement Survey (HRS), also

from the University of Michigan’s Institute for

Social Research and sponsored by the National

Institute on Aging, has interviewed random samples of about 22,000 people over the age of 50

every two years since 1992. It collects data on

physical and mental health, insurance coverage,

financial status, family support systems, labor

market status, and retirement planning.12

# The Consumer Expenditure Survey (CEX), carried out by the Bureau of Labor Statistics since

1980, collects information on demographic characteristics and annual income, expenditures, and

saving from random samples of about 7,500

households representative of the U.S. noninstitutionalized population. It provides the basic data

used to create the consumer price index.13

# The Current Population Survey (CPS), a monthly

survey of about 50,000 households conducted by

the Census Bureau for the Bureau of Labor Statistics, is the basic source of information about detailed characteristics of the U.S. labor force. It collects data on demographic and occupational characteristics, employment, unemployment, hours

worked, and earnings.14

Studies of retirement preparedness may draw on

sources of aggregate data as well as individual data.

Those sources include the Federal Reserve Board’s

flow-of-funds accounts, which measure quarterly and

annual changes in total assets held by sectors of the

economy, including households, and the national income and product accounts, which provide quarterly

and annual aggregate measures of economic activity,

including personal saving. Those two sources use different concepts and therefore yield different measures

of saving: the NIPAs measure saving from disposable

income, whereas the flow-of-funds accounts also measure changes in wealth because of capital gains.15

9. For further information about the SIPP, see www.sipp.census.

gov/sipp/.

10. For further information about the SCF, see www.federal

reserve.gov/pubs/oss/oss2/scfindex.html.

11. For further information about the PSID, see http://psidonline.

isr.umich.edu/.

12. For further information about the HRS, see http://hrsonline.

isr.umich.edu/.

13. For further information about the CEX, see www.bls.gov/cex/

home.htm.

14. For further information about the CPS, see www.bls.census.

gov/cps/cpsmain.htm.

15. For further information about the flow-of-funds accounts, see

www.federalreserve.gov/releases/z1/ffguide.htm. For further

information about the NIPAs, see www.bea.gov/bea/an/

nipaguid.htm.
18 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Box 1.

The Effect of Retirement Age on the Need for Saving

Even if they have not saved much, households can

often meet their retirement needs by working just a

few years longer and saving slightly more of their

income. By extending their working lives, households have more time to save and to earn returns

on their previous savings; they also reduce the

number of years of retirement income they need to

finance. People in their mid-60s can typically expect to live another 18 years, so each year they continue to work lessens their retirement needs by several percent and increases the value of their assets

by the annual rate of return, plus any additional

saving. Moreover, by delaying their application for

Social Security benefits, households can increase

their benefit payments substantially, thus reducing

the share of their needs they must finance from

their own assets. Taken together, those factors can

decrease needed retirement assets by 10 percent or

more for every additional year of work after age 62.

As an illustration, consider a married couple in

their early 60s earning $62,000 per year (roughly

the median before-tax income of married households in the decade before retirement) who have no

pension plan. After federal and state income taxes

and Social Security taxes are deducted, the couple

typically take home $48,943 in income. Thus, in

retirement, they will need about $39,154 per year

in order to replace 80 percent of their preretirement income (a percentage that financial planners

often recommend to allow most people to continue

their previous standard of living).

If both members retire at 62, the couple will receive $17,735 in Social Security benefits annually.

Therefore, to achieve the 80 percent replacement

rate, they will have to finance $21,419 of income

per year themselves—for 21 years, if they reach the

average U.S. life expectancy for people in their

mid-60s. Assuming a 3 percent real (inflationadjusted) rate of return on their assets, they will

need to accumulate about $330,170 before retirement to produce that amount of income (see the table at right).

1

If the couple retire one year later, however, they will

receive about $19,279 in Social Security benefits

and will need to finance $19,875 per year themselves for 20 years; thus, they will have to accumulate only about $295,680 in assets before retiring.

That latter figure continues to decline for each year

the couple delay retirement—to about $225,330 if

they retire at age 65 and to only about $77,060 if

they retire at 70. The effect is even more dramatic

for a single person earning roughly the median

before-tax income of individuals in the decade before retirement (see the table).

Not only does each additional year of work increase

Social Security benefits and reduce the amount of

wealth needed at retirement, but it also increases the

amount of time that working households have to

earn returns on their savings. As a consequence, if

the married couple described above reaches age 62

with $192,365 in savings—only 58 percent of the

assets they need to retire immediately—they can still

retire with sufficient assets at age 65 by saving 10

percent of their income. Likewise, by continuing to

work and saving 10 percent of their income, the

household can still retire comfortably at 70 even if

they reach age 62 with only $26,476 in savings.

The effect of retirement age on saving rates applies

to workers long before retirement. For example, 

a couple making $62,000 per year who have

$167,670 in retirement assets at age 55 would need

to save 33 percent of their income to accumulate the

$330,170 in assets necessary to retire at an 80 percent replacement rate of after-tax income by age 62

(assuming a 3 percent real rate of return). But they

already have enough money saved to retire at age 65.

1. All of the values in this example are in 2003 dollars.
CHAPTER FOUR METHODOLOGIES FOR ANALYZING RETIREMENT PREPAREDNESS 19

Box 1.

Continued

An Illustration of How Retirement Age Affects

the Total Assets Needed in Retirement (In 2003 dollars)

Retirement Age

80 Percent of

Preretirement

After-Tax Income

Annual Social

Security Paymentsa

Additional Retirement Income

(Besides Social Security)

Needed to Achieve

80 Percent of

Preretirement Income

Assets Needed at

Retirement to

Produce That

Additional Incomeb

Married Couple Earning $62,000 per Year Before Taxes

62 39,154 17,735 21,419 330,170

63 39,154 19,279 19,875 295,680

64 39,154 20,958 18,196 260,630

65 39,154 22,770 16,384 225,330

66 39,154 24,591 14,563 191,740

67 39,154 26,517 12,638 158,740

68 39,154 28,593 10,561 126,080

69 39,154 30,832 8,322 94,010

70 39,154 31,908 7,246 77,060

Single Person Earning $24,000 per Year Before Taxes

62 15,555 7,629 7,927 122,190

63 15,555 8,283 7,272 108,190

64 15,555 8,994 6,561 93,980

65 15,555 9,760 5,795 79,700

66 15,555 10,530 5,025 66,160

67 15,555 11,344 4,211 52,890

68 15,555 12,221 3,334 39,800

69 15,555 13,166 2,389 26,990

70 15,555 13,620 1,935 20,580

Source: Congressional Budget Office.

