Outlook
 

SPRING 2006 

Banking on the Baby Boomers: How Demographic 

Trends Are Reshaping the Financial Landscape 

Are Baby Boomers Financially Prepared for Retirement? 

The leading edge of the baby boom generation is now approaching retirement age. Data on income and savings suggest at least 

some members of this group may not have adequate resources for a comfortable retirement. This article explores the primary 

sources of baby boomer retirement income, discusses obstacles to accumulating savings, and identifies developments that could 

unexpectedly change the financial situation of retirees. See page 3. 

The Shift Away from Defined Benefit Plans 

As businesses struggle with mounting costs and increasing global competition, the trend away from defined benefit pension plans 

appears to be accelerating. The author argues this shift is made worse by cyclical market volatility and the desire of corporations to 

shift the costs and risks inherent in these plans to individuals. Although many companies have moved away from defined benefit 

plans in favor of defined contribution plans (such as 401(k) plans), many others maintain healthy defined benefit plans and are 

finding creative ways to fund the plans and manage their costs. See page 10. 

The Demographics of Housing Demand Baby Boomers Have Been Moving in Increasing 

A snapshot of U.S. population growth during the past Numbers to the West and South 

20 years shows significant increases in the numbers of 

aging baby boomers and foreign-born individuals. 

Although these groups differ in age, income, education 

level, and household size, both are expected to significantly affect the demand for owner-occupied housing. 

This article looks at how the aging baby boomer and 

immigrant cohorts are poised to influence the nation’s 

housing markets in the coming years. See page 17. 

Regional Demographic and Banking Trends 

The potential impacts of the aging baby boomer generation as well as other key demographic developments Baby Boomer Population in 2003 

as a ratio to 1990, Quintile Groups are not evenly distributed across the country. Analysts 0–0.948 

0.948–1.006 

1.006–1.069 “on the ground” in the FDIC’s eight geographic areas 

offer insights about the implications of key trends for	 1.069–1.176 

1.176–2.613 local economies and the banking sector. See page 24. 

Note: See page 19 for an explanation of concentration levels. 

How Aging Baby Boomers Are Changing the Financial Marketplace 

As baby boomers near retirement age, their financial needs can be expected to change considerably. Many older households have 

accumulated significant assets in the form of retirement accounts and equity in their homes, and these individuals are likely to 

prefer relatively low-risk assets as they near retirement. As baby boomers undergo this transition, they are also experiencing the 

challenge of rising health care costs and a shift in the corporate sector from traditional defined benefit to defined contribution 

pension plans. Understanding the opportunities these trends present can help FDIC-insured institutions design and offer financial 

products and services that will meet the unique needs of an aging baby boom generation. See page 34. 

FEDERAL DEPOSIT INSURANCE CORPORATION 
The FDIC Outlook is published quarterly by the Division of Insurance and Research of the Federal Deposit 

Insurance Corporation as an information source on banking and economic issues for insured financial 

institutions and financial institution regulators. 

The FDIC Outlook provides an overview of economic and banking risks and discusses how these risks relate 

to insured institutions nationally and in each FDIC region. 

Single copy subscriptions of the FDIC Outlook can be obtained by sending the subscription form found on 

the back cover to the FDIC Public Information Center. 

The FDIC Outlook is available online by visiting the FDIC’s Web site at www.fdic.gov. For more information 

or to provide comments or suggestions about FDIC Outlook, please call Richard A. Brown at 202-898-3927 

or send an e-mail to rbrown@fdic.gov. 

The views expressed in the FDIC Outlook are those of the authors and do not necessarily reflect official 

positions of the Federal Deposit Insurance Corporation. Some of the information used in the preparation 

of this publication was obtained from publicly available sources that are considered reliable. However, the 

use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance 

Corporation. 

Acting Chairman Martin J. Gruenberg 

Director, Division of Insurance Arthur J. Murton 

and Research 

Executive Editor Maureen E. Sweeney 

Managing Editor Kim E. Lowry 

Editors Richard A. Brown 

Ronald L. Spieker 

Mary Ledwin Bean 

Publications Managers Elena Johnson 

Geri Bonebrake 

Contact information for the FDIC’s six geographic regions: 

Atlanta Region (AL, FL, GA, NC, SC, VA, WV) 

Jack M. Phelps, Regional Manager, 678-916-2295 

Chicago Region (IL, IN, KY, MI, OH, WI) 

David Van Vickle, Regional Manager, 312-382-7551 

Dallas Region 

Midsouth (AR, LA, MS, TN): Gary Beasley, Regional Manager, 901-821-5234 

Southwest (CO, NM, OK, TX): Alan Bush, Regional Manager, 972-761-2072 

Kansas City Region (IA, KS, MN, MO, ND, NE, SD) 

Richard Cofer, Acting Regional Manager, 816-234-8198 

New York Region 

Mid-Atlantic (DC, DE, MD, NJ, NY, PA, PR, VI): Kathy Kalser, Regional Manager, 917-320-2650 

New England (CT, MA, ME, NH, RI, VT): Paul Driscoll, Regional Manager, 781-794-5502 

San Francisco Region (AK, AS, AZ, CA, FM, GU, HI, ID, MT, NV, OR, UT, WA, WY) 

John Anderlik, Acting Regional Manager, 415-808-8158 

FDIC OUTLOOK 2 SPRING 2006 
Are Baby Boomers Financially 


Prepared for Retirement?
 

After U.S. soldiers returned from World War II, fertility 

rates rose, resulting in 18 years of higher birth rates 

from 1946 through 1964—the “baby boom” years. 

Seventy-six million babies were born in the United 

States during this time, 12 million more than the 64 

million who would have been born during this period if 

fertility levels had remained at prewar levels. In 2006, 

these American baby boom children now range in age 

from 42 to 60. 

Many baby boomers are nearing the traditional 

retirement age of 65. However, reduced availability of 

pensions with defined benefits, uncertainties related 

to retirement plans funded largely by employee contributions, and lower levels of savings have challenged 

financial planning for many baby boomers. This 

article explores the primary sources of baby boomer 

retirement income, discusses impediments to accumulating future savings, and identifies some situations 

that could unexpectedly change retirees’ financial 

situations. 

Baby Boomers Are Aging, as Is America 

Advances in medicine have increased longevity, resulting in an older America. The percentage of the population that is older has grown during the past century. 

The number of Americans 65 and older rose 183 

percent between 1950 and 2000, more than double the 

77 percent increase in the number of Americans under 

65. This rapid growth in the elderly population 

increased the share of the population age 65 and older 

from 8.2 percent to 12.4 percent. Some of this growth 

can be attributed to the significant increase in life 

expectancy that occurred during the 20th century. At 

age 65, women today are expected to live 25 percent 

longer than their counterparts in 1960, while men are 

expected to live 31 percent longer.1 In addition to 

medical advancements lengthening life spans, the large 

number of baby boomers approaching 65 will continue 

to swell that age group. 

1 U.S. Department of Health and Human Services. 2005. Health, United 

States, 2005, Table 27, Life Expectancy at birth, at 65 years of age, and 

at 75 years of age, according to race and sex: United States, selected 

years 1900–2003, p. 167. 

Chart 1 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

1900 1920 1940 1960 1980 2000 2020* 2040* 

Female 

Male 

The Elderly Population Grew Rapidly in the 1900s, 

and the Trend Is Projected to Continue 

* Projections based on middle assumptions for future fertility, life expectancy, 

and net immigration levels. 

Source: U.S. Census Bureau. 

Population Ages 65 and Older 

(percent of total population) 

Declining fertility rates also are contributing to this 

demographic shift, shrinking the size of subsequent 

generations. Although fertility rates were lower among 

baby boomers than among preceding generations, the 

size of this age demographic meant more parents were 

having children. Between 1977 and 1995, 72 million 

babies were born, approximating the 76 million babies 

born during the baby boom. Nevertheless, the trend of 

an aging U.S. population is projected to continue 

through the first half of the 21st century (see Chart 1). 

Large numbers of baby boomers are now nearing retirement age. 

Will Baby Boomers Have Sufficient Income 

in Retirement? 

Baby boomers’ work-related retirement income consists 

largely of Social Security and pension income. As of 

July 2005, more than 30 million retired workers were 

receiving Social Security income, with benefits averaging $960 per month, or less than $12,000 per year.2 

Although the Social Security program is designed only 

as a supplement to other sources of income, during 

2003 the majority of senior Americans relied on Social 

Security as the source for at least 80 percent of their 

income (see Chart 2, next page). 

2 Social Security Administration. www.ssa.gov. 

FDIC OUTLOOK 3 SPRING 2006 
 

Banking on the Baby Boomers 

Chart 2 Table 1 

0% 

10% 

20% 

30% 

40% 

50% 

60% 

70% 

80% 

90% 

100% 

All Lowest 20% – 40% 40% – 60% 60% – 80% Highest

 20% 20% 

Senior Citizens in Lower-Income Brackets 

Depend on Social Security the Most 

Percentage of Income from Social Security and 

Pensions for Those 65 and Older in 2003 

Source: Employee Benefit Research Institute. 

Social 

Security 

Pensions 

Income Quintile 

Retirement Savings Have Shifted from 

Defined Benefit to Defined Contribution 

Plans over the Past 25 Years 

1978 2003–2004 Difference 

Defined Benefit Plan Participation 

Number (in millions) 29.0 20.0 –9.0 

Percentage 41% 17% –24% 

Defined Contribution Plan Participation1 

Number (in millions) 15.6 64.3 48.7 

Percentage 22% 58% 37% 

Note: Participation is measured by the number and percentage of private, nonfarm, wage 

and salary workers participating in the given plan. 

1 The IRS did not issue 401(k) regulations until 1981. One earlier type of defined contribution plan is the employee stock ownership plan, which invests primarily in stock of the 

employer. 

Source: Employee Benefit Research Institute. Retirement Income: A Mix of Pensions and 

Social Security 

For retirees to maintain a standard of living reasonably 

close to what they had while working, employmentrelated pension income is needed to supplement Social 

Security. Two basic types of pension plans exist— 

defined benefit plans and defined contribution plans.3 

Defined benefit plans are traditional employer-funded 

pension plans that provide a fixed income stream 

during retirement. In defined contribution plans, the 

employee makes retirement contributions that may be 

matched at least in part by the employer.4 

The distribution of pension plans has changed significantly during the past 25 years (see Table 1). In 

2003 and 2004, only 17 percent of workers were 

covered by defined benefit plans, compared with 

41 percent in 1978. Fully 25 percent of workers were 

not covered under either defined benefit or defined 

contribution plans. 

3 Most defined contribution plans are 401(k) plans. Other defined 

contribution plans include 403(b) plans (offered by tax-exempt organizations such as churches, schools, and charities), employee stock 

ownership plans, and profit-sharing plans. 

4 In defined contribution plans, the employee is responsible for the 

investment decisions and assumes the market risks. Defined contribution plans became increasingly popular when the stock market 

soared in the 1980s and 1990s. Over time, new companies, as well as 

many older ones, began offering only defined contribution plans, 

which take the burden of the investment and annuity risk away from 

the employer. 

Defined Benefit Plans and Defined Contribution 

Plans Have Limitations 

Fewer workers are now covered by defined pension 

plans, and those with coverage may find that the plans 

have shortcomings. The plans are often less generous 

than in the past and rarely adjust for inflation. In addition, workers are changing jobs more frequently, and 

defined benefit plans’ lack of portability is a major issue 

for participants (see “The Shift Away from Defined 

Benefit Plans,” page 10, for more information on 

defined benefit and defined contribution plans).5 

Defined contribution plans offer the opportunity for 

workers to accumulate wealth during their working 

years. Employee salary contributions, in many cases 

coupled with some matching employer contributions, 

provide funds for employees to invest throughout their 

careers. Employees have the potential to accumulate 

large sums in these savings plans. The outcome depends 

on (1) employees beginning to contribute early in their 

5 Some defined benefit plans have failed, and others are in financial 

trouble. Although the vested benefits of failed plans are insured by the 

federal Pension Benefit Guaranty Corporation (PBGC), there is a maximum insurance benefit. In 2005, the maximum insurance benefit for 

participants in terminating, underfunded pension plans was $45,614 

per year for those who retire at age 65; the amount was higher for 

those who retire later and lower for those who retire earlier or elect 

survivor benefits. As a result, the pensions of some higher-income 

workers may be less than they anticipated or could change should the 

parent company experience financial difficulties. Some well-known 

pension failures covered by the PBGC include Kaiser Aluminum, 

Bethlehem Steel, Polaroid, US Airways, and United Airlines. 

FDIC OUTLOOK 4 SPRING 2006 
Are Baby Boomers Financially Prepared for Retirement? 

Table 2 

401(k) Balances Generally Increase the Longer Participants Work 

but Still May Not Fully Fund Retirement 

Average 401(k) Account Balance in 2003 

(by participant job tenure) 

Age
 0 to 2 Years >2 to 5 Years >5 to 10 Years >10 to 20 Years >20 to 30 Years >30 Years
 

40s $13,970 $22,386 $36,832 $74,641 $103,156 — 

50s
 17,618 25,208 39,877 83,318 138,382 $131,873
 

Source: Investment Company Institute. 2005. The Investment Company Factbook (tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project). 

careers and regularly contributing the maximum allowable amounts, (2) funds being invested wisely, and 

(3) employers matching contributions. However, based 

on a review of outstanding 401(k) balances, it does not 

appear that the average baby boomer has accumulated 

substantial wealth in their retirement accounts (see 

Table 2). For baby boomers who were in their 40s and 

50s in 2003 and had 401(k) plans, the maximum average 401(k) accumulation was less than $140,000, and 

many had considerably less.6 

In addition to having less-than-desired wealth accumulation in 401(k) plans, some participants compound 

that problem by borrowing from their plans while working and sometimes having loans outstanding when they 

retire. In 2003, 18 percent of eligible 401(k) plan participants borrowed from their account and had average 

loan balances of 13 percent of their account balances.7 

Perhaps a more important issue is that employees 

generally direct the investment decisions and bear the 

resulting investment risk for defined contribution plans. 

Further, investment returns for defined contribution 

plans are not guaranteed and can be greatly affected by 

market fluctuations. This uncertainty can make retirement planning more challenging. Finally, since defined 

contribution plans are voluntary, fully 18 percent of 

employees do not participate at all.8 These factors tend 

6 U.S. Department of Labor, Employee Benefits Security Administration. July 2005. Preliminary Private Pension Plan Bulletin, Abstract of 

2000 Form 5500 Annual Reports (tables D3 and A1). In 2000, 401(k) 

assets totaled $1.725 trillion, which is 78 percent of the $2.216 trillion 

in total defined contribution assets. 

7 Sarah Holden and Jack VanDerhei. August 2004. “401(k) Plan Asset 

Allocation, Account Balances, and Loan Activity in 2003.” Perspective 

10, no. 2. http://ici.org/perspective/per10-02.pdf. 8 Ruth Helman, Dallas Salisbury, Variny Paladino, and Craig Copeland. 

April 2005. “Encouraging Workers to Save: The 2005 Retirement Confidence Survey,” EBRI Issue Brief No. 280. www.ebri.org. This survey 

suggests that 18 percent of employees do not participate in their workplace retirement savings plan. Nearly seven out of ten employees not 

using the plans are aware of them but simply choose not to participate. 

to reduce the effectiveness of defined contribution 

plans in providing adequate funding for retirement. 

Baby Boomer Assets May Not Adequately 

Supplement Retirement Income 

While there is no definitive standard for how much a 

person needs for retirement, many baby boomers appear 

to have a net worth insufficient to meet basic retirement needs, according to some guidelines.9 In 2004, the 

median net worth for families headed by baby boomers 

between the ages of 45 and 54 was $144,700.10 

However, these data are somewhat difficult to interpret, 

as wealth holdings in the United States are skewed 

toward the top 10 percent of families (see Chart 3, 

next page). The median family net worth was $1,700 

for the lowest 25 percent of U.S. households and 

$43,600 for those in the 25th to 49th percentile. In 

contrast, those in the 75th to 89th percentile had 

median family net worth of $506,800, while the figure 

for those in the top 10 percent was $1.4 million. These 

data do not apply only to baby boomers, however. 

Chart 3 suggests that although many families have a 

9 One research report (Kenn B. Tacchino and Cynthia Saltzman, 

March 2001, “Should Social Security Be Included When Projecting 

Retirement Income?” Journal of Financial Planning, table 1) 

suggested targets for asset accumulation by ages 66 to 67, after 

taking into account projected Social Security income, that ranged 

from $226,000 for those whose current income is $40,000 to $1.9 

million for those whose current income is $200,000. Another rough 

rule of thumb suggested for asset accumulation for retirement recommended private savings of 12 to 16 times final salary (Ben Stein and 

Phil DeMuth, 2005, Yes, You Can Still Retire Comfortably, Carlsbad, 

Calif.: New Beginnings Press). For example, using the lower-end 

multiple of 12, someone with an income of $50,000 would need at 

least $600,000 in assets to fund retirement. 

10 Federal Reserve Board. March 2006. 2004 Survey of Consumer 

Finances. The Survey of Consumer Finances is a triennial survey. In 

2004, the 40 million baby boomers born between 1950 and 1959 fell 

into the 45 to 54 age bracket. The net worth data do not account for 

the present value of future Social Security benefits. 

FDIC OUTLOOK 5 SPRING 2006 
Banking on the Baby Boomers 

Chart 3 

Net Worth Is Highly Concentrated in the 


Top 10 Percent of U.S. Families
 

2004 Median Family Net Worth

(in 2004 dollars) 

$1,600,000 $1,430,100 

$1,400,000 

$1,200,000 

$1,000,000 

$800,000 

$600,000 $506,800
 

$400,000
 

$170,700
 $200,000 $43,600 $1,700 $0 

<25 25 – 49.9 50 – 74.9 75 – 89.9 90 – 100 

Net Worth Percentiles 

Source: Federal Reserve Board, 2004 Survey of Consumer Finances. 

fairly substantial amount of assets, a large number have 

few resources with which to supplement retirement 

income. 