Note: The first example assumes a married couple earning $62,000 (roughly the median annual income of married households ages 55 to 64) solely from

wages, with one member of the couple earning twice as much as the other. The couple pays annual federal income taxes of $6,260 (filing jointly), state

income taxes of $2,054, and Social Security taxes of $4,743 and has an after-tax income of $48,943. The second example assumes a single person earning

$24,000 (roughly the median annual income of single households ages 55 to 64) solely from wages, paying annual federal income taxes of $2,080 (filing

individually), state income taxes of $640, and Social Security taxes of $1,836 and having an after-tax income of $19,444. Those taxes (including average

state income taxes) are calculated using 2003 rates specified in the National Bureau of Economic Research’s TAXSIM model (available at www.nber.org/

~taxsim/taxsim-calc5/). For simplicity, the examples assume that retirement income is not taxed, that people have typical life expectancies, and that they

die at predictable dates leaving no bequests.

a. Taken from the Social Security Administration’s “Social Security Quick Calculator” (available at www.ssa.gov/OACT/quickcalc/calculator.html). 

b. Assuming a real rate of return of 3 percent.
20 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

or analyzing the retirement preparedness of the babyboom generation, each of the sets of data described

above has strengths and weaknesses. For example, the

Survey of Consumer Finances provides highly detailed

financial data—including more information about

very wealthy people than any other sample—but only

at a point in time. The Panel Study of Income Dynamics provides less detail but tracks particular individuals and households over time. The Health and

Retirement Survey offers details on health status and

insurance coverage as well as on financial assets, but it

tracks only people over age 50.

Demographic and 

Socioeconomic Detail

Studies of retirement preparedness generally present

statistics for a number of demographic and socioeconomic variables, such as income and wealth for different groups classed by age cohort, sex, race or ethnicity,

marital status, and so forth. Summary statistics 

include mean (average) values—for example, total

wealth divided by total population—as well as means

for particular segments of the population, ranked by

income or wealth. 

Because income and wealth are unequally distributed,

studies usually present medians (values for the middle

person or household in a ranking) as well as means.

With very skewed distributions, a median more accurately represents the typical person or household than

a mean does.
5

Major Recent Studies of

Retirement Preparedness

This chapter reviews the major studies of retirement preparedness that have been published in the

past decade—grouped according to their approach

and the populations they cover—and draws general

conclusions from their findings. (Those studies, presented by date of publication, are summarized in Table 1

on pages 24-27.) Overall, the studies suggest that the

average baby boomer’s prospects for a comfortable

retirement are good but that some boomers could face

serious challenges.

Studies That Compare Baby Boomers

with Preceding Generations 

A 1993 study by the Congressional Budget Office and

a related paper by John Sabelhaus and Joyce Manchester compared the income and wealth of baby boomers

during their early working years (ages 25 to 44) with

those of the preceding generation at the same age,

nearly 30 years earlier.1

 A similar 1993 study by Richard Easterlin and coauthors compared the income and

wealth of boomer cohorts with those of several older

cohorts.2

 Both studies concluded that boomers generally had higher income and wealth than their predecessors had possessed at the same age, were saving similar

percentages as preceding cohorts, and thus were likely

to enjoy higher income in retirement. 

The Easterlin study attributed much of that improvement to the massive entry of women into the labor

force and their propensity to have fewer children—

trends that increased household income while reducing expenditures on raising children. However, the

study also noted that the improvement in living standards was distributed very unevenly: households in the

highest 10 percent (or decile) of the income distribution were far better off than their predecessors, but

those in the lowest income decile had the same or even

lower real (inflation-adjusted) income than in the previous generation.3

1. Congressional Budget Office, Baby Boomers in Retirement: An

Early Perspective (September 1993); and John Sabelhaus and

Joyce Manchester, “Baby Boomers and Their Parents: How

Does Their Economic Well-Being Compare in Middle Age?”

Journal of Human Resources, vol. 30, no. 4 (Fall 1995), pp.

791-806.

2. 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 in the United States,” Population

and Development Review, vol. 19, no. 3 (September 1993), pp.

497-522. That study measured income “per adult equivalent,”

an approach that adjusts the size of a household for the fact

that children do not consume as much as adults do.

3. Households with higher income tend to save a larger share of

their income and to have more wealth than low-income households do, but the correlation between income and wealth is not

ironclad. Low-income households receive higher Social SecuCHAPTER
22 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

A 1994 study by researchers at AARP, using their pension and retirement income simulation model, projected boomers’ incomes in retirement in 2010 and

2030 and compared them with the incomes of current

retirees.4

 That study predicted generally higher incomes for boomers than for current retirees but also

substantial diversity in outcomes, with a gradually

widening gap between the best-off and worst-off

households. According to the study’s assumptions, by

2030, roughly three-quarters of boomer households

would receive income from a combination of Social

Security, assets, and private pensions; most of the rest

would get income from two of those three sources.

The study projected that by 2030, Social Security

would account for about 38 percent of all boomer income, pensions for 24 percent, assets for 23 percent,

and earnings for about 14 percent.5

 Higher-income

households would receive proportionately more of

their retirement income from pensions and assets than

other boomers would, whereas those in the lowest

one-fifth (quintile) of the income distribution would

receive nearly 80 percent of their income from Social

Security.

Although Social Security was expected to help narrow

income disparities, the 1994 AARP study estimated

that in 2010, roughly 3 percent of boomer households

would be living in poverty and 10 percent in nearpoverty.6

 Those figures were projected to fall by 2030:

to 2 percent in poverty and 5 percent in near-poverty.

A more recent study sponsored by AARP reached

slightly less optimistic conclusions. It predicted that

the poverty rate would be about 6 percent for boomer

households by 2020 and about 3 percent by 2040.7

 (In

2001, by comparison, about 12 percent of households

age 60 or older had incomes below the poverty level.)

A 2002 study by Eric Toder and coauthors reached

fairly similar conclusions using projections of retirement income from the Social Security Administration’s Model of Income in the Near Term to estimate

poverty rates of future elderly households.8

 That study

projected that only about 4 percent of households age

62 or older would be living below the official poverty

line in 2020, down from about 8 percent in the early

1990s. The study attributed the decline in poverty

rates to rising real wages, offset in part by other expected changes—mainly the increase in the age of 

eligibility for full Social Security benefits that is under

way, as well as projected changes in marital status.

Studies That Compare Boomers’ 

and Preboomers’ Saving 

with “Needed” Saving 

A parallel body of research has focused on whether

baby boomers’ saving rates are likely to yield enough

rity benefits in retirement relative to their lifetime earnings,

and some save assiduously as well. See Steven F. Venti and

David A. Wise, Choice, Change, and Wealth Dispersion at Retirement, Working Paper No. 7521 (Cambridge, Mass.: National Bureau of Economic Research, February 2000), available

at www.nber.org/papers/w7521. For a discussion of the correlation between income and saving, see Karen E. Dynan,

Jonathan Skinner, and Stephen P. Zeldes, Do the Rich Save

More? Working Paper No. 7906 (Cambridge, Mass.: National

Bureau of Economic Research, November 2000), available at

www.nber.org/papers/w7906.

4. American Association of Retired Persons, Aging Baby Boomers:

How Secure Is Their Economic Future? (Washington, D.C.:

AARP, 1994).

5. In 2000, by comparison, elderly households also received

about 38 percent of their income from Social Security, but

income from pensions and assets each accounted for only 18

percent, and earnings accounted for 23 percent. See Social

Security Administration, Annual Statistical Supplement to the

Social Security Bulletin, 2001 (December 2001). 

6. The AARP study defined near-poverty as a level of income

between 100 percent and 150 percent of the federal poverty

level. (The Census Bureau’s definition of near-poverty, by

contrast, extends from 100 percent to 125 percent of the

poverty level.)

7. See Karen Smith, How Will Recent Patterns of Earnings Inequality Affect Future Retirement Incomes? Working Paper No.

2003-06 (Washington, D.C.: AARP, May 2003), available at

http://research.aarp.org/econ/2003_06_retire.pdf.

8. See Eric Toder and others, Modeling Income in the Near Term:

Revised Projections of Retirement Income Through 2020 for the

1931-1960 Birth Cohorts (Washington, D.C.: Urban Institute,

June 2002), available at www.urban.org/url.cfm?ID=410609.
CHAPTER FIVE MAJOR RECENT STUDIES OF RETIREMENT PREPAREDNESS 23

retirement wealth to maintain working-age consumption levels in retirement. That research is based on the

assumption that people try to avoid sharp swings in

their consumption and thus set aside resources while

they are working to make sure they will be able to

keep the same standard of living when they retire.

Estimating Preparedness Using Projections

Studies of that type by Douglas Bernheim, published

from 1993 to 1997, reported evidence of significant

undersaving—in contrast to the relative optimism of

studies that compared boomers with their parents.9

Bernheim used phone surveys to measure the personal

savings, expected Social Security income, and pensions

of at least 2,000 boomer households and then used

those data to project future income and wealth accumulation. On the basis of those sources, he consistently found that personal saving rates were much

lower than required to cover the portion of retirement

needs that those households would have to pay for

themselves—assuming they wished to retire at age 65,

remain in their homes, and keep roughly constant levels of consumption over their working and retirement

years. 

Under the assumption that households’ savings would

be used entirely to generate retirement income, Bernheim concluded that, on average, households were saving only 45 percent to 62 percent of what they needed

to be adequately prepared for retirement. If only those

savings specifically earmarked for retirement were assumed be used for it, households were saving just 15

percent to 27 percent of what they needed, he found.

Under midpoint assumptions, Bernheim concluded

that households were saving 36 percent to 38 percent

of the amount necessary. Those midpoint estimates

became the basis of a widespread view that boomers

were accumulating only about one-third of the assets

they needed to be adequately prepared for retirement.

Those studies’ conclusions, however, were based on a

rather pessimistic assumption about the real rate of

return on assets, which necessitated high rates of saving to reach target levels of retirement wealth. Moreover, the measure of wealth used in those reports excluded home equity, which is the major asset of most

U.S. households. In a 1997 reexamination of Bernheim’s 1993 calculations, William Gale found that if

housing equity was included in the measure of wealth,

about two-thirds of boomer households appeared to

be accumulating the minimum wealth they would

need for retirement, given their age and other factors.10 He concluded that in general terms, about onethird of households were preparing adequately by any

measure, another third were preparing well by some

standards but not by others, and the remaining third

were preparing poorly.

More-recent studies, using slightly different approaches and population samples, reached largely the

same general conclusion that Gale did. For example, a

1998 study by Yonkyung Yuh and coauthors, applying

a broad measure of wealth to a sample of boomer and

preboomer households, found that about half were on

track to accumulate adequate retirement wealth by

their planned retirement age.11 The households in that

half shared various characteristics: they were typically

older, better educated, and had higher income than

other boomer households; they tended to be white,

non-Hispanic, and married; they typically owned a

home and some stock and participated in definedcontribution or defined-benefit pension plans; they

9. B. Douglas Bernheim, Is the Baby Boom Generation Preparing

Adequately for Retirement? Summary Report (Princeton, N.J.:

Merrill Lynch, January 15, 1993); B. Douglas Bernheim, The

Merrill Lynch Baby Boom Retirement Index (Princeton, N.J.:

Merrill Lynch, July 1994); B. Douglas Bernheim, The Merrill

Lynch Baby Boom Retirement Index: Update '95 (Princeton,

N.J.: Merrill Lynch, February 1995); B. Douglas Bernheim,

The Merrill Lynch Baby Boom Retirement Index: Update '96

(Princeton, N.J.: Merrill Lynch, April 1996); and B. Douglas

Bernheim, “The Adequacy of Personal Retirement Saving:

Issues and Options,” in David A. Wise, ed., Facing the Age

Wave, Publication No. 440 (Stanford, Calif.: Hoover Institution Press, 1997), pp. 30-56.

10. William G. Gale, “The Aging of America: Will the Baby

Boom Be Ready for Retirement?” Brookings Review, vol. 15,

no. 3 (Summer 1997), pp. 4-9.