The single largest source of wealth for retirees is often an 

illiquid asset, real estate.11 It is useful, therefore, to look 

separately at non-real-estate assets for a realistic picture 

of available assets retirees have accumulated. Although 

94 percent of families headed by persons ages 45 to 54 

held at least one type of non-real-estate financial asset 

in 2004, the median holdings of financial assets for this 

group were only $38,600.12 These data include 58 

percent of families that held a median of $55,500 in 

retirement accounts (which include individual retirement accounts or IRAs), but only 18 percent that held 

the next largest asset category, pooled investment funds 

($50,000). Even fewer—less than 7 percent—held the 

third and fourth largest asset categories, other managed 

assets and bonds ($43,000 and $30,000, respectively) 

(see Table 3, next page).13 For the average person, 

financial assets would not last long in retirement. 

Inheritance is often considered another option to fund 

retirement. However, relatively few people will be able 

to rely on this strategy, or even substantially supple11 As noted previously in this article, for families headed by persons 

ages 45 to 54, in 2004 the median family net worth was $144,700, and 

77 percent of these families owned a primary residence. The median 

home market value for these homeowners was $170,000. (Note: The 

home market value reflects gross value, which may differ significantly 

from the net equity in the home; figures on average home equity were 

not available.) Data from Federal Reserve Board 2004 Survey of 

Consumer Finances. 

12 See note 10. 

13 Ibid. 

ment their wealth through inheritance. For example, in 

2003 only 66,000 estate tax returns were filed (estates 

of $1 million or more), compared with about 2.4 

million deaths that year.14 Without substantial inherited wealth and in view of the difficulties related to 

providing sufficient retirement income, personal 

savings will often be needed to supplement Social 

Security benefits and pensions related to employment. 

However, several factors may constrain the ability of 

lower-income baby boomers to accrue assets to fund 

their retirements: uneven growth in incomes, significant levels of debt, and high current expenses. 

The data presented thus far highlight the need for 

many baby boomers to increase savings for retirement 

aggressively. However, those with lower incomes may 

find this particularly challenging, in part because earnings growth has been skewed toward the highestincome households (see Table 4, next page). 

Heavy debt burdens can make wealth accumulation 

more difficult, because funds used to repay debt cannot 

be put into savings. By various measures, household 

debt has risen significantly. For example, household 

debt outstanding has been increasing steadily as a 

percentage of disposable personal income, from 70 

percent in 1980 to 122 percent as of third quarter 

2005.15 Further, the proportion of families with very 

large debt payments relative to income is also rising. In 

2004, 13.1 percent of families headed by persons ages 

45 to 54 had a debt-to-income ratio greater then 40 

percent, an increase of 1.5 percentage points since 

2001. This compares with 12.2 percent of all families 

with a debt ratio above 40 percent, only a 0.4 percentage increase since 2001.16 

Another potential barrier to building additional retirement assets is that many older baby boomers have 

expenses somewhat unique to their age group. As baby 

boomers approach retirement age, they often become 

part of what has been called the “sandwich generation.” 

At this point in their lives, boomers may still be caring 

for their children and providing for their educational 

14 Estate data are from the Internal Revenue Service. There were 

2.4 million deaths in 2002, per the National Center for Health Statistics
 

of the Centers for Disease Control and Prevention (CDC)
 

(www.cdc.gov/nchs/fastats/deaths.htm), and preliminary figures also
 

show 2.4 million deaths for 2003 (see CDC, 2004, “Deaths: Preliminary
 

Data for 2003,” National Vital Statistics Reports 53, no. 15).
 15 Calculated using data from the Bureau of Economic Analysis and
 

the Federal Reserve Board Flow of Funds. 


16 See note 10.
 

FDIC OUTLOOK 6 SPRING 2006 
Are Baby Boomers Financially Prepared for Retirement? 

Table 3 

Assets Held by Families Headed by Baby Boomers Vary Widely 

Median Asset Value for 

Families Holding Assets Families Holding Assets 

(percent) (in 2004 dollars) 

Type of Financial Asset 1989 2004 Difference 1989 2004 Difference 

Retirement Accounts 52.2% 57.7% 5.5% $23,500 $55,500 $32,000 

Pooled Investment Funds 9.6 18.2 8.6 17,600 50,000 32,400 

Other Managed Assets 3.5 6.2 2.7 14,700 43,000 28,300 

Bonds 5.2 1.8 –3.4 14,700 30,000 15,300 

Stocks 22.1 23.2 1.1 7,300 14,500 7,200 

Certificates of Deposit 20.1 11.9 –8.2 13,200 11,000 –2,200 

Cash Value of Life Insurance 41.2 26.0 –15.2 6,600 8,000 1,400 

Other 15.4 12.1 –3.3 4,400 5,000 600 

Transaction Accounts 87.9 91.8 3.9 3,900 4,800 900 

Savings Bonds 22.6 21.0 –1.6 700 1,000 300 

Note: Heads of households are between 45 and 54 years old. Asset values do not account for the present value of future Social Security benefits. 

Source: Federal Reserve Board, 2004 Survey of Consumer Finances. 

Table 4 

Income Growth Was Greatest for 

Households with the Highest Earnings 

Mean Household Income 

(2004 Dollars) 

Earnings Percent 

Percentile 1980 2004 Change 

Top 5% $150,869 $264,387 75% 

Next 15% 84,321 113,995 35% 

Bottom 80% 31,926 37,761 18% 

Source: U.S. Census Bureau (Historical Income Tables). 

needs while simultaneously facing financial burdens 

imposed by the health care costs of their aging parents. 

On the positive side, data suggest that baby boomers 

have become more diligent in their efforts to save for 

retirement. Between 1995 and 2005, the percentage of 

workers who have saved for retirement has increased 

for each age category (see Table 5). 

Financial Planning Is Becoming More Complex 

for Aging Baby Boomers 

As noted previously, many baby boomers have limited 

resources to fund their retirement and may find it difficult to add to their wealth. To help overcome these 

obstacles, it is important for baby boomers to be knowlTable 5 

Over the Past Decade, More Workers from 

Each Age Group Have Saved for Retirement 

% Saying They Have 

Saved for Retirement 

Age of Worker 1995 2005 Increase 

35 to 44 60% 71% 11% 

45 to 54 69% 73% 4% 

55 and older 63% 71% 8% 

Source: Retirement Confidence Survey 2005 Fact Sheet, “Age Comparisons Among 

Workers.” 

edgeable about their finances and actively plan their 

own financial futures or seek the assistance of financial 

professionals. The results of a recent survey focusing on 

baby boomer preparation for retirement suggest this is 

not the case among many older Americans; in fact, 

only 19 percent had engaged in successful retirement 

planning (defined as always or mostly able to stick to 

their plan).17 This is notable in light of the investment 

responsibilities that defined contribution plans place on 

the individual. For example, a frequently cited concern 

is that employees often hold too much stock in the 

company they work for in their 401(k) plans, failing to 

take advantage of the benefits of a more diversified 

17 Annamaria Lusardi and Olivia S. Mitchell. December 2005. “Financial Literacy and Planning: Implications for Retirement Wellbeing.” 

www.dartmouth.edu/~alusardi/Lusardi_Mitchell_aea06.pdf. 

FDIC OUTLOOK 7 SPRING 2006 
Banking on the Baby Boomers 

portfolio. In 2003, 36 percent of workers in their 50s 

had more than 30 percent of their 401(k) account 

balances invested in their company stock, and 11 

percent had more than 90 percent.18 The results of a 

financial literacy questionnaire may help explain why 

this occurs: Only 52 percent of the respondents understood correctly that holding a single company stock 

offers a riskier return than a stock mutual fund.19 So, 

while not all baby boomers need professional advice, it 

appears that many could benefit from greater assistance 

in their financial preparation for retirement. 

Even with Careful Planning, Savings May 

Still Be Insufficient 

Baby boomers who appear to be financially prepared for 

a comfortable retirement may continue to encounter 

unexpected challenges. Three areas of risk could 

complicate even the most carefully designed retirement 

plans: inflation risk, longevity risk, and risk of underestimated and unexpected expenses. 

Risk of Inflation 

Increases in consumer prices and the risk of inflation 

have been limited for a number of years, making it easy 

to forget that not long ago rapidly rising prices were a 

serious problem in the United States. Although the 

annual rate of increase in consumer prices, as measured 

by the consumer price index, has been 3 percent or less 

since 1992, this index rose at an annual rate of at least 

10 percent in every year between 1979 and 1981.20 

Rising prices can deplete the value of a fixed pension 

benefit and fixed-income investments, and therefore 

remain an ongoing risk for retirees. 

Risk of Longevity 

Baby boomers need to factor increased longevity into 

their financial planning. While advances in medicine 

are increasing average longevity, it remains difficult to 

predict accurately the length of the retirement period 

and, therefore, how long accumulated wealth must last. 

18 Sarah Holden and Jack VanDerhei. August 2004. Perspective.
 

Investment Company Institute. Statistics calculated from data
 

contained in figure 6, “Asset Allocation Distribution of Participant
 

Account Balances to Company Stock in 401(k) Plans with Company
 

Stock by Age, 2003.”
 

19 See note 17.
 

20 U.S. Department of Labor, Bureau of Labor Statistics. November 16,
 

2005. Consumer Price Index: All Urban Consumers, U.S. City Average.
 

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.
 

When uncertain longevity is combined with the risk of 

inflation, it becomes problematic for even the most 

experienced planners to prepare for all scenarios. 

Risk of Underestimated Health Care Expenses 

Finally, underestimated and unexpected health care 

expenses could consume a large portion of retirement 

savings. For example, in March 2005, Fidelity Investments estimated that the average 65-year-old couple 

retiring then would need $190,000 to cover medical 

costs during the next 15 to 20 years.21 This figure does 

not compare favorably with the 2004 median family net 

worth of $144,700 for the baby boomers ages 45 to 54. 

In addition, although the estimated cost of health care 

is a substantial figure, it is just an average, meaning that 

many people may need to spend considerably more. 

Moreover, this average health cost figure covers a 65­

year-old retiree only through ages 80 to 85. 

Is the Future Really So Dark? 

This article has explored the question of whether baby 

boomers are financially prepared for retirement. Data 

on defined benefit plans, defined contribution plans, 

and wealth accumulation suggest that many baby 

boomers may not have adequate resources for a 

comfortable retirement. Moreover, issues such as 

uneven growth in incomes, large amounts of baby 

boomer debt, and high current expenses could make it 

difficult for baby boomers to increase their savings. 

Even those who appear financially well prepared for 

retirement face risks related to inflation, longevity, and 

health care costs. 

However, the financial situation for many baby 

boomers is not as dire as it may seem. Changing preferences may lead baby boomers to seek a different type of 

retirement than their parents. For example, baby 

boomers may choose to postpone their retirement or 

begin a second career after retirement. Both scenarios 

would provide an opportunity for them to accumulate 

additional assets. The labor force participation rate for 

people ages 65 and older is 20 percent higher in 2005 

than it was 25 years ago. Although the bulk of this 

increase is due to more elderly women participating in 

the labor force (the labor force participation rate for 

women ages 65 and older increased 43 percent during 

21 Fidelity Investments. March 28, 2005. “Fidelity Investments 

Increases Estimate for Retiree Medical Expenses.” 

FDIC OUTLOOK 8 SPRING 2006 
Are Baby Boomers Financially Prepared for Retirement? 

this period), participation for men in this age group is 

on the rise as well.22 Overall, although the financial 

future for many baby boomers is uncertain, continuing 

to work later in life may allay financial strains for some. 

As longevity continues to rise with the development of 

new medical technologies, people who are able to work 

into their late 60s or 70s could become the norm. Life 

expectancy for people born today is 78 years, approximately ten more years than for people born during the 

baby boom generation. Should individuals choose to 

work for a portion or all of this time, this could help 

mitigate concerns about how prepared they are for 

retirement. 

J. Aislinn Bohren, Economic Research Assistant 

Heather Gratton, Senior Financial Analyst 

Brian Lamm, Senior Financial Analyst 

22 The labor force participation rate is the percentage of the population in the labor force. 

FDIC OUTLOOK 9 SPRING 2006 
 

The Shift Away from Defined Benefit Plans
 

As the U.S. population ages, issues surrounding retirement security for baby boomers and future generations 

loom large. Thirty years ago, employer-sponsored 

defined benefit (DB) plans that provided guaranteed 

monthly payments during retirement were a standard 

employee benefit. However, the number of DB plans 

has declined sharply in recent years, from 112,208 in 

1985 to about 29,600 in 2004.1 As U.S. businesses 

struggle with mounting costs and try to remain competitive in a global economy, the trend away from DB 

plans appears to be accelerating (see Chart 1). In their 

place, businesses increasingly are offering defined 

contribution (DC) plans that allow employees to 

contribute to an individual account owned and 

managed by the employee, placing more responsibility 

on employees to save for retirement and to manage 

their own funds. 

Several factors have coalesced to pressure the DB 

system in recent years. The system was designed when 

U.S. manufacturing companies such as General Motors 

dominated U.S. and world markets for generations at a 

time. In today’s period of fierce global competition, 

when new companies routinely emerge to challenge the 

old, employee benefit costs can reduce earnings and 

hamper flexibility for many companies in old-line 

industries. In addition, recent periods of negative equity 

returns and low interest rates have contributed to 

volatility in the value of pension assets and significant 

underfunding in a number of plans. Amid these developments, DC plans have gained in popularity among 

companies as a means to shift some of the cost and risk 

of retirement savings to their employees. 

This article explores some of the cyclical and structural 

causes of the recent shift from DB to DC retirement 

plans. It discusses the motivations for companies to 

shift from DB to DC plans and the specific risks inherent in both types of plans. Although many companies 

have moved from DB to DC plans, such as 401(k) 

plans, many others maintain healthy DB plans and 

are finding creative ways to invest and manage 

the costs. With 34 million participants, the private 

single-employer DB system remains a vital, though 

1 Several types of DB plans exist: private, single-employer plans; 

multiemployer plans available through unions; and publicly sponsored 

plans offered to state employees. This article focuses on the private, 

single-employer DB system. (Pension Benefit Guaranty Corporation 

Pension Insurance Databook, 2004.) 

Chart 1 

The Number of Defined Benefit Plans Has 

Declined Steadily during the Past Two Decades 

120,000 

100,000 

80,000 

60,000 

40,000 

20,000 

0 

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 

Years 

Source: Pension Benefit Guaranty Corporation. 

Number of Plans 

Defined Benefit and Defined 

Contribution Plans: Definitions 

Defined Benefit Plan 

Upon retirement, employees are guaranteed a monthly 

benefit payment for the rest of their lives. This payment 

is based on a formula that considers tenure and salary. 

The employer owns and manages the assets, which are 

held in trust. These assets in most cases are not portable 

and cannot move with the employee to another job. To 

fund future benefits, the employer makes annual contributions based on actuarial assumptions. 

Defined Contribution Plan 

Individuals fund their retirement by saving over their 

entire careers. Employees elect to contribute a portion 

of their pay, up to an annual dollar limit (currently 

$15,000). As an incentive to participate, employers 

may offer matching contributions up to 100 percent of 

the employee contribution. The employee owns and 

manages the investments of the accrued assets. These 

assets are portable and can move with the employee to 

a new job. Employees may also take pre-retirement 

distributions, which are subject to a tax penalty. 

increasingly less available, component of the retirement 

infrastructure.2 

2 Pension Benefit Guaranty Corporation. This figure includes working 

and retired participants. 

FDIC OUTLOOK 10 SPRING 2006 
The Shift Away from Defined Benefit Plans 

The Evolution of Defined Benefit Plans 

Although DB pension plans have been around for 

decades, they gained in popularity during and after 

World War II as a means to boost employee compensation in an era of binding wage and price 

controls.3 Because employers could not increase 

employees’ pay, they instead offered deferred income 

in the form of generous health and retirement benefits. 

As employee benefits became commonplace, they also 

became a bargaining tool for unions, allowing companies to negotiate future payments in lieu of pay 

increases, even after wage restrictions were lifted. 

Historically, then, the majority of workers covered 

under DB plans tended to be in the unionized, goodsproducing and transportation industries, which had a 

much more significant market presence 60 years ago. 

In 1945, manufacturing, utilities, wholesale trade, and 

transportation services made up more than half of the 

gross domestic product (GDP), and about 20 percent 

of workers were unionized. Today, those industries 

represent about a third of GDP, and 12 percent of the 

workforce is unionized.4 

DB plans remained the norm until the 1970s, when the 

legal structure governing pensions made plan sponsorship more onerous. Enacted partly in response to the 

Studebaker Company’s default on its pension obligations, the Employee Retirement Income Security Act 

(ERISA) of 1974 standardized all aspects of DB sponsorship, including funding, investment and administration.5 In addition, ERISA created the Pension Benefit 

Guaranty Corporation (PBGC), the federal agency 

that insures pensions and provides benefit payments 

to retirees in the event of a DB plan termination. 

Employers pay annual, per-participant premiums or 

variable premiums to the PBGC, depending on plan 

funding levels.6 

3 The first employer-provided retirement plan in the United States was 

offered by American Express in 1875. 

4 Bureau of Economic Analysis, Bureau of Labor Statistics (BLS), 

Haver Analytics, and FDIC analysis. 

5 During the past 30 years, ERISA and applicable sections of the Internal Revenue Code (which also applies to DB plans) have been 

amended a number of times, making compliance increasingly 

complex. Defined contribution plans are also subject to ERISA. 

6 The recently enacted Deficit Reduction Act of 2006 raised premiums 

to $30 from $19 per participant. Pension plans are not fully insured. 

Rather, when a plan is terminated, the maximum amount the PBGC 

pays to beneficiaries is based on a number of factors and adjusted 

annually for inflation. In most cases, the PBGC payment represents 

less than a beneficiary would have received had the plan not been 

terminated. 

Driven by widespread corporate restructuring and 

movement away from lifetime employment during the 

1980s, alternative retirement funding vehicles began to 

emerge. In addition, employee tenure declined, and 

traditional jobs in the goods, manufacturing and transportation sectors increasingly were replaced by jobs in 

the service sector. Companies in newer industries, such 

as information technology, have been much less likely 

to sponsor DB plans. 

Today, DB plans primarily are offered in the airline, 

automobile, and manufacturing industries. Many 

companies in these industries have experienced stiff 

pressures in recent years from globalization and other 

market forces, exacerbating the burden of decades of 

accrued pension liabilities.7 Even companies that are 

better positioned in their core businesses and under less 

pressure are finding it difficult to compete with more 

efficient rivals that do not sponsor DB plans. Taken 

together, these factors have created intense competitive 

pressure to freeze or terminate DB plans in favor of DC 

plans.8 

Why Are Defined Benefit Plans Under Pressure? 

Interest Rates and Market Returns 

Particularly notable of late has been the inherent 

volatility of DB funding levels. Dubbed “the perfect 

storm” by some industry observers, the low interest rate 

environment of the past few years, in tandem with 

equity market volatility, has negatively affected the net 

market value of DB plans. The sensitivity of pension 

plan obligations to short-term fluctuations in interest 

rates and market performance creates significant uncertainty for plan sponsors about future contribution 

levels. 

Because pension payments accrue and are paid out over 

decades, DB plans are highly sensitive to changes in 

interest rates. The discount rate used to establish 

current liabilities (based on an average of investmentgrade corporate bonds) is critical in determining a 

plan’s funding level. The lower the interest rate, the 

7 According to the PBGC, 56 percent of workers covered under DB
 

plans are in the manufacturing, transportation, utilities, and wholesale
 

trade sectors. 


8 When a plan is frozen, it generally is closed to new participants,
 

with none, some, or all prior participants accruing additional benefits.
 

When a plan is terminated, the sponsor either purchases an annuity
 

or issues a lump-sum payment to beneficiaries. 


FDIC OUTLOOK 11 SPRING 2006 
 

Banking on the Baby Boomers 

higher the present value of the liability and the annual 

contributions needed to avoid underfunding.9 But this 

is only part of the toll that low interest rates have 

taken on the net market value of DB plans. Asset 

returns for DB plans also were reduced in 2000 and 

2001 by the combination of low interest rates and 

equity market losses, a situation that has only gradually 

improved in the years since then.10 As corporate DB 

plans became increasingly underfunded, ERISA and 

Internal Revenue Code rules began to require that 

firms raise their annual contributions.11 In some cases, 

these plans also incurred additional PBGC premiums as 

well as “shortfall” charges. 

Despite the gradual improvement in asset yields in 

recent years, 81 percent of corporate pension plans 

remain underfunded at present; during the past two 

years the plans have regained only 14 percent of the 

$392 billion in surplus assets lost over the preceding 

three years.12 The Government Accountability Office 

estimates that in aggregate, DB plans are underfunded 

by a total of $450 billion, with more than half the 

largest plans underfunded.13 It is estimated that 

unfunded pension liabilities of S&P 500 companies in 

2005 were close to $218 billion.14 

Legacy Costs 

Plan sponsors in some traditional sectors of the economy face large “legacy costs” on their balance sheets 

9 A plan is considered underfunded when the asset-to-liability ratio 

falls below 80 percent in a single year or is consistently below 90 

percent. Plan sponsors must contribute to their plans at least annually and must fund them up to 90 percent for the plans to be considered “well funded.” To calculate a plan’s funding level, the plan 

converts long-term payments to a lump sum, representing the present 

value of the plan’s liabilities. Increased required contributions tend to 

coincide with financial downturns, when the company can least 

afford to make these contributions. 

10 When stock market gains declined in 2000, pension funds were 

among those investments most adversely affected. Because of the 

traditional “65/35” pension fund investment strategy, in which 65 

percent of the fund’s assets are typically allocated toward equities 

and the remaining 35 percent toward fixed-income securities, corporations experienced huge drops in funding levels when stock prices 

plummeted. 

11 Current tax rules offer no incentive for plan sponsors to fund 

pensions in economic good times. Currently, an employer may only 

deduct contributions that increase the plan funding level to 100 

percent, with no deductibility after 100 percent. 12 Millman 2005 Pension Study. 

http://www.milliman.com/pubs/EB/PDFs/PensionFundSurvey2005.pdf 

13 Government Accountability Office. May 2005. Recent Experiences
 

of Large Defined Benefit Plans Illustrate Weakness in Funding Rules.
 

GAO-05-294. 


14 Davis Zion and Bill Carache. Credit Suisse First Boston, Pension
 

Update: Pension Plans getting weaker this year. October 25, 2005. 


that are closely related to DB pension obligations. The 

product of decades of labor negotiations in which 

corporations and their unions agreed to increased 

pension benefits in lieu of wage increases, pension 

costs that were once viewed as comfortably far in the 

future are now coming due.15 As more people retire 

and companies increase productivity by reducing their 

payrolls, fewer workers are available to contribute to 

the funding of rising heath and pension costs. Moreover, the workforce is not only aging, but people are 

living longer; the average lifespan of retirees has 

increased from 68 years in 1950 to 78 today.16 Hardest 

hit by these legacy costs are traditional industries, such 

as airlines and automobile manufacturing, which are 

facing significant competitive pressure in their core 

business lines as well as the rising burden of pension 

obligations and steadily increasing numbers of 

retirees.17 

Intense Competition 

To cope with severe underfunding, more companies are 

freezing or terminating their DB plans as part of bankruptcy reorganization or efforts to improve their 

balance sheets. Recent events in the airline industry 

illustrate this trend.18 Faced with rising fuel prices and 

increasing competition from newer, low-cost airlines, 

such as Southwest and JetBlue, which do not sponsor 

DB plans, legacy airlines (major carriers operating 

under the hub-and-spoke system) have posted a record 

$32 billion in losses during the past four years, with an 

additional $4.8 billion in losses projected for 2005.19 

Delta and Northwest filed for bankruptcy in September 

2005, joining the ranks of other major carriers in Chapter 11, including United Airlines, US Airways (which 

emerged from bankruptcy in September 2005), ATA, 

and Aloha Airlines. 

15 According to the 2005 National Compensation Survey published by 

the Bureau of Labor Statistics, 73 percent of union workers have 

access to DB pensions, compared with 16 percent of non-unionized 

workers, making heavily unionized industries more likely to face large 

legacy costs. These industries also tend to be those that have significantly downsized during the past 30 years, increasing the ratio of 

retiree/nonactive participants to active participants. 

16 Centers for Disease Control and Prevention. 

www.cdc.gov/nchs/data/nvsr/nvsr53/nvsr53_06.pdf. 17 Manufacturing and transportation companies comprise a third of 

single-employer plans, yet they represent 90 percent of PBGC claims 

during the past 30 years. 

18 In general, a plan sponsor may terminate its plan under a 

“distressed termination”; however, the employer must prove to a 

bankruptcy court or to the PBGC that it cannot remain in business 

unless the plan is terminated. 

19 David Pauly. “U.S. Airlines – All-Time Losers, and Counting,” 

November 4, 2005 (Bloomberg). 

FDIC OUTLOOK 12 SPRING 2006 
The Shift Away from Defined Benefit Plans 

After filing for bankruptcy in 2002, United terminated 

its DB pension plan in 2005, saving $645 million a 

year.20 Industry analysts also expect Delta, Aloha, and 

Northwest to turn over their pension obligations to the 

PBGC. The remaining legacy airlines with defined DB 

plans face more than $60 billion in fixed obligations 

during the next four years (including $10.4 billion in 

pension contributions), which figures to place additional financial pressure on them.21 

The domestic auto industry has seen a similar weakening in profitability as a result of excess capacity, price 

competition, changing consumer preferences, and 

rising employee benefit costs. After announcing an 

$8.6 billion loss in 2005, General Motors (GM) 

revealed recently it would begin freezing benefits in its 

DB plan for salaried workers, replacing it with a 

401(k)-type DC plan. GM estimates that by restructuring its pension program from DB to DC, it will reduce 

its 2006 pension liability by $1.6 billion. When GM 

announced its plan to freeze benefits in the DB plan, it 

noted the difficulty of competing with companies that 

do not carry these legacy costs.22 GM has fewer than 

200,000 U.S. workers, but nearly 1 million retirees and 

dependents. In 2004, the cost of pension and health 

benefits for retired GM workers represented $1,784 per 

vehicle, compared with Toyota, which does not offer a 

DB plan and whose employee benefits represented only 

$200 per vehicle.23 With a retiree-to-employee ratio 

close to one-to-one, Ford Motors also is having trouble 

meeting its benefit obligations.24 Going forward, 

analysts expect Ford to negotiate with its labor unions 

to restructure benefits, or possibly even switch to a 

DC plan.25 

Increased Investor and Regulatory Scrutiny 

Regulators, investors and analysts also have become 

increasingly concerned about the lack of transparency 

in DB pension plans and the leeway the current rules 

provide in reporting a plan’s financial condition. Under 

20 United’s pension obligations were underfunded by about $9.8 billion
 

and represented the largest claim in PBGC history.
 

21 Don Young, Chairman of the U.S. House of Representatives Committee on Transportation and Infrastructure. www.house.gov/transportation/press/press2005/release85.html.
 

22 General Motors press release, March 7, 2006. 


23 www.businessweek.com/magazine/content/04_29/b3892001_
 

mz001.htm.
 

24 Bradley A. Rubin. December 7, 2004. Ford Motor Company: Driving
 

Profitability Through New Model Introductions, BNP Paribas, Fixed
 

Income. 


25 Fitch: Successful UAW Negotiations Vital for Ford upon Restructuring. www.theautochannel.com/news/2006/01/23/208239.html.
 

current rules, plan sponsors may value plan assets at 

anywhere from 80 to 120 percent of market value, and 

earnings may be projected using a long-term expected 

rate of return, with gains or losses amortized over five 

years. On the liability side, valuation is based on a fouryear weighted average of investment grade corporate 

bonds, where the rate must fall between 90 and 100 

percent of the index.26 Under this approach, plan 

sponsors are able to reduce funding volatility by 

“smoothing” fluctuations in interest rates, making 

future payment more predictable. 

Critics argue, however, that this flexibility allows sponsors to mask the plan’s true health, and that today’s 

underfunding is due, at least in part, to current rules that 

allow sponsors to amortize gains or losses on assets and 

liabilities over extended periods and use credits in lieu of 

cash contributions.27 It has been reported in the financial media that the Securities and Exchange Commission is reviewing whether some companies changed 

their assumptions about pension obligations to meet 

short-term earnings targets. The agency has not formally 

charged any company with wrongdoing.28 In addition, 

investors and analysts increasingly are wary of the 

impact pension obligations will have on earnings and 

cash flow. Since 2002, a number of analyst reports 

have criticized large corporate funding obligations, and 

credit rating agencies have noted pension problems as 

contributing factors in ratings downgrades, such as in 

the cases of Ford and GM in 2005. A recent Bear 

Stearns report warned that investors who fail to consider 

a company’s pension liabilities do so at their own risk.29 

The increasingly common practice of using the bankruptcy process to shift legacy costs to the PBGC is 

prompting discussion about the potential for moral 

hazard (where, to the extent allowed, the plan sponsor 

may take unnecessary risks or not fully fund the plan, 

expecting the PBGC will take over the plan in the 

26 The previous benchmark was the 30-year Treasury rate; however, 

the Pension Funding Equity Act of 2004 temporarily replaced the 30­

year rate with the composite index of bonds. 

27 Pension overhaul legislation, which attempts to resolve these 

issues, among others, is now working its way through Congress. In 

2005, the House and Senate passed reform legislation, and a conference is currently working to resolve differences between the bills. 

The Bush administration released its reform proposal in January 2005. 

28 “Pension Inquiry Shines Spotlight on Assumptions; Small Changes 

in Calculations at Companies Have a Big Effect on Retiree Liability – 

and Profit,” The Wall Street Journal, November 9, 2005. 29 Bear Stearns. January 2006. Accounting Issues Pension Tension: 

Hurricane Watch Estimated 2005 and Forecasted 2006–2007 Funding 

Status. 

FDIC OUTLOOK 13 SPRING 2006 
Banking on the Baby Boomers 

event of bankruptcy). Critics argue that the ability to 

socialize pension obligations by shifting them to the 

PBGC has eroded incentives for companies to rein in 

these obligations on their own. Further, the series of 

large DB plan terminations of the last few years has 

impaired the financial position of the PBGC itself, 

further fueling the national debate about the future of 

DB plans. With the PBGC currently operating at a 

$23 billion deficit, sponsors of healthy plans are implicitly subsidizing plans that are currently underfunded or 

that have been terminated due to bankruptcy. Legislators and policymakers face the possibility of a taxpayer 

bailout should the agency not return to solvency before 

more large terminations occur.30 

The Transition to Defined Contribution Plans 

To reduce costs and manage pension risks, more companies are shifting out of the DB system and into DC 

plans, in which employees contribute a portion of their 

salary to an individual account that they own and 

manage.31 Facilitating this trend was a piece of legislation enacted in 1978 that allowed the deferral of 

income in retirement plans on a tax-advantaged basis; 

this section of the Revenue Act of 1978 became Section 

401(k) of the Internal Revenue Code. The regulations 

were finalized in 1981 when the Internal Revenue 

Service (IRS) sanctioned the use of employee salary 

deductions as a source of retirement plan contributions.32 Within two years, nearly half of all large firms 

were either offering or considering a 401(k) plan.33 

Between 1985 and 2005, total assets in defined contribution plans grew 560 percent, from $430 billion to 

$2.8 trillion (see Chart 2).34 According to the 

Employee Benefit Research Institute (EBRI), about 

60 percent of private retirement assets are now held in 

401(k) plans and individual retirement accounts 

30 Pending pension reform bills also address PBGC solvency and aim 

to give the agency more pricing power, while introducing a risk-based 

premium structure. The PBGC has the authority to borrow $100 million 

from the Treasury, but Congress must act to provide additional funding. 

31 Current IRS rules allow employee contributions of up to $15,000 

in 2006. 

32 In 1986, the Federal Thrift Savings Plan was established and 

signaled to the private sector that the DC plan structure was an 

acceptable alternative. 

33 Employee Benefit Research Institute (EBRI). February 2005 History 

of 401(k) Plans, An Update. 

34 Federal Reserve Flow of Funds. 

Chart 2 

3000 

2500 

2000 

1500 

1000 

500 

0 

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 

Assets in Defined Contribution Plans Have 

Surpassed Assets in Defined Benefit Plans 

Year 

Defined Benefit Plans 

Defined Contribution Plans 

Source: Federal Reserve Flow of Funds, Supplementary tables L.118.b and L.118.c. 

(IRAs).35 Employees covered under a DC plan 

increased from 41 percent in 1985 to 51 percent in 

2003, while those covered under a DB plan fell from 

80 percent to 33 percent during the same period.36 

Despite their relatively recent emergence, DC plans 

have quickly become commonplace, and are viewed by 

many companies as a cost-effective alternative to the 

DB system.37 

Employers are not alone in their newfound affinity for 

DC plans as a vehicle for retirement savings. Many 

workers have become concerned about relying for their 

retirement security on employers that may not be in 

business in 20 or 30 years. Further, as lifetime employment with one company has become less common, 

employees have begun to prefer greater flexibility and 

portability of their retirement savings, as well as the 

ability to manage their own assets. The increased 

mobility of the workforce has fueled growth in DC 

plans, as younger employees tend to change jobs more 

frequently than in previous generations. Payouts under 

DB plans are typically based on ending salary and 

tenure; an employee maximizes the DB potential by 

staying with the company for an extended period. In 

contrast, DC plans have shorter vesting periods and do 

35 Fast Facts from EBRI, February 3, 2006. www.ebri.com/pdf/publications/facts/fastfacts/fastfact020306.pdf. 

36 EBRI Databook 2005. 

http://www.ebri.org/publications/books/index.cfm?fa=databook 

37 The most popular DC plan type is the 401(k); other forms are thrift 

savings plans, employee stock ownership plans, and profit sharing 

plans. Companies also are offering hybrid plans, which combine characteristics of DC and DB plans; the legal and regulatory environment 

surrounding hybrid plans, however, remains uncertain. 

FDIC OUTLOOK 14 SPRING 2006 
The Shift Away from Defined Benefit Plans 

not impose penalties for changing employers as long as 

fund proceeds are reinvested in another qualified retirement plan. 

The expense of DB plan sponsorship has become too 

much for even some healthy companies that are relatively well positioned in their markets.38 Some recent 

examples of the shift from DB to DC plans include 

large employers in high-tech industries. Verizon Wireless, which opted in 2005 to shift to a DC plan, estimates savings of $3 billion over the next ten years. In 

January 2006, when IBM froze its pension plan in favor 

of a DC plan, executives claimed the move would 

result in savings of $450 to $500 million for 2006, and 

$2.5 to $3 billion for 2006 through 2010.39 In 2005, 

Hewlett Packard also announced plans to freeze its pension plan. Sprint, Motorola, and Lockheed-Martin are 

among the other companies that have recently 

announced plans to phase out their DB plans, and 

many expect the list to grow in the near term. 