11. Yonkyung Yuh, Catherine Phillips Montalto, and Sherman

Hanna, “Are Americans Prepared for Retirement?” Financial

Counseling and Planning, vol. 9, no. 1 (1998), pp. 1-13.
24 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Table 1.

Major Studies of Retirement Preparedness Published in the Past Decade

Bernheim 

(1993-1997) CBO (1993)

Easterlin and Others

(1993) AARP (1994)

Group Studied Households headed by

people born from 1946

to 1956 (older boomers)

Households headed by

people born from 1946

to 1964 (baby boomers)

Households headed by

people born in five-year

cohorts from 1946-1950

through 1961-1965

(baby boomers)

Households headed by

people born from 1946 

to 1964 (baby boomers)

Measure of Adequacy Comparison of financial

saving with the saving

needed to maintain

preretirement living standards in retirement

Comparison of boomers’

income and wealth with

those of households at 

same age 30 years earlier

Comparison of boomer

cohorts’ income (per

adult equivalent) and

wealth with those of several older cohorts

Comparison of boomers’

projected household income in 2010 and 2030

with that of elderly households in 1990

Assumed Interest, 

Discount, and TimePreference Rates 

Real interest rate based

on past U.S. Treasury bill

rates and consumer price

index; 1 percent rate of

time preference

Not applicable Not applicable 2.3 percent real rate of 

return

Measure of Net Wealth Financial retirement assets plus zero, 50 percent, or 100 percent of

financial assets not earmarked for retirement

Real financial assets,

home equity, and pension

assets that can be borrowed against

Financial assets, home

equity (for all cohorts),

and liquid pension assets

(for 1945-1954 cohorts

only)

Financial assets, home 

equity, pensions, and 

Social Security

Assumptions About 

Life Expectancy 

Not available Not applicable Not applicable Social Security Administration’s 1991 base-case and

alternative projections

Data Set Used Annual telephone surveys

of more than 2,000

households

Census (1960), CPS

(1990), SCF (1962 and

1989)

CPS (1965-1990) CPS (1991), ICF Pension/

Social Security Database

Conclusions Under midpoint assumptions, boomer households’ saving rates are 34

percent to 38 percent of

amount required to meet

financial portion of preretirement needs (assuming retirement at 65,

remaining in home, and

smoothing of consumption between working

years and retirement).

Under assumption that

Social Security payments

will be cut by 35 percent,

boomer households’ saving adequacy is only 18

percent to 22 percent 

In general, boomers are

expected to have more

income and wealth in

retirement than the previous generation, as well

as higher pension and

Social Security benefits.

However, boomers with

poor education or who

do not own homes may

not be as well off as the

prior generation

Boomers as a whole are

better off in terms of income per adult equivalent

and wealth than their parents, though most of the

improvement stems from

women’s working and

having fewer children.

Boomers have roughly

the same saving rates as

their parents at similar

ages. Top 10 percent are

far better off than their 

predecessors; bottom 10

percent are the same or

worse off

In general, boomers will

have more income in

retirement than elderly

people did in 1990. Threequarters will receive a mix

of Social Security, assets,

and pensions; most of the

rest will have a combination of two. In 2030, 38

percent of boomers’ total

income will come from

Social Security, 24 percent

from pensions, 23 percent

from assets, and 14 percent

from work. Social Security

will make up 80 percent of

income for lowest one-fifth

of the income scale

(Continued)
CHAPTER FIVE MAJOR RECENT STUDIES OF RETIREMENT PREPAREDNESS 25

Table 1.

Continued

Kotlikoff and

Auerbach (1994) Gale (1997)

Moore and

Mitchell (1997)

Gustman and

Steinmeier (1998)

Yuh and Others

(1998)

Group Studied Individuals born in

1946, 1955, and

1964 (baby boomers)

Married households

with a working husband born from

1946 to 1964 (baby

boomers)

Households headed

by people born from

1931 to 1941 (preboomers)

Households headed 

by people born from

1931 to 1941 (preboomers)

Households headed by

working people born

from 1925 to 1960

who indicate a planned

age of retirement

(preboomers plus

boomers)

Measure of 

Adequacy

Comparison of boomer cohorts’ projected

average income and

consumption at age

65 with that of individuals age 65 in 1992

Comparison of financial saving with the

saving needed to

maintain preretirement living standards

in retirement

Ability to preserve

preretirement consumption, assuming

retirement at age 62

or 65

Ability to replace preretirement income at

expected retirement

age through a twothirds joint-and-survivors benefit annuity

Ability to preserve preretirement consumption, assuming retirement at planned age

Assumed Interest,

Discount, and

Time-Preference

Rates 

6 percent real beforetax rate of returnReal interest rate

based on past U.S.

Treasury bill rates

and consumer price

index; 1 percent rate

of time preference

Historical financial

rates of return from

Ibbotson Associates;

no real housing

appreciation

2.3 percent real rate 

of return

Asset-specific historical rates of return (including real estate)

from Ibbotson Associates

Measure of 

Net Wealth

Financial assets,

home equity, pensions, Social Security,

value of Medicare and

Medicaid benefits

Financial assets,

home equity, pensions, Social Security

Financial assets,

home equity, pensions, Social Security

(all net of taxes and

debt)

Financial assets, 

home equity, pensions, Social Security

Financial assets, 

home equity, pensions, Social Security

Assumptions

About Life 

Expectancy 

Not applicable Not applicable Social Security 

Administration’s 

actuarial tables

Social Security 

Administration’s 

actuarial tables

1998 IRS Actuarial

Annuity Tables by sex

and retirement age

Data Set Used CEX, CPS, SIPP, SCF

(various years)

SCF (1983-1992) HRS (1992) HRS (1992) SCF (1995)

Conclusions Under most optimistic

policy scenario,

boomers will average

higher consumption

in retirement than

they or current retirees do now, mostly

because of a projected rise in medical

benefits. Younger

boomers will fare

worse than older

ones. Forty percent to

50 percent of boomers will fare worse

than the average current retiree

Accounting for all net

housing assets, 71

percent of households were saving

adequately in 1992;

accounting for half of

housing assets, 63

percent were;

accounting for no

housing assets, 48

percent were. Excluding home equity,

median inadequacy

of retirement wealth

equaled 4-5 months

of current income

31 percent to 40 percent of households

are already prepared; median

household in wealth

distribution needs to

save 9 percent to 18

percent of income;

poor households

face substantial

shortfalls. However,

for most households,

actual saving rates

are about one-quarter to one-third of

prescribed rates

On average, households will be able to

achieve a permanent

real replacement rate

of 60 percent. Ranked

by wealth, the median

household will achieve

a 50 percent real replacement rate; ranked

by lifetime earnings,

67 percent will. Lowearning and lowwealth households will

achieve much lower

rates

About 52 percent of

households are on

track to accumulate

adequate retirement

wealth

(Continued)
26 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Table 1.