Who Bears the Risk? 

Saving and investing over the long term carry significant risks for companies and individuals. Participants in 

and underwriters of both DB and DC pension plans 

must make assumptions over several decades about the 

direction of interest rates, market returns, and life 

expectancies that, taken together, will determine the 

plan’s long-term financial viability. The uncertainties 

associated with this forecasting process introduce 

three types of risk: longevity risk, market risk, and 

bankruptcy risk. 

Longevity risk is the risk that plan beneficiaries will live 

longer than expected. DB plans pay benefits essentially 

in the form of an annuity. Therefore, a longer average 

lifespan for beneficiaries raises the expected value of 

the plan’s liabilities and increases the chance the plan 

will run short of funds. Certainly, the longer average 

life expectancy of retirees in recent years has contributed significantly to the financial pressure facing 

DB plans. In the case of DC plans, however, longevity 

38 The cost difference between these types of plans is striking: DB 

plans cost companies $2.21 per hour, on average, compared with 

$0.27 for DC plans. (Bureau of Labor Statistics. September 2005. 

Employer Costs For Employee Compensation.) Millman estimated that 

for the 100 companies in its survey, pension expenses increased 

$4.1 billion dollars in 2004, producing an aggregate pension cost of 

$18.3 billion. 

39 IBM. www-03.ibm.com/press/us/en/pressrelease/19090.wss. 

risk is borne by the individual. This tends to convert 

longevity risk from a factor that could bankrupt a 

pension plan into one where the beneficiaries risk 

outliving their financial assets. Instead of receiving a 

guaranteed amount each month during retirement, 

retirees must plan and invest, taking distributions 

according to their specific circumstances. This is in 

contrast to DB payments, which generally are not 

adjusted for inflation and cannot be exhausted, mitigating the possibility of over- or under-consumption. 

Further, in a DB plan, employees cannot cash out 

before retirement, as they can in DC plans. 

Market risk affects the value of DB plans in two ways. 

First, the value of the assets held by DB plans is determined by the returns, which typically take the form of 

stock dividends and capital gains as well as interest 

earned on fixed-income investments. To the extent 

that market returns or interest rates underperform 

expectations, the value of DB plan assets may not 

grow fast enough to keep pace with the obligations. In 

addition, the market value of a DB plan’s liabilities is 

determined in part by discounting at a market rate of 

interest. In this case, low interest rates can increase the 

market value of DB plan liabilities and force a refunding of the plan. By comparison, the market risk associated with DC plans is concentrated on the asset side. 

Lower-than-expected interest rates and market returns 

drive down the asset value of DC plans and make it 

more likely that beneficiaries will outlive their financial assets.40 

DC plans tend to push longevity risk and market risk 

off the corporate balance sheet and onto the household 

balance sheet. What do employees get in return for 

assuming these large, long-term risks? Besides the 

opportunity to make more decisions for themselves, 

employees in DC plans are rewarded with a significant 

reduction in the risk that their retirement benefits will 

be reduced or eliminated by bankruptcy or other forms 

of repudiation. As long as the assets and liabilities of the 

DB pension plan reside with a corporation that could 

file bankruptcy or terminate or modify the plan over its 

long life, the beneficiary could experience a significant 

decline in lifetime benefits. Corporate bankruptcy, 

which shifts pension liabilities to the PBGC and often 

40 The need for financial education is significant; however, employers 

are restricted in what advice they can provide employees. Certain 

provisions of the proposed pension reform legislation would make it 

easier for employees to access investment advice and allow automatic enrollment of employees. 

FDIC OUTLOOK 15 SPRING 2006 
Banking on the Baby Boomers 

results in substantial reductions in benefits, is one 

example of bankruptcy risk. But perhaps an even more 

common and less visible risk that faces DB plan beneficiaries is the erosion of pension and health benefits 

that could occur through negotiation and fiat during 

the life of a DB agreement. It is perhaps in this regard 

that DC plans offer the greatest perceived value to 

today’s workers by simplifying and solidifying the 

ownership rights they have to the proceeds of their 

retirement plan. 

What Is the Future of Defined Benefit Plans? 

The decision to maintain a DB pension plan or move 

to a DC plan is one that companies weigh carefully as 

they balance the sometimes conflicting needs and 

expectations of employees and shareholders. Despite 

the market and structural forces that have pressured DB 

plans and the companies that offer them, some 34 

million working and retired Americans depend on 

company-funded plans to provide for their retirement. 

Many companies continue to fund their own retirement 

plans because they feel these programs reward loyalty 

and give them an edge in hiring and retaining the best 

people. However, the recent trend has been for more 

companies to bypass DB sponsorship altogether. It is 

likely that competitive pressures will continue to force 

companies to consider terminating their DB plans and 

offering alternative types of retirement savings 

programs to their employees. 

In today’s volatile business environment, where corporate structure changes frequently and large bankruptcies 

are not uncommon, many employees may feel more 

secure controlling their retirement assets and making 

their own investment decisions. Under DC plans, the 

advantage of portability is attractive to younger workers, in particular, and helps to offset the longevity and 

market risks they bear. However, neither structure eliminates risks entirely, and employees and employers must 

continue to work together to arrive at mutually beneficial ways to manage the risks inherent in long-term 

retirement saving and investment. 

Alison T. Touhey, Economic Analyst 

The author wishes to acknowledge valuable comments 

received on previous versions of this article from Stephen 

C. Gabriel, Senior Financial Economist, and Devin W. 

Sloss, Student Intern. 

FDIC OUTLOOK 16 SPRING 2006 
The Demographics of Housing Demand
 

Traditionally, anticipating the demand for owneroccupied housing involves the analysis of several underlying factors, including interest rates, local economic 

conditions, rent levels, population growth, and affordability. However, market analysts also place emphasis on 

the demographic characteristics of population growth 

when assessing trends and preferences for housing, as 

shifts in age and family composition affect demand. 

What key demographic trends are currently influencing 

the demand for housing in the United States, and how 

will these trends continue to affect the market? 

Two distinct demographic groups, baby boomers and 

immigrants, dominate all other groups by sheer size 

(see Chart 1) and, for boomers, their wealth. Both 

already have shaped housing markets and contributed 

to rising levels of homeownership. Retiring boomers 

influence demand for housing as they downsize, trade 

up, and invest in second homes. Immigrants, typically 

characterized by larger and younger households, will 

strengthen demand for owner-occupied housing as they 

age and live longer in this country. 

The extent of how strongly demographics influences 

the housing market is a hotly debated issue among 

industry analysts. For example, a study by Mankiw and 

Weil in 1989 forecasted a dramatic decline in home 

prices over the next 20 years.1 This forecast assumed 

that as baby boomers age, demand for single-family 

homes could not be sustained by the much smaller 

“baby bust” generation. With the benefit of hindsight, 

however, we see that the housing market has boomed 

in many areas during the past 13 years, while the 

average price of homes continues to appreciate. In fact, 

the close of fourth quarter 2005 marked the sixth 

consecutive quarter of year over year double-digit home 

price growth nationwide. 

More recently, economist Dean Baker of the Center for 

Economic and Policy Research has cautioned that 

population growth is not driving the recent appreciation in home prices and will do little to sustain current 

price levels.2 Rather he predicts the housing market, 

which he believes is sustained by borrowing against 

1 Mankiw, Gregory, and David Weil. 1989. The Baby Boom, the Baby 

Bust, and the Housing Market. Regional Science and Urban 

Economics, p. 19. 2 Baker, Dean. July 2005. The Housing Bubble Fact Sheet. Center for 

Economic and Policy Research. 

Chart 1 

Baby Boomers and Immigrants Have Dominated 

U.S. Demographic Trends in Recent Decades 

U.S. Population Growth

Percent Change During Decade 

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 

Source: Moody’s Economy.com. 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

–10% 

–20% 

Foreign-Born Population (% change) 

Age 40–59 Cohort (% change) 

U.S. Population (% change) 

inflated home values, will suffer the same fate as one of 

its precipitating factors—the stock market boom of the 

late 1990s. This perspective contrasts with the opinion 

of other industry experts who predict only a moderate 

slowdown in prices in certain regions of the country as 

the market is bolstered by increased demand for housing 

in retirement communities and continued high levels of 

immigration.3 This article examines the impact of baby 

boomers and immigrants on the nation’s housing sector 

and provides insights on how these groups may influence and sustain demand for years to come. 

Baby Boomers and the Housing Market 

The baby boomer generation includes some 78 million 

persons who were born between 1946 and 1964, the 

first of whom begin turning 60 this year.4 This generation is not only the country’s largest, but also its highest paid and most educated. Comprising some 26 

percent of the U.S. population, baby boomers 

represent the wealthiest generational group, with 

more than $2 trillion in estimated spending power. 

According to the 2000 Census, the boomer cohort 

represents just less than a third of the population in 

the states of Alaska, New Hampshire, Vermont, 

Maine, and Maryland. 

3 Deloitte and McGraw-Hill Construction. January 2005. U.S. Homebuilder Survey.
 

4 MetLife Mature Market Institute. May 2005. Demographic Profile:
 

American Baby Boomers. Spending power is calculated as total
 

annual household spending. 


FDIC OUTLOOK 17 SPRING 2006 
Banking on the Baby Boomers 

A study of baby boomers born in the 1950s, published 

in the University of Southern California’s Lusk 

Review, reveals correlations between this cohort and 

movements in the housing market. When this group 

reached 20 years of age, many moved to rental units, 

stimulating the construction of apartments in the 

suburbs as well as the rejuvenation of some central 

cities. By the late 1970s, this slice of boomers entered 

prime homebuying years, stimulating demand for housing and a ramping up of home prices.5 According to the 

2000 Census, boomers were the largest homeowning 

group, representing approximately 40 million of the 

111 million American households. Although baby 

boomers may no longer be the dominant force driving 

demand for traditional single-family homes, this key 

demographic group will remain an influential component of the owner-occupied housing market as a whole. 

Currently, the homeownership rate peaks at 84.5 

percent for individuals between the ages of 70 and 74. 

David Berson, Fannie Mae’s chief economist, has 

suggested that the peak rate of home ownership may 

rise further to age 74 or 75 as a result of improved 

health and greater longevity.6 As boomers move toward 

peak ownership age, per capita home equity increases 

and may influence the housing market as a source of 

funds for second homes, downsizing, trade-up 

purchases, or relocation to age-specific communities. 

Moving into Retirement 

Baby boomers are poised to enjoy a longer, healthier, 

and more active retirement than any previous generation. Observers predict this will shape postretirement 

lifestyles and homebuying decisions. Traditional determinants of housing demand, particularly interest rates, 

do not restrict this group as strongly as they do most 

other age cohorts. According to Pulte Homes, a developer specializing in active adult communities, 50 percent of clients in this market pay in cash, making this 

segment of the population relatively “rate insensitive.”7 

How strongly will boomers affect the housing market 

as they enter retirement? According to the results of 

the Pulte Homes’ May 2005 Baby Boomer Survey, 

5 Myers, Dowell, and Lonnie Vidaurri. Summer 1996. Real Demographics of Housing Demand in the United States. The Lusk Review for Real 

Estate Development and Urban Transformation, Vol. II, No. 1, pp. 55–61. 6 Stowe, Robert. April 1, 2005. The Boomer Boost. Mortgage Banking. 7 Sullivan, Marianne. January 5, 2004. Aging Boomers Fuel Home 

Building Market. American Banker Online. 

more than half the respondents intend to purchase a 

new home for retirement, and at least 40 percent will 

downsize.8 Developers are anticipating this influx of 

boomer retirees. According to the National Association of Home Builders (NAHB), seven of the ten top 

U.S. home builders are designing and building housing for adults older than 55. In fact, during the first 

half of 2005, one-third of the revenue of Pulte Homes 

was attributed to homes for older buyers, and the 

company predicts this could grow to 40 percent of its 

business.9 Although baby boomers’ demand for particular types of housing is expected to increase, certain 

unanswered questions about this demand remain. How 

do industry experts expect boomers’ housing choices 

to deviate from prior generations of retirees? Three 

factors—location, lifestyle, and leisure—tell much of 

the story. 

Location 

Unlike earlier retirees’ preference for the Sunbelt, 

research shows boomers favor retirement destinations 

that are more scattered across the country. Charles 

Longino, author of Retirement Migration in America, has identified shifts in retiree migration patterns. 

Although Florida remains a popular destination, 

Longino notes mountainous areas in the West and 

smaller states of the South are becoming increasingly 

popular. For example, boomer migration patterns from 

1990 to 2003 show this demographic group grew in 

the Pacific Northwest, Florida, and selected areas of 

the South, as well as in areas that previously had 

attracted significant numbers of these individuals, 

particularly the Washington, D.C., Minneapolis, 

Atlanta, and Dallas metropolitan areas (see Map 1, 

next page). In addition, baby boomers show greater 

propensity to “age in place”—continuing to live in 

the same geographic area. Developers are responding 

to these changing preferences and shifts in population 

concentrations. For example, Pulte Homes is planning 

22 active adult communities, half of them in coldweather states, including Illinois, Michigan, New 

Jersey, and Ohio. 

8 Pulte Homes is one of the nation’s leading home builders, ranking at
 

the top in the delivery of homes in 2005. Under the Del Webb brand,
 

Pulte is the largest builder of active adult communities. The company
 

conducted a survey of 1,814 individuals ages 41–69; the results,
 

released in Pulte Homes—Baby Boomer Survey, May 2005, show
 

boomers’ housing preferences, plans for retirement and lifestyle.
 

http://media.corporate-ir.net/media_files/irol/14/147717/pdf/Full%20
 

Boomer%20Report.pdf.
 

9 Mucha, Thomas. September 1, 2005. The Builder of Boomtown.
 

CNNMoney.com.
 

FDIC OUTLOOK 18 SPRING 2006 
Map 1 

The Demographics of Housing Demand 

The Baby Boomer Cohort Shifted Increasingly to the West, to Florida, 

and to Select Areas of the South between 1990 and 2003 

Baby Boomer Population in 2003 as a ratio to 1990, 

Quintile Groups 

0–0.948 

0.948–1.006 

1.006–1.069 

1.069–1.176 

1.176–2.613 

Note: Mapping the ratio of 40- to 55-year-olds in 2003 to 25- to 44-year-olds in 1990 shows concentrations of this cohort increased in the Pacific Northwest, Florida, and selected areas of the 

South. Areas with ratios greater than one imply a net increase in the number of individuals in the baby boom cohort. 

Source: Rogerson, Peter A., and Daejong Kim. October 25, 2005. Population Distribution and Redistribution of the Baby-Boom Cohort in the Unted States: Recent Trends and Implications. 

Proceedings of the National Academy of Science. 

Lifestyle 

Current baby boomer homebuyers are downsizing, but 

at the same time want homes with more amenities than 

they owned in the past.10 Developers increasingly are 

appealing to trade-up buyers who prefer single-family, 

one-story homes with more floor space and upscale 

amenities, such as high ceilings and large garages. This 

trend is even more apparent among younger boomers, 

who exhibit a stronger inclination for luxury features.11 

Developers also are taking note of the fact that aging 

baby boomers are living more active lifestyles than 

previous retiree cohorts. Active adult communities, 

built for individuals ages 55 and older, feature gyms and 

computer labs with high-speed Internet access, and are 

10 The National Association of Home Builders’ Building for Boomers &
 

Beyond: Senior Housing Symposium 2005 was held May 16–18, 2005,
 

in Chantilly, Virginia.
 

11 Pulte Homes—Baby Boomer Survey, May 2005. 


appearing near major urban areas (Washington, D.C., 

Chicago, and Northern New Jersey) with high concentrations of boomers who are staying connected to 

the workforce.12 Another housing trend, collegeoriented retirement communities, is gaining popularity, 

reflecting the desire of many retirees to continue their 

education.13 

Leisure 

Although the number of boomers owning second 

homes is smaller than previous retiree generations, the 

sheer size of this group is fueling the second-home 

market. The Homeownership Alliance, an organization that educates the public about housing and home12 Blanchard, Taylor. May 18, 2005. Urban, Luxurious, Diverse: Experts 

See New Trends in 50+ Housing Market. National Association of 

Home Builders. 

13 Campbell, James. May 6, 2005. Back to School, The Latest Trend in 

Retirement Living. Escapehomes.com. 

FDIC OUTLOOK 19 SPRING 2006 
Banking on the Baby Boomers 

ownership issues and trends in the United States, esti- Chart 2 

mates this generation will boost second-home housing Homeownership Rate for Foreign-Born Households starts by 125,000 annually through 2013.14 

Increases in Tandem with Years Since Arriving in the U.S. 

80% David Lereah, chief economist of the National Associ70% ation of Realtors (NAR), attributed strong second25% 

46% 

60% 

74% 

home sales in 2004 to the presence of boomers and 

predicted their influence will continue to fuel this 

market: “[I]t’s likely over the next decade that secondhome sales will remain historically high. The boomers 

are still in their peak earning years and have both the 

Homeownership Rate

60% 

50% 

40% 

30% 

20% 

wherewithal and the desire to purchase vacation homes 

and investment properties.”15 

Immigrants and the Housing Market 

Boomers and immigrants occupy opposite ends of the 

demographic spectrum in terms of age, wealth, and 

family size. Immigrants are on average a distinctly 

younger and less wealthy group. The Census Bureau 

estimates roughly 12 percent of the present U.S. population is foreign born. This cohort represents a diverse 

mix of origins, ages, education levels, and economic 

backgrounds. The 2000 Census shows more than half 

the foreign-born population originated in Latin America, with 9.2 million immigrants coming from Mexico. 