Continued

Engen, Gale,

and Uccello

(1999, 2002)

Gist, Wu, and Ford

(1999)

Bernheim and Others

(2000)

Warshawsky and

Ameriks (2000)

Group Studied Married working households headed by people

born from 1931 to 1941

(preboomers), or with a

working husband born

from 1921 to 1970 (preboomers, boomers, and

postboomers)

Households headed by

people born from 1946

to 1964 (boomers) and

representative single and

married households with

median income and net

wealth, headed by a person born in 1950 or

1960 (older or younger

boomers)

Households headed by

people born from 1931 

to 1941 (preboomers)

Households with at least

one full-time worker, with

respondent or spouse born

from 1921 to 1967 (preboomers, boomers, and

postboomers)

Measure of Adequacy Comparison of distribution of actual households’

wealth with that of simulated households’ wealth,

assuming reasonable economic behavior in the

face of uncertainty and

retirement at 62 or 65

Ability to replace 80 percent of preretirement

earnings, assuming retirement at age 66 or 67

Ability to sustain a constant

living standard before and

after retirement

Ability to replace 80 percent of real current living

expenses

Assumed Interest, 

Discount, and TimePreference Rates 

3 percent after-tax real

rate of return; zero and 

3 percent rate of time

preference

3.9 percent real rate of

return (net of administrative expenses), no

housing appreciation

3 percent real rate of 

return

6 percent to 10 percent

nominal rate of return,

depending on risk preference

Measure of Net Wealth Financial assets, 50 percent to 100 percent of

home equity, pensions,

Social Security

Financial assets, home

equity, pensions, Social

Security

Financial assets, home 

equity, pensions, Social

Security

Financial assets, home 

equity, pensions, Social

Security

Assumptions About 

Life Expectancy 

Social Security Administration’s actuarial tablesSocial Security Administration’s actuarial tablesSocial Security Administration’s actuarial tablesTen years beyond conventional life expectancy

Data Set Used HRS (1992), SCF (1983-

1998)

SIPP (1993), SCF

(1995), PSID (1994)

HRS (1992) SCF (1992)

Conclusions Simulations suggest a majority of married working

households of all ages are

accumulating enough

wealth for retirement,

with evidence of undersaving in the bottom

quarter of the income and

wealth distributions

Median households must

save 3 percent to 9 percent of annual income

with a pension (assuming

modest income growth),

6 percent to 14 percent

without a pension, 16

percent to 29 percent

with long life and low returns

For households with 

annual income of $15,000

or more, median recommended saving rate ranges

from 13 percent to 23 percent. Assuming significant

cuts to future Social Security benefits, median

recommended rate ranges

from 19 percent to 25 percent

48 percent of households

are adequately preparing

for retirement. Of the rest,

15 percent will retire without financial assets; 20 percent will run out within 10

years of retirement; another 10 percent within 20

years; and another 5 percent within 30 years. The

average underfunded

household faces 19 years of

unfunded living expenses

(Continued)
CHAPTER FIVE MAJOR RECENT STUDIES OF RETIREMENT PREPAREDNESS 27

Table 1.

Continued

Montalto (2001)

Toder and

Others (2002) Wolff (2002)

Scholz, Seshadri,

and Khitatrakun

(2003)

Group Studied Households headed by

working people born

from 1928 to 1963 

who indicate a planned

age of retirement (preboomers plus boomers)

Households headed by

people born from 1931

to 1960 (preboomers

plus boomers)

Households headed by

working people born

from 1919 to 1951

(largely preboomers)

Households headed by 

people born from 1931 

to 1941 (preboomers)

Measure of Adequacy Ability to maintain projected preretirement consumption, assuming retirement at planned ageComparison of poverty

rates among future older

households with those

among current older

households; replacement

rates

Ability to replace preretirement income 

(using projected retirement wealth and assuming retirement at age 65),

and retirement income

relative to poverty level

Comparison of actual

households’ wealth with

wealth of simulated households, assuming reasonable

economic behavior in the

face of uncertainty and

retirement as expected by

households

Assumed Interest, 

Discount, and TimePreference Rates 

Asset-specific historical

rates of return (including

real estate) from

Ibbotson Associates

3 percent real rate of 

return

3 percent to 7 percent

real rate of return

4 percent real rate of 

return

Measure of Net Wealth Financial assets, home

equity, pensions, Social

Security

Financial assets, home

equity, pensions, Social

Security

Financial assets, home

equity, pensions, Social

Security

Financial assets, home 

equity, pensions, Social

Security

Assumptions About 

Life Expectancy 

1998 IRS Actuarial Annuity Tables by sex and 

retirement age

Not available Social Security Administration’s actuarial tables1992 life tables of the Centers for Disease Control

and Prevention

Data Set Used SCF (1998) HRS, PSID, SIPP (1990-

1993)

SCF (1983-1998) HRS (1992)

Conclusions About 56 percent of

households are on track

to be able to maintain

preretirement level of

consumption

Price-adjusted poverty

rates among households

ages 62 and older will fall

from about 8 percent in

the early 1990s to around

4 percent in 2020

Median total wealth of

households headed by

people ages 47 to 64 fell

by 17 percent between

1983 and 1998; households with incomereplacement rates of less

than half rose from 30

percent in 1989 to 43

percent in 1998

Under basic assumptions,

more than 80 percent of

households are accumulating enough retirement

wealth; excluding half of

home equity, 58 percent

are; assuming a 25 percent

cut in Social Security benefits, 64 percent are

Source: Congressional Budget Office based on the studies shown here (full citations can be found in the bibliography of this report).