China ranked second as the birthplace of 1.5 million 

immigrants. The median age of the adult foreign-born 

population is slightly lower than the native born, with 

36 percent between the ages of 18 and 34, compared 

with 31 percent of the native-born population. Latin 

American immigrants, in particular, are a younger 

group, with 43 percent between the ages of 18 and 34. 

Results of the 2000 Census also show the average 

annual wage of foreign-born workers was about 75 

percent that of natives, or $27,000. States with the 

largest share of immigrant populations were California 

(26.2 percent), New York (20.4 percent), New Jersey 

(17.5 percent), Hawaii (17.5 percent), and Florida 

(16.7 percent). 

Immigrants’ influence on the housing market is based 

largely on the current considerable size of this group 

and its potential for significant growth. The volume of 

immigration expanded in the late 1970s, and the 

number of immigrant households increased 16 percent 

14 Berson, David, David Lereah, Paul Merski, et al. 2004. America’s
 

Home Forecast: The Next Decade for Housing and Mortgage Finance.
 

Homeownership Alliance.
 

15 Salvant, Lucien, and Walter Molony. March 1, 2005. Second-Home
 

Market Surges, Bigger Than Shown in Earlier Studies. Realtor.org.
 

10% 

0% 

<10 years 10–20 years 20–30 years >30 years 

Years Since Immigrating 

Source: U.S. Census Bureau, Current Population Survey, 2000 per Homeownership 


Alliance America's Home Forecast.
 

during the 1980s. Strong immigration during the 1990s 

contributed to a greater minority share of first-time 

homebuyers.16 Between 1990 and 2000, the number of 

foreign-born households in the United States grew to 

just under 12 million, 50 percent of which were owneroccupied households. This increase in foreign-born 

homeowners represented 20 percent of the overall 

increase in U.S. homeowners—twice that of the prior 

decade.17 The influx of immigrants continued to 

strengthen through 2003, contributing to growth in 

household formation, homeownership, and construction of rental units. This impact will become more 

pronounced as immigrants’ native-born children— 

second-generation Americans—mature. 

Although immigrants are becoming homeowners in 

greater numbers, their initial impact is most apparent 

on rental markets. Between 1990 and 2000, the 

increase in foreign-born households comprised threequarters of the net growth in renters.18 However, homeownership rates among immigrants increase with their 

age and the length of time an immigrant lives in this 

country (see Chart 2).19 For example, more than half 

the growth in immigrant homeownership during the 

1990s is attributed to individuals who arrived before 

1990. Significant levels of immigration, as well as the 

16 During the 1990s, approximately 1 million people per year were part 

of the migration flow to the United States, nearly two-and-a-half times 

the number in the 1970s. 

17 Pitken, John. October 2002. The Growth of the Foreign-Born 

Population, Households, and Homeownership: 1990–2000. Fannie Mae 

Foundation Census Note 10. 

18 Ibid. 

19 Papademetriou, Demetrios, and Brian Ray. March 2004. From 

Homeland to a Home: Immigrants and Homeownership in Urban 

America. Fannie Mae Papers. 

FDIC OUTLOOK 20 SPRING 2006 
Map 2 

The Demographics of Housing Demand 

Immigrant Population Growth Surged between 1990 and 2000, 

San Francisco 

Oakland 

Valley 

Salt Lake City 

Sacramento 

PortlandVancouver 

Tacoma 

San Jose 

Stockton 

Fresno 

Bakersfield 

Ventura 

Los Angeles 

Orange County 

San 

Diego 

Tucson 

Riverside 

Las Vegas 

Denver 

Colorado 

Springs 

Albuquerque 

El Paso 

Fort Worth Dallas 

Austin Houston 

San Antonio 

McAllen 

Oklahoma 

City Tulsa 

Wichita Kansas 

City 

Omaha 

MinneapolisSt. Paul 

Little Rock 

Baton 

Rouge 

St. Louis 

Memphis 

Milwaukee 

Chicago 

New Orleans 

Mobile 

Birmingham 

Nashville 

Louisville 

Indianapolis 

Gary 

Ann Arbor 

Grand 

Rapids Detroit 

Toledo 

Dayton 

Cleveland 

Buffalo 

Syracuse 

YoungstownHarrisburg 

Akron Columbia 

Cincinnati 

Knoxville 

Atlanta 

Greenville 

Pittsburgh 

Washington 

Philadelphia

Wilmington 

New York Nassau 

Providence 

Boston Springfield 

Hartford 

Newark 

Albany 

Baltimore 

Richmond Norfolk 

Raleigh 

Charlotte 

Columbia 

Charleston 

Jacksonville 

Orlando 

West Palm Beach 

Miami 

Fort Lauderdale 

Sarasota 

Tampa 

Rochester 

Concentrating in Top U.S. Metro Areas 

Traditional Immig. Gateways 

Slow-Growth Destinations 

New Immigrant Gateways 

New Fast-Growing Cities 

Metropolitan Area Types 

New immigrant gateways are cities where the proportion of immigrants in 1990 was large, 

Note: Honolulu, not shown, is one of the traditional immigrant gateways. greater than 11.1 percent, and experienced an average rate of immigrant population growth 

Traditional large immigrant gateways are cities where the proportion of immigrants in 1990 between 1990 and 2000 that exceeded 55 percent. 

exceeded 11.1 percent but experienced a below-average rate of immigrant population New fast-growing hubs are cities where the proportion of immigrants in 1990 was less than 

growth between 1990 and 2000. 11.1 percent but experienced an average rate of immigrant population growth between 1990 

Slow-growth immigrant destinations are cities where the proportion of immigrants in 1990 and 2000 greater than 55 percent. 

was less than 11.1 percent and experienced a below-average rate of growth in the immi- Source: Papademetriou, Demetrios, and Brian Ray. March 2004. From Homeland to a Home: 

grant population between 1990 and 2000. Immigrants and Homeownership in Urban America. Fannie Mae Papers. 

relative youth of the foreign-born population, continues 

to affect housing demand as immigrant homeownership 

rates rise in tandem with length of residence. 

Immigrant Households: 

Concentrations and Composition 

Foreign-born households traditionally have concentrated in or around “gateway” cities, such as Los 

Angeles, New York, Miami, and Boston (see Map 2). 

Although still concentrated in metropolitan areas, 

during the last decade immigrants increasingly have 

populated areas that have not been traditional points of 

entry. For example, foreign-born populations in North 

Carolina, Georgia, Nevada, and Tennessee grew at 

least 145 percent between 1990 and 2000.20 

Although immigrant homeowners in large part are 

concentrated in metropolitan areas, two-thirds reside in 

suburban rather than central city neighborhoods.21 

Cities classified as “new immigrant gateways” have the 

highest homeownership rates for the most rapidly growing groups of immigrants. For example, according to 

2000 Census data, the Latino ownership rate exceeded 

the national Latino average in 10 of the 12 new immigrant gateway cities, and the Asian rate exceeded the 

national Asian average in all 12 cities. While “traditional gateway” metro areas continue to have the 

largest immigrant communities, they also have the 

21 Drew, Rachel Bogardus. August 2002. New Americans, New Home­ 20 Lippman, Barbara J. July 2003. “America’s Newest Working Families: owners: the Role and Relevance of Foreign-Born First-Time HomeCost, Crowding, and Conditions for Immigrants.” Center for Housing buyers in the U.S. Housing Market. Joint Center for Housing Studies 

Policy/National Housing Conference. of Harvard University. 

FDIC OUTLOOK 21 SPRING 2006 
Banking on the Baby Boomers 

Chart 3 

16 

14 

12 

10 

8 

6 

4 

2 

0 

Growth Rate (percent) 

Source: Brookings Institution Center on Urban and Metropolitan Policy. 

In Central Cities, Population Growth and Slowing Household Formation Show Immigrants’ Influence 

30 

25 

20 

15 

10 

5 

0 

1970–1980 1980–1990 1990–2000 

Household Population 

U.S. Growth Central Cities Growth 

Growth Rate (percent) 

1970–1980 1980–1990 1990–2000 

Household Population 

lowest rates of foreign-born homeownership.22 This is 

attributed to high turnover rates, increased competition 

for space, and the fact that these urban areas tend to be 

characterized by high housing costs and a greater 

percentage of residents living in rental units. The cost 

of housing in new immigrant gateway metro areas 

reflects immigrants’ generally lower income level. In 

fact, 20 percent of immigrant-owned homes are valued 

at $90,000 or less in these areas, compared with only 

9.8 percent in traditional gateway cities.23 

Immigrants tend to populate ethnically homogeneous 

neighborhoods, a trend that has spurred population 

growth and homeownership in the new gateway cities 

and has sustained the foreign-born population in the 

traditional hubs. Census data from the ten largest U.S. 

metropolitan areas show that between 1990 and 2000, 

the number of white and black individuals living in 

homogeneous neighborhoods declined 10 percent. 

However, the opposite was true for Latinos and Asians. 

22 Papademetriou, Demetrios, and Brian Ray. March 2004. From 

Homeland to a Home: Immigrants and Homeownership in Urban 

America. Fannie Mae Papers. The authors differentiate between 

metropolitan areas that have been traditional points of immigrant 

entry and places of residence, and those that are new. Among the 

traditional large immigrant gateways are Los Angeles-Long Beach, 

CA; San Francisco, CA; Honolulu, HI; Miami, FL; El Paso, TX; Ventura, 

CA; New York, NY; Jersey City, NJ; Boston-Worcester-LawrenceLowell-Brockton, MA-NH; Stockton-Lodi, CA; San Diego, CA; Newark, 

NJ; Fresno, CA; Orange County, CA; and Bergen-Passaic, NJ. New 

immigrant gateways include Vallejo-Fairfield-Napa, CA; Chicago, IL; 

San Jose, CA; Bakersfield, CA MSA; Riverside-San Bernardino, CA; 

Oakland, CA; Washington, DC-MD-VA-WV; McAllen-EdinburgMission, TX; West Palm Beach-Boca Raton, FL; Middlesex-SomersetHunterdon, NJ; Houston, TX ; and Fort Lauderdale, FL. 

23 Ibid. 

Individuals in these ethnic groups are more likely to 

live in neighborhoods where their group makes up at 

least 50 percent of the population.24 

Household composition and size are significant predictors of the volume of future housing demand. Foreignborn households’ living arrangements differ from that of 

native-born households. Contrary to boomers’ declining household size, immigrant households are more 

likely to include more family members, married couples 

with children, and adults beyond the head or spouse.25 

Although central city population growth in the late 

1990s reached a three-decade high, household growth 

for these metros declined to a three-decade low, as 

fewer households were formed with more family 

members (see Chart 3). A rate of household growth 

that lags population growth suggests pent up, or future, 

housing demand. This divergence was most evident in 

“melting pot” metro areas with significant growth in 

the immigrant population.26 

These trends suggest immigrants will be attracted 

toward specific regions of the country and favor homes 

designed to accommodate larger or extended families. 

However, the extent of immigrants’ impact on housing 

demand depends on the availability of financing 

24 Fasenfest, David, Jason Booza, and Kurt Metzger. April 2004. Living 

Together: A New Look at Racial and Ethnic Integration in Metropolitan Neighborhoods, 1990–2000. The Brookings Institution Center on 

Urban and Metropolitan Policy. 

25 McArdle, Nancy. March 2001. The Living Arrangements of ForeignBorn Households. Joint Center for Housing Studies of Harvard 

University. 

26 Frey, William H. February 2002. City Families and Suburban Singles: 

An Emerging Household Story from Census 2000. The Brookings 

Institution Center on Urban and Metropolitan Policy. 

FDIC OUTLOOK 22 SPRING 2006 
The Demographics of Housing Demand 

opportunities for lower-income individuals, as affordability is a major obstacle to immigrant homeownership. 

A number of programs encouraging minority and immigrant homeownership were introduced in the 1990s. 

Flexible mortgage financing and other initiatives made 

home purchasing feasible for groups historically unable 

to afford or qualify for a mortgage. Despite such initiatives, however, there are significant hurdles to immigrant homeownership. In 2003, Fannie Mae conducted 

a survey of Spanish-speaking households, currently the 

largest immigrant group and the group expected to 

grow 75 percent during the next two decades. The 

study concluded that affordability issues and lack of 

understanding of the market were barriers preventing 

these individuals from achieving homeownership. A 

similar study conducted by the Homeownership 

Alliance surveyed Hispanics’ outlook about homeownership. Although a majority of participants stated they 

would prefer to own a home, lack of knowledge about 

credit ratings and the mortgage process, as well as a 

language barrier, prevented them from doing so. 

The Bottom Line 

Clearly, shifts in two dominant demographic groups— 

immigrants and baby boomers—will continue to influence housing demand in the future. The long-run 

fundamentals of demand appear to remain favorable, 

due in large part to strong growth in immigrant households and future housing needs of their children. In 

addition, the housing preferences of the graying but 

active boomer cohort and the need to replace aging 

housing stock are expected to sustain the production of 

as many as 2 million new homes annually during the 

next ten years.27 

Some skeptics cite a slowdown in household formation 

to an annual average growth of only 1.5 percent during 

the past five years, down from 2.5 percent in the late 

1970s. However, current housing projections indicate 

that with inflows of immigrants consistently underestimated and likely to increase, as well as increased 

longevity of the overall population, net household 

growth during the next decade may actually exceed 

that of the baby boomers’ entrance into the market in 

the 1970s.28 Although overall household growth did 

slow in the past five years, growth in households in the 

45-to-54-year cohort was almost double that of the 

nation as a whole, averaging 2.8 percent growth 

between 2000 and 2004. Furthermore, one in five U.S. 

households in 2005 was headed by either a foreign-born 

individual or a second-generation American, a share 

that likely will increase. 

Demographics are not the sole determinant of future 

trends in the nation’s housing market; however, they 

are a key indicator of the size and nature of demand for 

housing. Boomers and immigrants will continue to 

stimulate demand, but in different sectors of the housing market. As boomers retire and downsize, they will 

fuel demand at the upper end of the market, with a 

focus on amenities.29 Immigrants, on the other hand, 

will look for less expensive housing to accommodate 

larger family size. In addition, geographic concentrations of baby boomer and immigrant populations will 

determine those housing markets that will be most 

significantly affected, particularly those areas where 

overlap occurs between the two groups, such as Florida 

and Texas. Going forward, these two distinct demographic groups appear likely to continue to drive 

increases in demand for U.S. housing. 

Cynthia Angell, Financial Economist 

Clare D. Rowley, Economic Assistant 

28 Ibid. 

29 Riche, Martha Farnsworth. February 2003. How Changes in the 

Nation’s Age and Household Structure Will Reshape Housing 

Demand in the 21st Century. HUD Issue Papers on Demographic 

Trends. Riche notes the pronounced income inequality in the growing 

older population, citing Census data showing that the income for 

households that have raised their families but are not yet retired is 

27 The State of the Nation’s Housing 2005. The Joint Center for Housing 

generally higher than the average for all households. This supports 

findings by NAHB and Blanchard relating to baby boomers’ preferStudies of Harvard University. ence for amenities to accommodate their active lifestyles. 

FDIC OUTLOOK 23 SPRING 2006 
Regional Demographic and Banking Trends
 

The aging of the baby boomers is becoming an increasingly important public policy issue for this country.1 

Demographers, health care professionals, and policymakers, among others, are concerned that as the ratio 

of elderly persons (those ages 65 and older) to the 

working-age population increases during the next two 

decades, expenditures for health care and other support 

of the elderly will fall on a proportionately smaller 

labor force. However, the potential impacts of the aging 

baby boomer generation as well as other key demographic trends are not evenly distributed across the 

country (see Map 1). For example, baby boomer populations are heavily concentrated in New England, the 

Northwest, the Rocky Mountain states, and metropolitan areas in the Midwest. The growing elderly segment 

of our nation’s population, however, is concentrated in 

the Great Plains, the Southwest, and Florida.

2 

This uneven distribution of baby boomers and elderly 

highlights several regional demographic trends. For 

Map 1 

example, domestic migration, or population shifts 

occurring within the United States, has been significant. During the past few decades, baby boomers and 

younger working-age people have moved from rural to 

urban areas in search of employment, leaving behind a 

disproportionate number of elderly residents. In addition, retirees have flocked to states such as Florida, 

Arizona, and Nevada because of the warm climates and 

amenities. Domestic migration may become more 

important as the number of baby boomers moving to 

retirement locations continues to increase. Improved 

communication technologies, including the Internet, 

have greatly improved the availability of information 

about employment opportunities, enabling workers to 

search for jobs across the country.3 

Another key regional demographic trend is international migration, the impact of which also is not felt 

equally across the country.4 Immigrants from Latin 

America and Asia, who represented 78 percent of legal 

Concentrations of Baby Boomers and Elderly Are Not Distributed Evenly across the Nation 

Baby Boomers Elderly 

Quartiles


 of U.S.


 Distribution* Counties
 

<27.54 786
 

27.55–28.94 785
 *Distribution of Counties,

28.95–30.34 785 by Percentage of

>30.34 785 Population Ages 35 to 55 

Source: U.S. Census Bureau, 2000 Census. 

1 The “baby boom generation” and “baby boomers” refer to persons 

born between 1946 and 1964. 

2 Easterlin, Richard A. 2000. Growth and Composition of the American 

Population in the Twentieth Century. In A Population History of North 

America. Cambridge University Press, pp. 564–655. 3 Cairncross, Frances. 2001. The Death of Distance: How the Communication Revolution is Changing Our Lives. Cambridge, MA: Harvard 

Business School Press, p. 209. 

` 

Quartiles

 of U.S.