Note: CEX = Consumer Expenditure Survey, CPS = Current Population Survey, HRS = Health and Retirement Survey, ICF = ICF Consulting (formerly ICF

Kaiser), IRS = Internal Revenue Service, PSID = Panel Study of Income Dynamics, SCE = Survey of Consumer Expenditures, SCF = Survey of Consumer

Finances, SIPP = Survey of Income and Program Participation.
28 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

tended to save systematically; and they planned to retire after age 65.

A 1999 study by John Gist and coauthors reached

similar conclusions while illustrating how strongly

those findings depended on the study’s assumptions.12

That research analyzed two groups, older boomers

(those born between 1946 and 1955) and younger

boomers (those born between 1956 and 1964), and

used a broad measure of wealth that included home

equity, projected Social Security income, and pensions. Narrowing the focus to a set of representative

single and married boomer households (some born

early in the boom and others near the end) with median income and wealth, the study found that those

households could meet their targets for retirement

wealth by saving roughly 3 percent to 9 percent of

their income per year. However, households’ needed

saving was very sensitive to assumptions about resources and needs. For instance, if boomers live beyond normal life expectancy and if returns on assets

are relatively low in coming years, those representative

households will need to save something on the order

of 16 percent to 29 percent (rather than 3 percent to 

9 percent) of their income each year to meet reasonable targets for retirement wealth.

Those conclusions were largely echoed in several 

studies that focused on the preparations of older, preboomer households who were already near retirement.

For example, a 1997 study by James Moore and

Olivia Mitchell concluded that 31 percent to 40 percent of such households in one sample were already

adequately prepared for retirement and could accumulate enough assets to continue their preretirement consumption simply by reinvesting the returns from their

current savings.13 However, for most households, actual saving rates were roughly one-quarter to one-third

of prescribed rates—similar to Bernheim’s conclusions. Those households would need to increase their

saving rate to maintain current levels of consumption

into retirement. The typical older household in the

middle of the wealth distribution would have to boost

its saving rate to around 18 percent to maintain its

preretirement income if it planned to retire at age 62

but to only about 9 percent if it planned to retire at

age 65.

A 1998 study by Alan Gustman and Thomas Steinmeier examined the same group of preboomer households as Moore and Mitchell and developed estimates

of each household’s total wealth, including pension

and Social Security wealth.14 The study defined adequacy as a household’s ability to purchase, upon retirement, a two-thirds joint-and-survivors benefit annuity

that would replace the average yearly income that

members of the household earned during their working life (adjusted for the lower expenses likely during

retirement).15 The authors concluded that most households appeared set to replace a substantial share of

their preretirement earnings: when households were

ranked by projected replacement rates, the median real

replacement rate was about 60 percent. When households were ranked by wealth, the median household

was projected to be able to replace 50 percent of its

average yearly earnings after retiring. When house12. John R. Gist, Ke Bin Wu, and Charles Ford, Do Baby Boomers

Save and, If So, What For? Publication No. 9906 (Washington,

D.C.: AARP, June 1999), available at http://research.aarp.org/

econ/9906_do_boomers.pdf.

13. James F. Moore and Olivia S. Mitchell, Projected Retirement

Wealth and Savings Adequacy in the Health and Retirement

Study, Working Paper No. 6240 (Cambridge, Mass.: National

Bureau of Economic Research, October 1997), available at

www.nber.org/papers/w6240. That study was later published

as James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Saving Adequacy,” in Olivia S. Mitchell, 

P. Brett Hammond, and Anna M. Rappaport, eds., Forecasting

Retirement Needs and Retirement Wealth (Philadelphia: University of Pennsylvania Press, 2000), pp. 68-94.

14. Alan L. Gustman and Thomas L. Steinmeier, Effects of Pensions

on Savings: Analysis with Data from the Health and Retirement

Study, Working Paper No. 6681 (Cambridge, Mass.: National

Bureau of Economic Research, August 1998), available at

www.nber.org/papers/w6681.

15. That annuity would provide an inflation-adjusted level of income while the purchaser was alive. If the purchaser died and

was survived by a spouse, the spouse would receive income

equal to two-thirds of that level.
CHAPTER FIVE MAJOR RECENT STUDIES OF RETIREMENT PREPAREDNESS 29

holds were ranked by lifetime earnings, the median

household was projected to be able to replace about 

67 percent of its average annual preretirement earnings. Households with low income and wealth, however, appeared likely to achieve much lower replacement rates.

A 2001 study by Catherine Montalto came to very

similar conclusions, although it focused on a much

wider age group (a sample of workers ranging in age

from 35 to 70).16 The study used information about

each household’s portfolio allocation, planned retirement age, and eligibility for Social Security benefits;

rates of return on specific assets that were based on

historical data; and projections of desired consumption levels and income needs in retirement. The study

concluded that 56 percent of households were on track

to maintain their preretirement consumption level in

retirement. It also projected that the average U.S.

household would receive 46 percent of its retirement

wealth from Social Security, 39 percent from personal

savings, and 14 percent from pensions. Planned retirement age varied widely among households and played

an important role in the outcomes: households who

planned a later retirement were generally more likely

to be well prepared. On the whole, poorly prepared

households tended to be younger, less educated, single,

and nonwhite.

Estimating Preparedness with 

Financial-Planning Software

Similar findings also come from using financialplanning software to analyze retirement preparedness.

Two studies published in 2000 compared households’

actual saving rates with the rates recommended by

popular software packages. One study, by Mark

Warshawsky and John Ameriks, applied the Quicken

Financial Planner program to data from an extensive

set of survey respondents between the ages of 25 and

71, taking into account college expenses for dependents, housing wealth, expected retirement age, life expectancy, future Social Security and pension benefits,

and a postretirement drop in living expenses.17 That

study found that under the authors’ assumptions

about future incomes and rates of return, about half of

those households were on track to fully finance their

retirement. The other half, however, were likely to run

out of assets—15 percent were expected to reach retirement with no financial assets; 20 percent would

run out of assets within a decade of retiring; another

10 percent within 20 years; and another 5 percent

within 30 years. The study concluded that, on average,

households would be able to fund 24 years of retirement, but the half who were not fully prepared would

face an average of 19 years of unfunded living expenses, amounting to $300,000 (in 1992 dollars).

A similar study by Douglas Bernheim and coauthors

in 2000 used the ESPlanner software package to calculate saving rates that would allow a sample of preboomer households to maintain a constant level of

consumer spending for the rest of their lives, given

their expected earnings and intended retirement age.18

That software recommended very little saving for

households in the bottom 15 percent or so of the income distribution, whose working-age income would

be largely replaced by Social Security. For households

with income of more than $15,000 per year, its median recommended saving rates ranged from 13 percent to 23 percent (depending on the households’ current age and planned retirement age)—higher than

those households’ actual average rates of saving. Under

the assumption that Social Security benefits will be cut

in the future to bring the Social Security system into

long-term balance, the program recommended even

higher saving rates.

16. Catherine P. Montalto, Retirement Wealth and Its Adequacy:

Assessing the Impact of Changes in the Age of Eligibility for Full

Social Security Benefits, Working Paper 2001-07 (Chestnut

Hill, Mass.: Boston College, Center for Retirement Research,

September 2001), available at www.bc.edu/centers/crr/papers/

wp_2001-07.pdf.

17. Mark J. Warshawsky and John Ameriks, “How Prepared Are

Americans for Retirement?” in Mitchell, Hammond, and

Rappaport, eds., Forecasting Retirement Needs and Retirement

Wealth, pp. 33-67.

18. B. Douglas Bernheim and others, “How Much Should Americans Be Saving for Retirement?” American Economic Review,

vol. 90, no. 2 (May 2000), pp. 288-292.
30 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

Estimating Preparedness 

Accounting for Uncertainty 

A 1999 study by Eric Engen, William Gale, and Cori

Uccello extended the financial-planning method of

measuring retirement preparedness by comparing the

income and wealth of a sample of real, largely preboomer households with the income and wealth of a

sample of simulated households.19 Unlike the planning

software mentioned above, which does not incorporate

much uncertainty about possible outcomes, the model

used in that study simulates households’ attempts to

maintain a relatively constant standard of living while

experiencing shocks to their circumstances, such as job

losses, career changes, marriage, and illness.20 As in

real life, those shocks lead to different career and life

outcomes, as households respond to changes in their

income by adjusting their saving and wealth. As a consequence, households with very similar backgrounds

and abilities can end up with very different levels of

simulated income and wealth. However, in the simulation, households retire at a specific age (62 in the

basic scenario and 65 in an alternative one) rather than

adjusting how long they work to shifting economic

circumstances.

Engen and his coauthors found that the distribution

of actual households’ levels of retirement preparedness

was very similar to that of simulated households that

had similar skills and life situations. However, real

households at the bottom of the income distribution

were not saving as much as simulated “rational”

households, and real households at the top of the income distribution were saving much more. The authors concluded that most real households were accumulating adequate levels of wealth (accounting for the

modeled uncertainties) but that households of all ages

in the bottom quarter of the wealth-to-income distribution were clearly undersaving. However, they also

noted that many of those households might not need

to save much of their income to meet their retirement

needs, given expected Social Security benefits,

employer-provided pensions, part-time work during

retirement, and other factors. 

Engen and his colleagues found that the most important assumptions in the study involved the treatment

of housing, the rate of time preference (the extent to

which people prefer current consumption over future

consumption), life expectancy, and health care costs.

However, even assuming a fairly large increase in projected medical costs in retirement did not dramatically

change the study’s conclusions. In a 2002 update, the

authors also found that fluctuations in the stock market did not greatly alter their estimates of the adequacy

of households’ retirement preparedness.21

A study published this year by John Karl Scholz,

Ananth Seshadri, and Surachai Khitatrakun extended

the approach taken by Engen and his colleagues.22 Instead of comparing the range of preparedness levels of

actual households and simulated households facing

various realistic shocks, Scholz and his coauthors compared each specific household with its simulated counterpart. They concluded that more than 80 percent of

households were accumulating enough wealth to

maintain preretirement consumption levels through

retirement, if all of their home equity was included as

wealth. If only half of home equity was included,

about 58 percent of households were accumulating

sufficient wealth. If Social Security benefits were projected to be cut by 25 percent in the future, 64 percent

of households were accumulating enough wealth (even

with all home equity included in the measure).

19. Eric M. Engen, William G. Gale, and Cori E. Uccello, “The

Adequacy of Retirement Saving,” Brookings Papers on Economic

Activity, no. 2 (1999).

20. In technical terms, simulated households attempt to smooth

the discounted marginal utility of consumption over their

working lives and retirement.

21. Eric M. Engen, William G. Gale, and Cori E. Uccello, “Effect

of Stock Market Fluctuations on the Adequacy of Retirement

Wealth Accumulation,” draft (October 2002), available from

the authors.

22. John Karl Scholz, Ananth Seshadri, and Surachai Khitatrakun,

“Are Americans Saving ‘Optimally’ for Retirement?” draft

(University of Wisconsin at Madison, September 22, 2003),

available at www.ssc.wisc.edu/~scholz/Research/Adequacy_

Version12.pdf.
CHAPTER FIVE MAJOR RECENT STUDIES OF RETIREMENT PREPAREDNESS 31

Studies That Compare Preboomers’

Wealth at Different Times

A 2002 study by Edward Wolff painted a more pessimistic picture of households nearing retirement (including the first few cohorts of baby boomers along

with preboomers). It reported that among households

headed by people ages 47 to 64, median retirement

wealth declined by 11 percent between 1983 and

1998, and median total wealth fell by 17 percent.23

The study found that the share of households who

would be able to replace no more than half of their

previous income during retirement climbed from 30

percent in 1989 to 43 percent in 1998. It also reported that the average household’s projected Social

Security benefits had fallen, partly because of legislation that raised the “normal retirement age” (the age

of eligibility for full benefits), but mainly because of a

projected decline in people’s lifetime earnings. 

Those results for preboomers suggest that the prospects of baby boomers, who will follow them into

retirement, may be even worse. However, the study

used unusual assumptions and projections to reach

those conclusions. For example, its projection that

people’s lifetime earnings will decline—which is integral to its projection of falling Social Security

wealth—is inconsistent with historical data, which

show rising median incomes for the same cohorts.

Moreover, the future claims on the Social Security

system that were projected to exist under previous law

(before the retirement age was changed) were unsustainable, which makes the part of the decline in Social

Security benefits that results from that change largely

theoretical.