 Distribution** Counties 

<12.07 786 

12.07–14.39 785 ** Distribution of Counties,

14.40–17.07 785 by Percentage of

>17.07 785 Population Older than 65 

4 According to the U.S. Census Bureau, net international migration is 

defined as “(1) net migration of the foreign born, (2) net movement 

from Puerto Rico, (3) net movement of the U.S. Armed Forces, and 

(4) emigration of the native born. The largest component, net migration of the foreign born, includes lawful permanent residents (immigrants), temporary migrants (such as students), humanitarian 

migrants (such as refugees), and people illegally present in the United 

States.” www.census.gov/popest/topics/terms/national.html. 

FDIC OUTLOOK 24 SPRING 2006 
Regional Demographic and Banking Trends 

immigrants to the United States during the 1990s, 

settled in California, Arizona, New Mexico, and Texas. 

In addition, an estimated 7 million unauthorized immigrants lived in this country in 2000; more than twothirds immigrated from Mexico, and these individuals 

tend to be concentrated in the southern states.5 These 

and other key demographic trends are examined in this 

article as analysts from the FDIC’s eight geographic 

areas offer insights about the implications of these 

trends for local economies and the banking industry. 

Atlanta Region 

Relatively large and growing elderly populations, as 

well as strong international immigration, have 

spurred increased banking activity. 

The elderly represent an important demographic in 

many areas of the Atlanta Region (see Map 2), particularly in Florida and West Virginia, where this group 

ranks among the highest in the nation. The relatively 

large number of elderly residents in Florida is due to 

high levels of retiree in-migration. However, in West 

Virginia, as well as the Region’s other rural areas, this 

situation may be the result of younger individuals leaving to pursue economic opportunities. Notable exceptions to significant concentrations of the elderly in the 

Region are the Atlanta metropolitan area, North 

Carolina’s Research Triangle, and Northern Virginia. 

Although Florida is expected to continue as a magnet 

for retirees, its deteriorating housing affordability may 

become problematic for some retirees. This may spur 

greater numbers of residents to relocate from the coast 

to areas of the Region where home prices are lower, 

such as the South Carolina Low Country and Myrtle 

Beach areas. 

The level and pace of international migration has 

ratcheted upward in the Southeast. Although widespread across the area, immigrants from outside the 

United States choose to reside in a few specific areas, 

such as South and Central Florida, metropolitan 

Atlanta, and Northern Virginia (see Table 1, next 

page). Combined, these areas represented more than 

half the Region’s international migration between 2000 

and 2005. 

5 Economics and Statistics Administration, U.S. Census Bureau. 2006. 

Statistical Abstract of the United States 2006. Table 7—Estimated Unauthorized Immigrants by Selected States and Countries of Origin: 2000. 

Map 2 

Several Areas of the Atlanta Region Are Home to 

Relatively High Shares of Elderly Population 

Source: U.S. Census Bureau, Economy.com. 

Elderly Population Share: 2000 

< 12.07% 

12.07–14.39% 

14.40–17.07% 

> 17.07% 

The immigration of unauthorized residents to the 

Atlanta Region has increased as well; between the 1990 

and 2000 Censuses, the number rose from 354,000 to 

910,000, a 157 percent jump.6 Florida was home to the 

most undocumented immigrants in the Region in 2000, 

but that number actually represented a decline from six 

years earlier. In contrast, a significant jump in the 

number of undocumented residents occurred during the 

same period in Georgia, North Carolina, and Virginia. 

Rapid growth in key segments of the population is 

expected to significantly affect local economies and the 

banking industry in the coming years. For example, 

international migration already has prompted growth 

in the number of insured institution branch offices. 

Between 2000 and 2005, according to FDIC Summary 

6 Source: Immigration and Naturalization Service (historical). Figures do 

not include West Virginia, for which Census figures were not available. 

FDIC OUTLOOK 25 SPRING 2006 
Banking on the Baby Boomers 

Table 1 Chart 1 

Portions of Florida and Metro Atlanta 

Have Been Top Destinations for 

International Migration 

International Residents 

County (000s): 2000–2005 

Dade County (FL) 252.1 

Broward County (FL) 96.9 

Fairfax, Fairfax City + Falls Church (VA) 70.7 

Palm Beach County (FL) 46.9 

DeKalb County (GA) 46.3 

Orange County (FL) 41.6 

Gwinnett County (GA) 34.3 

Fulton County (GA) 34.3 

Hillsborough County (FL) 29.3 

Cobb County (GA) 29.2 

Source: U.S. Census Bureau, Economy.com. 

of Deposits data, banks and thrifts operating in the 

counties in the Southeast with a relatively high volume 

of international migration also reported some of the 

greatest increases in bank branching activity. Similarly, 

demand by the elderly for financial products and 

services differs from other demographic groups and is 

expected to influence bank product development and 

marketing decisions. (See “How Aging Baby Boomers 

Are Changing the Financial Marketplace” on page 34 

for an overview of how the financial needs and preferences of the baby boom cohort are expected to change 

as they near retirement and the opportunities this presents for the nation’s insured institutions.) 

Chicago Region 

Relatively low population growth, a result of domestic 

out-migration, has contributed to heightened competition among banks. 

The Chicago Region is characterized by a below-average 

rate of population growth because of domestic outmigration. In several states, domestic out-migration 

exceeded total population growth, while other states 

experienced relatively low rates of in-migration (see 

Chart 1). Two factors are responsible: a decline in the 

number of jobs, particularly in the manufacturing sector, 

and the out-migration of retirees to warmer climates. 

Except for Kentucky, every state in the Region experienced net domestic out-migration in the 20–29 age 

cohort, apparently because individuals in this group 

(400) 

(300) 

(200) 

(100) 

0 

100 

200 

300 

400 

Illinois Ohio Michigan Indiana Wisconsin Kentucky 

Note: Natural growth is the number of births minus the number of deaths. 

Source: U.S. Census Bureau. 

Population Change 

Natural Growth 

International Migration 

Domestic Migration 

Several Factors Have Led to Population Changes 

in the Chicago Region 

Changes from 

2000 to 2004 

Number of People (thousands) 

sought job opportunities elsewhere. Illinois and Ohio 

also experienced out-migration of baby boomers, and 

out-migration of elderly occurred in all states in the 

Region. Despite these shifts in population, however, the 

percent of the elderly population is expected to grow 

due to an aging baby boomer population. 

International in-migration offset some or all of each 

state’s domestic out-migration. However, this in-migration occurred unevenly as most individuals settled in 

larger metro areas, such as Chicago or Detroit. In 

general, the population in suburban counties near 

larger metro areas grew most significantly. 

The Region’s relatively weak population growth could 

dampen overall household wealth, which, in turn, 

could constrain sources of insured institution deposits, 

particularly for those banks and thrifts operating in 

affected areas. In addition, a smaller potential customer 

base likely will heighten competition among institutions. Generally, during the past five years, community 

institutions in counties with relatively slow rates of 

population growth have reported lower levels of growth 

in assets (7.0 percent), loans (6.5 percent) and deposits 

(7.1 percent) than those operating in areas with relatively high rates of population growth (asset growth of 

12.9 percent, loan growth of 14.3 percent, and deposit 

growth of 12.9 percent).7 

7 Low population growth counties consist of counties that experienced 

population growth rates below the 25th percentile between 1990 and 

2004. High population growth counties consist of those that experienced growth above the 75th percentile. Community institutions include 

insured banks and thrifts with assets less than $1 billion excluding 

credit card and other specialty banks as of September 30, 2005. 

FDIC OUTLOOK 26 SPRING 2006 
Regional Demographic and Banking Trends 

To extend their geographic reach, more banks in the 

Region have branched into other states or are offering 

electronic banking products. Insured institutions also are 

reporting upticks in investment sales and trust activity, 

product areas of interest to an aging population. In addition, some institutions, particularly in the larger metro 

areas, have expanded outreach and marketing efforts to 

target the growing immigrant population. 

Dallas Region—Southwest 

Concentrations of aging baby boomers and elderly 

with significant wealth present opportunities for local 

banking institutions. 

Three key demographic trends are emerging in the 

Southwest United States: a slowing in domestic migration from other areas of the country, rapid growth in 

the number of baby boomer retirees and preretirees, 

and continued rapid growth in the Hispanic population. Between 2000 and 2004, Hispanics represented 

nearly two-thirds of the Region’s population growth, 

increasing at a rate two-and-a-half times that of nonHispanics. In addition, robust economic and job growth 

during the 1990s, particularly in Colorado and Texas, 

contributed to a substantial net domestic migration 

from California, the Midwest, and the Northeast. 

During the past five years, this relocation of population 

slowed and, in some states, turned negative largely as a 

result of the economic downturn in the Southwest. 

Looking forward, however, because of a strong 

economic outlook, each of the Region’s states is 

projected to rank among the top third among the 50 

states in employment growth through 2009, which 

should result in a resumption of domestic in-migration.8 

And finally, U.S. Census Bureau data project that 

between 2000 and 2030 the Region’s elderly population 

will grow 136 percent, compared with 48 percent for 

the Region’s overall population.9 

Banks and thrifts are expected to target aging baby 

boomers and the elderly with significant wealth accuMap 3 

Favorable Amenities and Lower Living Costs Are 

Attracting Affluent Retirees and Baby Boomers 

to the Southwest 

Prosperous Empty Nester 

Silver and Gold 

Both 

Note: These counties have twice the national average of Prosperous Empty Nesters 

and Silver and Gold, designated by ESRI as representing affluent boomers and retirees. 

Source: ESRI. 

mulation. Environmental System Research Institute 

(ESRI), an information management firm that has 

developed a methodology for segmenting population 

groups, has identified two such affluent groups.10 

Prosperous Empty Nesters typically are married couples 

with no children living at home, often age 55 years or 

older, well educated, and with a median income of 

more than $64,000. Silver and Gold persons are among 

the nation’s wealthiest seniors, having a median age of 

58 years, retired from professional occupations, and 

owning a home with a median value of $276,000. 

Although almost every county in the nation is home to 

individuals in these groups, the Dallas Region has many 

counties with concentrations that are more than double 

the U.S. average (see Map 3).11 

8 Source: Moody’s Economy.Com State Précis reports dated November
 

and December 2005. 10 Source: Community Tapestry Segments as defined by ESRI Business
 9 Source: U.S. Census Bureau, Population Division, Interim Population Information Solutions. 


Projections, 2005. 11 Location quotients were used to establish county concentrations.
 

FDIC OUTLOOK 27 SPRING 2006 
Banking on the Baby Boomers 

These two elderly segments of the population increasingly will influence labor and housing markets, expenditures for health care and travel, and demand for 

financial services. Financial institutions are expected to 

develop and market products for these individuals 

because of their significant assets. Current product offerings include reverse mortgages and annuities, investment 

management, and trust and estate planning services. 

Dallas Region—Mid-South 

Affluent Mid-South suburbs have attracted baby 

boomers, and insured financial institutions have 

followed. 

The Mid-South continues to be characterized by 

modest population growth, depopulation of the Mississippi Delta area, and a growing concentration of baby 

boomers in metropolitan areas. Overall population 

growth in the area has trailed the nation during the 

past 40 years. Since 1962, when the first baby boomers 

entered the workforce, the total population of the MidSouth grew 46 percent, compared with 60 percent for 

the nation. During the same period, nearly all counties 

in the Mississippi Delta declined in population as residents, including baby boomers, left the area in search of 

jobs and amenities in metropolitan areas, such as 

Memphis, Little Rock, and Jackson.

12 Approximately 

66 percent of the area’s 4.2 million baby boomers now 

live in the Mid-South’s metropolitan areas. 

A few smaller Mid-South communities also are drawing 

these individuals as they retire. The baby boomer population of these “retirement havens,” including Hot 

Springs, Arkansas, and Crossville, Tennessee, has 

grown in recent decades. A few other areas are now 

beginning to attract aging baby boomers, including 

communities near the Smokey Mountains, the Mississippi Gulf Coast, and college towns, such as Oxford, 

Mississippi. These communities share a number of desirable factors: a relatively low cost of living, affordable 

housing, favorable climate, cultural opportunities, and 

other amenities.13 

12 Walser, Jeffrey, and John Anderlik. 2004. Rural Depopulation: What
 

Does It Mean for the Future Economic Health of Rural Areas and the
 

Community Banks That Support Them? FDIC Banking Review, vol. 16,
 

no. 3.
 

13 As of first quarter 2005, Arkansas had the lowest cost of living in
 

the nation. Mississippi ranked 3rd, Tennessee 5th, and Louisiana 20th.
 

Missouri Economic Research and Information Center, available at
 

www.ded.mo.gov/researchandplanning. 


Interesting distinctions among populations are now 

emerging in the Mid-South’s metropolitan areas. 

Drilling down to the county level, our analysts found 

the demographic characteristics of suburban county 

households generally include higher income and rates 

of home ownership, more years of education, and a 

higher ratio of married couples to single individuals.14 

Our analysis identifies 20 “affluent” counties that are 

home to significant numbers of residents who share 

these traits (see Table 2, next page); these affluent 

counties are primarily suburban counties that have 

attracted an influx of relatively high-earning baby 

boomers from the urban core. As a result, these counties have experienced strong population growth. The 

Mid-South’s median county population growth between 

1995 and 2003 fell below 5 percent; however, median 

growth for affluent counties was 18 percent, including a 

disproportionate number of baby boomers.15 

Insured financial institutions have followed baby 

boomers into these affluent counties. Although the 

number of banking institutions fell 28 percent across 

the country between 1995 and 2005, and Mid-South 

totals dropped 24 percent, the number of banks and 

thrifts in these affluent counties increased 42 percent.16 

Branching activity also has been very strong in these 

counties; the number of branches increased 36 percent 

between 1995 and 2005, more than double the average 

of the entire Mid-South area. 

Kansas City Region 

Large concentrations of elderly in depopulating, 

rural counties will increase as baby boomers retire, 

placing additional stress on financial institutions’ 

sources of funding. 

Since 1970, a majority of the Region’s 618 counties 

have lost population. As farm technology has continued to improve, fewer farmers are required to work on 

farms. As a result, displaced farmers and residents of 

small towns that support farms have migrated to less 

agriculturally intensive areas in search of better 

employment and educational opportunities.17 

14 Kasarda, John, et. al. 1997. Central-City and Suburban Migration
 

Patterns: Is a Turnaround on the Horizon? Fannie Mae Foundation
 

Housing Policy Debate, vol. 8, issue 2.
 15 Most recent county-level data available.
 

16 FDIC’s Summary of Deposits database.
 

17 Walser and Anderlik, p. 70.
 

FDIC OUTLOOK 28 SPRING 2006 
Regional Demographic and Banking Trends 

Table 2 

Significant Numbers of Baby Boomers Now Live in Relatively Affluent Mid-South Counties 

County/Parish Metropolitan Total Boomers’ Share Per Capita Poverty 

Name State Statistical Area Boomers1 of Total1 Income3 Rate2 

Pulaski AR Little Rock 108,534 30.0% $33,620 14.0% 

Saline AR Little Rock 25,217 30.2% 26,004 9.2% 

Ascension LA Baton Rouge 23,063 30.1% 26,441 10.4% 

St. Charles LA New Orleans 15,580 32.4% 26,470 11.6% 

St. Tammany LA New Orleans 63,815 33.4% 31,639 10.4% 

De Soto MS Memphis 32,126 30.0% 28,713 8.2% 

Madison MS Jackson 22,930 30.7% 36,451 12.5% 

Rankin MS Jackson 35,805 31.0% 27,729 10.3% 

Anderson TN Knoxville 21,497 30.1% 27,668 12.9% 

Blount TN Knoxville 32,482 30.7% 26,253 10.3% 

Cheatham TN Nashville 12,008 33.4% 26,888 8.9% 

Hamilton TN Chattanooga 93,042 30.2% 32,365 12.9% 

Knox TN Knoxville 114,642 30.0% 30,901 12.3% 

Maury TN Nashville 21,792 31.4% 28,810 11.3% 

Robertson TN Nashville 16,887 31.0% 26,958 9.5% 

Sevier TN Knoxville 22,190 31.2% 25,822 13.0% 

Sullivan TN Johnson City­ 46,191 30.2% 27,232 12.7% 

Kingsport-Bristol 

Sumner TN Nashville 41,173 31.6% 28,544 9.3% 

Williamson TN Nashville 45,778 36.1% 42,694 4.8% 

Wilson TN Nashville 29,245 32.9% 31,376 7.9% 

Note: Areas in the Mid-South region with at least 10,000 baby boomers, at least 30 percent of total population consisting of baby boomers, per capita income greater than $25,700, and less 

than 14 percent of population below the poverty line. 

1 U.S. Census Bureau, Based on 2000 Census data. 

2 U.S. Census Bureau Small Area Income & Poverty Estimates, 2002 data. 

3 Bureau of Economic Analysis, 2003 data. 

Because rural-to-urban migrants tend to be younger 

people, declining counties—those that lost population 

between the 1970 and 2000 Censuses—typically have 

fewer young people and large elderly populations (see 

Chart 2, next page). Note the relatively small proportion of the population ages 20 to 34 and the large 

number of elderly people. In this example, almost 20 

percent of the population is older than 65, compared 

with 12.4 percent for the nation as a whole. 

The population of a majority of the Region’s counties is 

characterized by a high share of elderly individuals. Our 

analysis ranked the nation’s counties by the proportion 

of the elderly population and divided the counties into 

quartiles. The data show a majority of the Region’s counties fall in the oldest quartile (see Map 4, next page). 

Of the Region’s 342 counties in this quartile, 285 are 

rural counties with declining populations. This phenomenon likely will worsen as baby boomers in these areas 

begin to join the ranks of the elderly in coming years. 