Furthermore, the study assumed that workers covered

by defined-benefit pension plans would remain at

their current jobs, and it apparently counted at least

some future accruals to those plans. At the same time,

it ignored workers’ and employers’ potential future

contributions to defined-contribution plans. That

approach tends to exclude the increasing share of

expected retirement wealth that will come from

defined-contribution plans and thus tends to misinterpret the structural shift from defined-benefit plans to

defined-contribution plans as a decline in wealth.

Studies That Account for 

Impending Difficulties in 

Public Benefit Programs

Relatively few studies explicitly consider the long-term

budgetary constraints that the Social Security and

Medicare programs are expected to face and their 

potential impact on the retirement income of baby

boomers. One such study, a 1994 analysis by Laurence

Kotlikoff and Alan Auerbach, looked at several possible future policy changes, most of them involving tax

increases or benefit cuts to correct those programs’s

funding imbalances.24 Projecting average income, saving, taxes, and government benefits for each annual

cohort well into the future, the authors assumed that

the distribution of income among retirees would remain relatively constant over time, as would saving

rates among working cohorts—that is, future 50-yearolds would save the same way that current ones do.

The study concluded that under a wide range of assumptions about policy, productivity growth, and

rates of return, most baby-boom cohorts would enjoy

considerably higher total consumption than their parents. However, an increasing share of that consumption would take the form of health care expenditures

covered by government programs (such as Medicare

and Medicaid), and the fiscal burden associated with

those expenditures would gradually crowd out private

investment and economic growth. Under the study’s

assumptions, younger boomers retiring in 25 to 30

years would have lower total consumption in retire23. Edward N. Wolff, Retirement Insecurity: The Income Shortfalls

Awaiting the Soon-to-Retire (Washington, D.C.: Economic Policy Institute, 2002).

24. Laurence Kotlikoff and Alan J. Auerbach, “U.S. Fiscal and

Savings Crises and Their Impact for Baby Boomers,” in Dallas

L. Salisbury and Nora Super Jones, eds., Retirement in the 21st

Century: Ready or Not? (Washington, D.C.: Employee Benefit

Research Institute, 1994), pp. 85-126
32 BABY BOOMERS’ RETIREMENT PROSPECTS: AN OVERVIEW

ment than older boomers would—and lower nonmedical consumption than current retirees have.25

Bernheim, in his series of analyses, also considered

some possible policy changes to correct the funding

problems facing Social Security and Medicare.26 Under the assumption that future Social Security benefits

will be cut by 35 percent (and under his standard assumptions, excluding housing equity and part of those

savings not explicitly earmarked for retirement), he

found that the average boomer household was saving

only 18 percent to 22 percent of the amount required

to meet the financial portion of its retirement needs.

Conclusions

The studies reviewed here generally suggest that, on

average, baby boomers appear likely to accumulate

more wealth—and thus be better off in retirement—

than their predecessors. However, demographic trends

make the boomers’ experience different from that of

their parents. Boomers can expect to live roughly two

years longer than their parents, so if they intend to retire at roughly the same age that their parents did (as

they indicate when polled), they will need more retirement wealth to provide the same standard of living

over a longer period of time. Moreover, although they

are having fewer children than previous generations

did, boomers are often having children later in life and

may therefore incur more child-raising expenses during their peak earning years, a time when households

otherwise tend to save the most.

The retirement system, too, has changed for baby

boomers. A greater proportion of the previous generation’s workers were covered by defined-benefit pension plans (whose assets were not included in measurements of those workers’ savings) than is likely to be

the case for boomers in retirement. Because fewer

boomers are covered by such plans, they may need to

save more on their own initiative to match the pension

benefits that their parents received (all else being

equal). That concern is partly offset by the fact that

boomers have access to—and many are making use

of—tax-free savings plans that were not available to

their parents.

Some observers argue that baby boomers are unlikely

to experience the pleasant economic surprises that

have benefited current retirees, such as the postwar

economic boom, unexpectedly large Social Security

and other government benefits, and a dramatic rise in

housing prices. Those developments helped provide

today’s retirees with more-rapid wage growth and

greater income in retirement than they had actually

prepared or saved for. If boomers are imitating their

parents’ saving behavior, they may need similar unexpected returns to end up better off in retirement.

However, it is not clear that boomers are undersaving

if they are saving at the same rates that their parents

did before government benefits and housing prices

jumped, because the current generation of retirees reduced its saving rates when it encountered those unexpected boons.27 If the basic issue is whether boomers

are accumulating wealth at roughly the same pace as

their predecessors, saving rates provide only part of the

answer.

Future rates of return add another layer of uncertainty

to the issue. Real long-term interest rates have declined in the past few years. If low returns continue,

they will translate into lower wealth accumulation and

income in retirement. Baby boomers are more likely

than their parents to own stock and tend to be more

exposed to stock market risk. Moreover, although

boomers who own homes have benefited from rising

25. Assuming that the distribution of consumption within the age65 cohort is the same as for current 65-year-olds, 40 percent of

the oldest boomer cohort, 42 percent of the middle cohort,

and 50 percent of the youngest cohort will not be able to

consume as much at age 65 as the median 65-year-old did in

1992.

26. B. Douglas Bernheim, The Merrill Lynch Baby Boom Retirement Index (Princeton, N.J.: Merrill Lynch, July 1994); 

B. Douglas Bernheim, The Merrill Lynch Baby Boom Retirement Index: Update '95 (Princeton, N.J.: Merrill Lynch,

February 1995); B. Douglas Bernheim, The Merrill Lynch Baby

Boom Retirement Index: Update '96 (Princeton, N.J.: Merrill

Lynch, April 1996).

27. See Sabelhaus and Manchester, “Baby Boomers and Their Parents,” p. 803.
CHAPTER FIVE MAJOR RECENT STUDIES OF RETIREMENT PREPAREDNESS 33

housing values, many have used the rise to take on

home-equity-financed debt.

In sum, the typical baby boomer has more current

income and wealth than his or her parents did at the

same age, is accumulating wealth at roughly the same

rate, and thus is likely to have more income in retirement. However, a number of uncertainties remain,

which suggest that at least some boomers could end

up worse off in retirement than their parents were.

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