Counties with declining populations and large 

elderly populations face significant challenges related 

to the composition of the labor force. Declining 

counties in general already have smaller-than-average 

labor forces, making it difficult to attract the significant employers needed to reverse population outflows. 

This unfavorable situation is exacerbated when a small 

community has a high proportion of elderly who typically lack the education and skills needed to attract 

employers. 

The concentration of elderly people in declining counties is also a concern for insured financial institutions. 

Banks in these areas find it difficult to maintain and 

grow deposits. Between 1994 and 2004, deposits in 

FDIC OUTLOOK 29 SPRING 2006 
Banking on the Baby Boomers 

Chart 2 

Declining Counties Have a Gap of Young Working-Age
 

People and Higher Concentrations of Elderly 


Holt County, Nebraska 

Age 

80–84 

70–74 

60–64 

50–54 

40–44 

30–34 

20–24 

10–14 

Male <5 Female 

10 8 6 4 2 0 0 2 4 6 8 10 

Percent of Total

Source: U.S. Census Bureau, 2000 Census. 

declining county bank and thrift branches grew 24.4 

percent; the figures were 74.5 percent and 58.7 percent 

for deposits in branches in metropolitan counties and 

growing rural counties, respectively.18 This situation is 

more serious in those cases where banks rely on the 

elderly for funding. Many rural bankers have a similar 

story to tell: an elderly depositor with significant 

deposits passes away, and that person’s funds are withdrawn within days by heirs who have moved to metropolitan areas. These deposits, used to make loans or 

other investments, are difficult to replace.19 The large 

elderly population in much of the Region suggests this 

problem will intensify in coming years. 

New York Region—Mid-Atlantic 

Housing affordability has shifted population in the 

Mid-Atlantic to the suburbs and exurbs. 

Growth in total population and baby boomer cohorts in 

the Mid-Atlantic region has trailed the U.S. average 

since 1990 and, for the most part, reflects out-migration 

to lower-cost areas of the country.20 Affordability also 

has contributed to migration patterns within the 

Mid-Atlantic from larger cities to suburbs and newly 

formed exurbs. 

18 Bank and Thrift Call Reports, all insured institutions. Rates shown
 

are median rates for each group of institutions. Growth rates are
 

merger-adjusted. 


19 Walser and Anderlik, p. 84.
 

20 Source: U.S. Census Bureau. This analysis tracks population growth
 

between 1990 and 2003. 


Map 4 

Counties with the Highest Proportion of 

Elderly Population Dominate the Region 

 Percentage of

 Population 

Older than 65* Counties 

<12.07 77 

12.07–14.39 68 

14.40–17.07 131 

>17.07 342

* Percent ranges represent county quartiles of U.S. Distribution. 

Source: U.S. Census Bureau. 

Map 5 

Mid-Atlantic Population Is Migrating to
 

Outer Suburbs
 

Pittsburgh 

New York City 

Baltimore 

Philadelphia Washington, D.C. 

County Population Growth (percent) 

by Quartiles (1990–2003) 

13.2 to 81.7

 4.8 to 13.2

 –0.3 to 4.8 

Source: U.S. Census Bureau. –14.5 to –0.3

FDIC OUTLOOK 30 SPRING 2006 
Regional Demographic and Banking Trends 

Overall population growth in the Mid-Atlantic states 

has been about 8 percent since 1990, but growth has 

been much stronger in rings of suburban and exurban 

counties surrounding major cities along the New York– 

Washington, D.C., corridor (see Map 5). Around the 

New York City metropolitan area, particularly in 

Orange and Putnam counties and in neighboring Pike 

and Monroe counties in Pennsylvania, population has 

expanded more than 55 percent since 1990. In addition, 

population growth along the Baltimore-Washington 

corridor ranged between 20 and 60 percent. The extension of suburban boundaries also has occurred around 

the Philadelphia metropolitan area, including suburbs 

in New Jersey. 

Affordability and lifestyle are key factors driving MidAtlantic population trends, as homes are generally less 

expensive further from major cities. However, growing 

demand for housing has pushed home appreciation 

rates in many Mid-Atlantic suburbs and exurbs to 

approximate those of major cities. During 2005, home 

appreciation reached cyclical highs that exceeded 20 

percent in some Maryland and New Jersey suburbs, a 

consequence of spillover demand from the neighboring 

larger metropolitan areas.21 However, because the 

recent increase in home prices started from much lower 

levels, homes remain relatively affordable in most MidAtlantic suburbs, which should continue to encourage 

out-migration from urban areas. 

Mid-Atlantic counties with higher rates of population 

growth also generally have experienced increases in job 

growth and bank branching activity. A majority of the 

counties that ranked in the top quartile for population 

growth between 1990 and 2003 also ranked in the top 

quartile for job growth. Stronger population growth has 

spurred demand for construction of local infrastructure—such as roads, sewers, and schools—and has 

supported new business formation, which collectively 

fosters an expanding economic base and demand for 

banking services. The number of bank branches has 

increased almost 9 percent in counties in the top quartile of population growth, compared with a 2 percent 

decline in counties in the bottom quartile. Loan growth 

also has been stronger among insured institutions in 

fast-growing counties. 

While the percentage increase in the baby boomer 

population in the Mid-Atlantic has slightly lagged the 

21 Office of Federal Housing Enterprise Oversight. Quarterly data 

through third quarter 2005. 

nation, demand for vacation and retirement homes by 

this cohort has driven population growth along the 

New Jersey, Delaware, and Maryland shorelines. Baby 

boomers in these areas represented one-fourth of the 

population gain since 1990—an average increase of 

34 percent, four times the national average. Demand 

for second homes also has contributed to significant 

growth in the baby boomer population in Pennsylvania’s Pocono resort area and the Delaware Valley. 

Recent studies also suggest a reversal of migration 

trends for some of the area’s aging baby boomers. Traditionally, baby boomers have migrated away from the big 

cities; however, data show that some “empty nesters”— 

those whose children are grown and out of the house— 

are returning to the larger cities to take advantage of 

amenities, such as restaurants, entertainment, and 

cultural events.22 The return of empty nesters and 

foreign immigration has offset, at least in part, domestic 

out-migration in some of the larger urban cities along 

the East Coast. 

New York Region—New England 

Net out-migration and aging baby boomers challenge 

future economic growth. 

In all six New England states, baby boomers make up a 

larger share of the total population than the national 

average. This is due in part to out-migration of younger 

individuals and some in-migration of baby boomers and 

retirees to the Region’s vacation areas. These shifts in 

population, in addition to the fact that a significant 

share of elderly already live in the area, have contributed to a relatively high median age, making New 

England the oldest of the Census Bureau’s nine divisions. Census Bureau projections show New England 

will remain at the forefront of this country’s “age wave” 

as the Region will be characterized by the highest 

median age from 2004 through 2030.23 As a result, economic and banking implications associated with aging 

baby boomers could be magnified in New England. 

While the aging of the baby boomer generation is a 

long-term concern, out-migration and slow natural popu22 Slobodzian, Joseph A. December 27, 2005. Center City Renaissance:
 

A Residential Population Boom and Retail Growth Power a Comeback. Philly.com. Empty Nesters Flock to Cities. September 7, 2004.
 

www.cbsnews.com. 
 23 U.S. Census Bureau, Interim State Population Projections, 2005.
 

Internet release date: April 21, 2005.
 

FDIC OUTLOOK 31 SPRING 2006 
Banking on the Baby Boomers 

Chart 3 Chart 4 

New England Expected to See Sluggish Growth of 

Working-Age Population 

U.S. Average 

Proj. % Change: 

2005–2015 

NH VT ME RI CT MA 

Source: U.S. Census Bureau. 

12 

10 

8 

6 

4 

2 

0 

0 

10 

20 

30 

40 

50 

60 

70 

NV AZ UT ID WA OR CA AK MT WY HI US 

1990–2000 

2000–2010* 

* Forecast data from the U.S. Census Bureau. 

Source: U.S. Census Bureau. 

Nevada and Arizona Are Expected to Continue to 

Lead the Region’s Growth Through 2010 

Population Change (percent) 

lation growth in New England are key demographic 

trends expected to affect businesses and governments in 

the near term. As expected from the population’s age 

distribution, New England has the slowest rate of natural 

increase. More troubling is the net out-migration attributable, at least in part, to lagging rates of job creation 

since the 2001 recession in the two most populous states, 

Massachusetts and Connecticut. 

Shifts in population exhibit a sharp north/south divide. 

From 2002 through 2005, domestic population outflows 

occurred in the three southernmost states: Connecticut, 

Massachusetts, and Rhode Island. Moreover, Massachusetts and Rhode Island lost total population 

between 2004 and 2005, and Massachusetts is the only 

state in the nation to lose population for two consecutive years. However, New Hampshire and Maine to 

the north enjoyed net inflows rivaling the best in the 

nation during that time.24 All three southern states are 

considered “mature” economies with significant concentrations of traditional industries, such as finance and 

insurance and production of consumer goods. Although 

Massachusetts boasts a vibrant technology economy, 

the state has not created enough jobs to offset attrition 

in the more traditional sectors. Conversely, the New 

Hampshire economy, consistent with the state’s strong 

population growth, continues to expand. 

The most significant demographic challenge for New 

England stems from the slow expansion of the workingage population, the age group most important for the 

economy’s health. Domestic migration by age shows 

24 U.S Census Bureau. Estimates of Average Annual Rates of the 

Components of Population Change for the United States and States: 

April 1, 2000, to July 1, 2005. 

clear patterns of working-age cohorts leaving New 

England and relocating south and west because of 

milder weather, less expensive housing, and shorter 

commutes. Census data suggest these trends will 

continue (see Chart 3), and estimates of slow growth in 

the 22-to-65-year-old cohort suggest a considerable 

headwind facing the New England economy. This age 

segment represents a significant share of an area’s workforce and encompasses most entrepreneurs. When these 

individuals relocate, an economy’s vitality often moves 

with them. 

San Francisco Region 

Strong population growth is expected to continue in 

much of the Region. 

States in the San Francisco Region added about 9 million new residents during the 1990s and generally 

reported more rapid population growth than the rest of 

the nation. Census data indicate this growth will 

continue, albeit at a somewhat slower rate, through 

2010 (see Chart 4), and that gains in population should 

occur among baby boomers and foreign immigrants. 

Affordability and quality of life attract many baby 

boomers to states in the West—both those groups of 

individuals who choose to “age in place” during retirement and those moving from other parts of the country. 

Cost of living affects relocation decisions at any age, 

but may be particularly important to baby boomers 

transitioning from their prime earning years to fixed 

incomes. Four Western states rank favorably for housing affordability: Wyoming, Idaho, Montana, and 

FDIC OUTLOOK 32 SPRING 2006 
Recreation only 

Retirement only 

Both 

Map 6 

Regional Demographic and Banking Trends 

“Recreation Counties” Will Likely Become “Retirement Counties” as Baby Boomers Relocate 

Note: “Recreation Counties are classified by the United States Department of Agriculture (USDA) as those that are not in a metropolitan area but do have a high share of employment or 

earnings in recreation-related industries. “Retirement Counties” are those in which the number of residents 60 years of age and older grew at least 15 percent between 1990 and 2000 due to 

in-migration. 

Source: USDA Economic Research Service. 

Utah. Also, relatively affordable housing in Oregon 

and Arizona has attracted baby boomers from California, where home prices are higher. Several states in the 

Region also are attractive because of retiree-friendly tax 

structures. While many retiree benefits and pension 

income is exempt from state taxes, residents enjoy 

another advantage in Alaska, Nevada, Washington, 

and Wyoming, where they do not pay income tax. 

The availability of health care, transportation, and 

recreation are also key considerations for individuals 

considering moving to a new area. In particular, nearly 

one-third of the nation’s nonmetropolitan, recreationbased counties are located in the West (see Map 6). 

Many recreational counties in the West, including 

Prescott, Arizona; St. George, Utah; Bend, Oregon; 

and Coeur d’Alene, Idaho, already have become retirement hubs and experienced significant in-migration. 

Immigration of younger job-seeking individuals also 

played a key role in the West’s robust population 

growth. During 2004, California ranked first in the 

number of immigrants in the nation, with 27 percent of 

its residents born outside the United States. Furthermore, the California foreign-born population expanded 

37 percent during the 1990s, far outpacing the growth 

of domestic-born residents (7 percent). Prospectively, 

immigration may increase in importance as California 

continues to lose baby boomers to other states. In 

addition, the number of foreign-born residents at least 

doubled in Nevada, Utah, Arizona, Idaho, and Oregon 

between 1990 and 2000. 

Conclusion 

Drilling down to the regional level adds insight into 

how national demographic trends may manifest themselves in local communities. The demographic trends 

highlighted in this article present challenges and 

opportunities for regional economies and the local 

banking sector. Understanding the factors driving 

these trends will help insured institutions anticipate 

their customers’ changing financial needs and develop 

financial products and services that will meet those 

needs. 

FDIC OUTLOOK 33 SPRING 2006 
How Aging Baby Boomers Are Changing the
 

Financial Marketplace
 

As the baby boom generation moves toward retirement, 

the financial needs and preferences of its members 

likely will change considerably as their lifestyles 

change. Key social and demographic trends will shape 

the retirement years and have implications for how 

insured institutions can attract and retain these 

customers. For example, older individuals generally 

want to move assets into safer, more conservative 

investments to protect the wealth they have accumulated. In addition, an ongoing shift from traditional 

defined benefit to defined contribution pension plans 

presents challenges to aging baby boomers, as they now 

must accept more responsibility for their own retirement planning. Retirees with substantial equity in their 

homes may have questions about how to use that equity 

to help fund their retirement. And finally, baby 

boomers can expect to live longer than past generations, and they must consider the effect higher health 

care costs may have on their retirement security. This 

article focuses on understanding the opportunities these 

trends may present and how FDIC-insured institutions 

may offer financial products and services that can help 

meet the needs of aging baby boomers. 

As Baby Boomers Approach Retirement, Their 

Preference for Lower Risk Financial Products Is 

Expected to Grow 

Studies show that as baby boomers age, their investment strategies tend to become more conservative. For 

example, older individuals tend to shift out of the 

stock market about the time they begin receiving 

annuities or withdrawing some of their financial 

assets.1 The results of a recent survey of baby boomers 

indicate that respondents shifted some portion of their 

retirement savings from relatively riskier assets, such as 

accounts invested in stocks and real estate, into safer 

ones, such as savings accounts.2 Forty-two percent said 

1 Ameriks, John, and Stephen P. Zeldes. September 2004. How Do Household Portfolio Shares Vary With Age? (draft). http://bear.cba.ufl.edu/ 

karceski/fin6930/lecture%20notes/Ameriks_Zeldes.pdf. 

2 Baby Boomers Envision Retirement II, prepared for AARP by Roper 

ASW, May 2004. The 1998 respondents were between ages 33 and 52, 

and the 2003 respondents were between ages 38 and 57. Riskier assets 

are defined here as assets with greater return volatility than shortterm, highly liquid, relatively low-risk debt instruments such as Treasury 

bills. http://assets.aarp.org/rgcenter/econ/boomers_envision.pdf. 

Chart 1 

As Individuals Age, Their CD Holdings Increase 

35 

30 

25 

20 

15 

10 

5 

0 

Less than 35 35–44 45–54 55–64 65–74 75 or more 

Age of Head of Household 

Percentage of 

Families Holding CDs 

Median Value of 

Holdings for Families 

Holding CDs* 

*Median values are in thousands of 2004 dollars. 

Source: Bucks, Brian K., Arthur B. Kennickell, and Kevin B. Moore. 2006. Recent Changes 

in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances. 

Federal Reserve Bulletin. 

they had put money into regular savings in 1998; by 

2003, this number had increased to 50 percent. The 

shift for older respondents (ages 53 to 57) was slightly 

higher—an additional 12 percent of them had put 

money into regular savings by 2003. During the same 

period, older respondents’ contributions to individual 

retirement accounts (IRAs), 401(k) plans, and other 

retirement savings accounts, often invested in equities, 

dropped 6 percent. Certificate of deposit (CD) data 

show similar results: older people are more likely to 

hold CDs than younger people, and the median value 

of their CD holdings exceeds that of younger people 

(see Chart 1).3 

These trends may present opportunities for insured 

institutions. The ability to offer a range of investment 

products and services may enable banks to help these 

individuals hedge against the risk that inflation could 

deplete the value of their assets.4 Inflation-linked 

CDs may be particularly attractive to baby boomers 

because of the enactment of legislation raising deposit 

3 Bucks, Brian K., Arthur B. Kennickell, and Kevin B. Moore. 2006. 

Recent Changes in U.S. Family Finances: Evidence from the 2001 and 

2004 Survey of Consumer Finances. Federal Reserve Bulletin. 

www.federalreserve.gov/pubs/bulletin/2006/financesurvey.pdf. The 

number of families interviewed for the 2004 survey was 4,522. 

4 Bodie, Zvi, and Michael J. Clowes. 2003. Worry-Free Investing. 

Financial Times Prentice Hall, pp. 17–21. 

FDIC OUTLOOK 34 SPRING 2006 
How Aging Baby Boomers Are Changing the Financial Marketplace 

insurance coverage of certain retirement accounts 

to $250,000.5 

Inflation reduces the purchasing power of fixed 

payment streams flowing from ordinary bonds and 

annuities.6 However, bonds and annuity products that 

feature payment streams that adjust for price increases 

can help mitigate the effects of inflation.7 Therefore, 

financial products that may be appropriate for baby 

boomers concerned about preserving their accumulated 

wealth include U.S. Treasury inflation-linked bonds 

(TIPS), TIPS mutual funds, inflation-linked U.S. 

savings bonds (I-bonds), or immediate life-escalating 

annuities (see text box at right for an explanation of 

immediate life escalating annuities).8 

Pension Plan Changes May Create Demand for 

Financial Planning Services 

The trend away from traditional defined benefit pension 

plans to defined contribution plans is tending to shift 

responsibility for retirement planning from employers 

to employees (see “The Shift Away from Defined Benefit Plans,” page 10). However, research shows that a 

significant number of households nearing retirement 

have done little or no retirement planning.9 Fewer than 

half (41 percent) of the respondents to the Vanguard 

study indicated that they have an asset accumulation 

5 For more information on one example of an inflation-linked CD 

offered by LaSalle Bank, see www.lasallecdips.com. Deposits (including CDs) are FDIC-insured. Legislation signed on February 8, 2006, will 

increase the $100,000 insurance limit to $250,000 for certain retirement accounts. This higher limit could attract nearly $30 billion of new 

deposits in IRA/Keogh accounts at FDIC-insured institutions. January 

31, 2006, update to a revised FDIC September 7, 2001, memorandum, 

“Potential Effects of Certain Cover Limit Changes on FDIC Insurance 

Funds Reserves.” 

6 Swensen, David F. 2005. Unconventional Success—A Fundamental 

Approach to Personal Investment. New York: Free Press, 51. 7 Banks that offer inflation-linked products can purchase and hold 

Treasury inflation-linked bonds in their own investment portfolios to 

hedge the inflation risk. 

8 U.S. Treasury inflation-linked bonds are called TIPS—Treasury 

Inflation Protection Securities. Banks, brokers and other investors 

purchase TIPS for their customers through the U.S. Treasury’s 

Commercial Book-Entry System. Inflation-linked CDs feature less 

duration risk than TIPS, but higher before-tax interest rates than Ibonds. 

9 Lusardi, Annamaria. December 2003. Planning and Saving for Retirement. Dartmouth College. The 4,489 respondents who were asked 

how much they thought about retirement were approximately 51–61 

years of age when interviewed. www.dartmouth.edu/~alusardi/ 

Lusardi_pdf.pdf. 

Immediate Life Escalating
 

Annuities: One Strategy to Protect
 

Retirement Income
 

A study conducted by the Vanguard Center for Retirement Research (Vanguard study) found that slightly 

fewer than half the respondents have given “a great 

deal of thought” to whether their income would keep 

pace with the rising cost of living during retirement.a 

A product that may help allay retirees’ concerns about 

inflation risk is an immediate life annuity with escalating payments. Currently, most immediate life annuities 

pay fixed amounts for the rest of the purchaser’s life. 

Some financial institutions recently have introduced 

immediate life escalating annuities featuring payment 

streams that adjust over time, either by a fixed percentage or an inflation-linked adjustment. 

Certain types of these innovative annuity products may 

be appropriate for specific financial situations, for 

example, a graded payment immediate life escalating 

annuity with payments that increase a fixed percentage 

(3 or 5 percent) each year as a way to offset rising 

prices, or an inflation-linked immediate life escalating 

annuity with payments that adjust each year for 

changes in inflation.b 

a Ameriks, John, Robert D. Nestor, and Stephen P. Utkus. 

November 2004. Expectations for Retirement: A Survey of Retirement Investors. Vanguard Center for Retirement Research. All 

1,000 respondents were working and were randomly selected 

from an online panel of more than 1.8 million individuals supplied 

by Greenfield Online. The age demographics were: 74 percent 

40–55 (all baby boomers), 14 percent 56–60 (majority baby 

boomers), and 11 percent 61 or over (older than baby boomers). 

Additionally, the authors found that respondents estimated their 

chances of living to age 70 to be 73 percent, while actuarial data 

suggest the actual probability is 87 percent. 

b Two other immediate life-escalating annuity types are available: 

the immediate life variable annuity, which features an income 

stream that fluctuates based on the performance of underlying 

investments, and the immediate life combination annuity, which 

allocates a portion of the investment to the variable option and 

another portion to either a graded or inflation-linked option. 

goal, and one-quarter did not have an income goal for 

their “current” standard of living or a “minimally 

acceptable” standard of living during retirement.10 

Almost 25 percent of the respondents to the AARP 

10 As noted in the Vanguard study, a target goal for asset accumulation is the dollar amount in financial assets a person plans to accumulate by retirement age to augment income flows from Social 

Security and traditional defined benefit pension plans. 

FDIC OUTLOOK 35 SPRING 2006 
Banking on the Baby Boomers 

baby boomer study said they would benefit from more 

retirement planning information and advice.11 

Some baby boomers will receive retirement income 

from both Social Security and traditional defined 

benefit pension plans; however, many may not know 

how much they can expect to receive from these 

sources and may need help choosing appropriate 

investment vehicles to augment that cash flow.12 In 

addition, a key issue for many baby boomers, as they 

look forward to living longer, will be determining an 

appropriate withdrawal strategy of retirement savings 

that ensures they will not outlive their financial assets. 

Penalties for early withdrawals, minimum required 

distribution requirements, and estate planning issues 

also must be considered. 

These questions are further complicated by the fact 

that baby boomers’ retirement assets are taxed at different rates. For example, some retirement accounts, such 

as traditional IRAs, are taxed at ordinary marginal tax 

rates when withdrawn, while other assets are taxed at 

capital gains or qualified dividend rates. Social Security 

is either tax-free or taxed at a preferential marginal tax 

rate, and Roth IRA withdrawals are tax-free.13 

Obtaining wealth management and financial and tax 

planning services, therefore, is critical to aging baby 

boomers.14 A newsletter for independent banks, Banc 

Investment Daily, recently reported that banks are 

beginning to develop long-term strategies as a means of 

attracting the $200 billion per year that soon will 

rollover from 401(k) plans when baby boomers retire.15 

In fact, Wachovia Corp. recently hired 15 consultants 

to provide education, marketing, and sales support for 

its retirement planning products.16 Customers 

11 See note 2.
 

12 In 2005, real lifetime benefits for an average-income couple from
 

Social Security were $439,000. Data are from testimony of C. Eugene
 

Steuerle, The Urban Institute, before the Subcommittee on Social
 

Security of the House Committee on Ways and Means on June 14.
 

2005, http://waysandmeans.house.gov/hearings.asp?formmode=
 

printfriendly&id=2774.
 

13 These issues are complex. For example, federal tax regulations vary
 

regarding distributions for an IRA in the retiree’s own name or one
 

that is inherited. Refer to the Internal Revenue Service website at
 

www.irs.gov.
 

14 Ten percent of the investment management services in the United
 

States are provided by banks or thrifts. Investment Company Institute,
 

2005 Investment Company Fact Book, 45th edition, March 2005.
 15 Banc Investment Group, LLC. April 28, 2005. Boomer Puzzle. Bank
 

Investment Daily.
 

16 American Banker Online. February 7, 2006. “In Brief: Wachovia
 

Deploys 15 Retirement Aides.”
 

Chart 2 

The Demand for Mortgages Declines as 

People Enter Retirement 120 

100 

80 

60 

40 

20 

0 

Age of Head of Household 

Percentage of 

Families Holding 

Home-Secured Debt 

Median Value of Debt 

for Families Holding 

Home-Secured Debt* 

Less than 35 35–44 45–54 55–64 65–74 75 or more 

*Median values are in thousands of 2004 dollars. Home-secured debt data are for 

primary residences. 

Source: Bucks, Brian K., Arthur B. Kennickell, and Kevin B. Moore. 2006. Recent Changes 

in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances. 

Federal Reserve Bulletin. 

approaching retirement increasingly will need rollover 

products and services; this strategy helped the brokerage house TD Waterhouse significantly increase its 

rollover deposits.17 

Some Baby Boomers May Need to Tap Equity in 

Their Homes to Fund Retirement 

For many older Americans, the value of their home is 

their most significant financial asset.18 Many baby 

boomers may have inadequate savings to fund their 

retirement years, but may hold significant illiquid 

equity in their homes.19 In fact, households headed by 

individuals 45 to 54 are more likely to own a home 

than to have a retirement account (77 percent 

compared with 58 percent).20 As Chart 2 indicates, 

home-secured debt diminishes for ages above 35 to 44 

(the age cohort that includes the youngest baby 

boomers).21 

Although aging baby boomers may no longer need a 

traditional mortgage, some are candidates for other 

forms of mortgage products. Statistics show that 

tapping the equity in real estate is becoming an increasingly attractive source of income to fund retirement. 

For example, retirees who face unexpected expenses 

17 Dente, Thomas, and Christine Detrick. January 28, 2005. How to
 

Keep Retirees’ Savings In the Bank. American Banker Online.
 18 Rich, Motoko, and Eduardo Porter. February 24, 2006. “Increasingly,
 

the Home is Paying for Retirement.” The New York Times.
 19 See “Are Baby Boomers Financially Prepared for Retirement?” in
 

this issue, for more information on sources of retirement income. 


20 See note 3, pp. 13 and 22. 


21 See note 3, p. 29.
 

FDIC OUTLOOK 36 SPRING 2006 
How Aging Baby Boomers Are Changing the Financial Marketplace 

(such as medical or home improvement bills) may 

apply for a home equity loan or a home equity line of 

credit that may have generally low closing costs and 

may be appropriate for short-term financial needs. 

Home equity conversion plans represent another way 

retirees can supplement their income (see text box). 

Although terms vary, in general, these plans allow 

homeowners to remain in their home while turning the 

equity into an income stream during retirement. The 

income stream is repaid when the home is sold. 

Dealing with the Rising Cost of Health Care 

As baby boomers age, they must consider how rising 

health care costs could affect their retirement security. 

About half the personal bankruptcy filers interviewed 

for an article in Health Affairs cited medical expenses 

as contributing to their decision to declare bankruptcy.22 Furthermore, some aging baby boomers are 

unclear about the level of protection their health 

insurance provides. For example, AARP statistics 

show that 30 percent of baby boomers mistakenly 

believe Medicare covers long-term nursing home care.23 

Others may overestimate the cost of long-term care 

insurance policies and decide against purchasing 

them.24 Although baby boomer income and wealth, on 

average, are higher than those of previous generations, 

the distribution is skewed toward higher income 

brackets.25 Baby boomers in higher income brackets 

may have the financial resources to cushion against 

rising health care costs; however, others in lower and 

middle income brackets may find it difficult to budget 

for unexpected health care expenses. 

22 Himmelstein, David U., Elizabeth Warren, Deborah Thorne, and 

Steffie Woolhandler. February 2, 2005. MarketWatch: Illness and 

Injury as Contributors to Bankruptcy. Health Affairs. 

http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.63/DC1. 23 See note 2. 

24 “Baby Boomers Get an ‘F’ in Planning for Old Age.” 

SeniorJournal.com, July 2, 2001. www.seniorjournal.com/NEWS/ 

Retirement/07-02-1BoomerF.htm. A study conducted by the Center for 

Aging Research and Education and sponsored by the GE Center for 

Financial Learning found that 75 percent of the respondents had no 

idea how much long-term care policies cost, with most overestimating the cost of long-term care insurance premiums by more than 300 

percent. 

25 For example, the U.S. Census Bureau Historical Income Tables 

show the mean inflation-adjusted household income for households 

with the highest incomes (top 20 percent) had a mean increase of 

50 percent between 1980 and 2004. The next 20 percent had a mean 

increase of 24 percent, while income for the remaining 60 percent of 

households grew only 13 percent. 

Home Equity Conversion Plansa 

A traditional reverse mortgage is the most common 

form of home equity conversion (HEC) plan. An individual borrows against the equity in his or her home, 

and the loan is paid off when the borrower moves or 

dies. (The borrower or the heir(s) receive any remaining equity value.) A reverse annuity mortgage is 

another form of HEC, in which the reverse mortgage 

proceeds are used to purchase an annuity that provides 

monthly income for life, even if the borrower is no 

longer living in the home. A third type of HEC is a 

home sale plan. An investor (which could be a bank) 

purchases a home at a discount and the owner remains 

in the house and receives the sale proceeds in a stream 

of lifetime payments. 

The volume of federally insured reverse mortgages 

more than doubled during the year ending September 

30, 2004, according to statistics provided by the 

National Reverse Mortgage Lenders Association.b 

Loan volume at Financial Freedom, the nation’s leading reverse mortgage servicer, expanded 44 percent 

during this time.c 

a See note 4. Pages 73–81 discuss home equity conversion plans.
 

b Growth in Reverse Mortgages Showing No Signs of Reversing.
 

Community Banker, April 2005, 64.
 c Ibid.
 

Receiving counseling about Medicare and the availability and costs of long-term care insurance, therefore, can 

help aging baby boomers make key decisions about 

health insurance products as they near retirement. 

Choosing a long-term care product is a complex decision that must weigh many variables, including age, 

current health, family medical history, income, and 

wealth.26 For example, some younger middle-income 

baby boomers may benefit from purchasing long-term 

care insurance. Baby boomers entering retirement may 

consider an immediate life annuity bundled with longterm care insurance.27 “Bundling” helps a bank offer 

products and services more affordably because the risks 

of each product to the bank are offsetting. For example, 

if a customer is a relatively high risk to the bank in 

terms of long-term care insurance (because of poor 

26 Driscoll, Marilee. 2003. Long-Term Care Planning. Penguin Group
 

(USA) Inc. 


27 Merton, Robert C. January/February 2003. Thoughts on the Future:
 

Theory and Practice in Theory Management. Financial Analysts
 

Journal, Volume 59, Number 1. http://students.washington.edu/
 

wcy/424/merton03.pdf. 


FDIC OUTLOOK 37 SPRING 2006 
Banking on the Baby Boomers 

health), this individual likely would be lower risk in Chart 3 

terms of an immediate annuity (poor health may 

suggest shorter longevity). 

Retirement Challenges May Create Opportunities 

for Banks 

Banks and thrifts that design and market products and 

services that respond to the changing financial needs of 

aging baby boomers may be well positioned to attract 

and retain these customers. In addition, these institutions have the opportunity to benefit from increasing 

levels of fee income. Overall, noninterest income is 

becoming more important as a source of revenue 

growth for banks of all sizes, as net interest margins 

continue to tighten in an increasingly competitive 

marketplace. Although larger banks (with assets greater 

than $1 billion) consistently have received a greater 

share of revenue from fee income sources, Chart 3 

shows the increasing importance of noninterest income 

to smaller institutions (with assets less than $1 billion). 

Larger institutions historically have offered product 

lines not readily available to smaller institutions, such 

as investment banking services and capital markets 

products. However, recent advances in technology and 

affiliations with other financial institutions are helping 

to bridge that gap. Increasingly, smaller community 

banks may find opportunities for growing fee income 

through the sale of wealth management products and 

financial planning services, as well as fees associated 

with electronic banking services. As baby boomers age 

toward retirement and their investment strategies 

become more conservative, banks of all sizes may be 

able to benefit by offering products and services that 

meet their financial needs. 

Heather Gratton 

Senior Financial Analyst 

Levels of Noninterest Income Have Been Trending 

Upward for All Insured Institutions 

10 

15 

20 

25 

30 

35 

40 

45 

50 

4Q95 4Q96 4Q97 4Q98 4Q99 4Q00 4Q01 4Q02 4Q03 4Q04 4Q05 

Note: Net operating revenue equals net interest income plus noninterest income. 

Source: FDIC. 

All insured institutions under $1 billion 

All insured institutions over $1 billion 

Banks Seek to Attract and Retain 

Baby Boomer Customers 

Some banks now are offering memberships in senior 

social clubs that offer travel tours, prescription drug 

and hotel discounts, as well as discounts on traditional 

banking services.a Bank social clubs have expanded 

across the country, and the National Association of 

Bank Club Organizations’ (NABOR) membership 

currently includes approximately 2,200 small community banks that have between 1,000 and 2,000 accounts 

each.b 

The Pew Internet Project reports that about 50 

percent of older baby boomers and 40 percent of 

younger baby boomers have banked online.c As a 

result, Internet banking may be a particularly good fit 

for aging baby boomers who travel extensively or relocate during retirement, but want to retain a relationship with a particular financial institution that does not 

have branches in the area. 

a Community Banks Use Branson, Online Banking to Lure Seniors,
 

Baby Boomers. Baby Boomer News. www.babyboomers.com/
 

news/1007c.htm. 


b Ibid. NABOR is a nonprofit organization headquartered in
 

Minneapolis, Minnesota, that provides education, benefit
 

programs, and professional networking opportunities for banks.
 

Membership information is current as of February 23, 2006.
 

c Pew Internet & American Life Project. February 2005. Data
 

Memo—The State of Online Banking. www.pewinternet.org/pdfs/
 

PIP_Online_Banking_2005.pdf. 


FDIC OUTLOOK 38 SPRING 2006 
Visit us on the Web for 

more details about 

Deposit Insurance 

Bank Statistical Data 

Emerging Economic Trends 

Current Bank Analyses 

Past Studies on the Banking Industry 
!
 Subscription Form 

To obtain a subscription to the FDIC Outlook, please print or type the following information: 

Institution Name __________________________________________________________________________ 

Contact Person __________________________________________________________________________ 

Telephone	 __________________________________________________________________________ 

Street Address __________________________________________________________________________ 

City, State, Zip Code __________________________________________________________________________ 

Please fax or mail this order form to:	 FDIC Public Information Center
 

3501 North Fairfax Drive, Room E-1002
 

Arlington, VA 22226
 

Fax Number (703) 562-2296
 

Publicinfo@fdic.gov
 

Federal Deposit Insurance Corporation 

Washington, DC 20429-9990 

OFFICIAL BUSINESS 

PENALTY FOR PRIVATE USE, $300 

PRESORTED
 

STANDARD
 

MAIL
 

Postage &
 

Fees Paid
 

FDIC
 

Permit No. G-36