Baby Boomers and Their Parents

How Does Their Economic Well-Beitig

Compare in Middle Age?

John Sabelhaus

Joyce Manchester

ABSTRACT

We use survey data to compare the income and consumption of baby

boomers in 1989 with that of their parents' generation in the early 1960s

when they were the same ages. Various adjustments allow for changes

in household composition and living arrangements. We also assess how

wealth accumulation by baby boomers compares to that of their parents' generation. We find that boomers on average have accumulated

more wealth relative to income at this point in their lives than their parents' generation had at the same stage of life 30 years ago. However,

measured consumption has not increased as much as measured income

for young adults.

I. Introduction

How does the economic well-being of baby boomers in 1989 compare to that of their parents' generation when they were the same ages in the

early 1960s? This paper uses survey data to look at the income and consumption

of the two groups, allowing for changes in household composition and living

arrangements. We also assess how wealth accumulation by baby boomers compares to that of their parents' generation. Our goal in presenting these measures

is to help distinguish facts from popular myths about the economic circumstances

facing boomers and about their economic behavior.

Theoretical work on how a large cohort like the baby boom should fare in

John Sabelhaus is a Researcher at the Urban Institute. Joyce Manchester is a Researcher at the Congressional Budget Office. The views here are those of the authors and do not necessarily reflect those

of the Congressional Budget Office or the Urban Institute. Blake Mackey provided excellent research

assistance on this project, and two anonymous referees provided useful comments on the original

draft. The data used in this article can be obtained beginning in June 1996 through June 1999 from

John Sabelhaus. The Urban Institute, 2100 M St. NW, Washington, D.C. 20037,

[Submitted February 1994; accepted January 1995]

THE JOURNAL OF HUMAN RESOURCES • XXX • 4
792 The Journal of Human Resources

economic terms suggests that "crowding" could cause a decrease in well-being.'

Members of a large birth cohort could face increased competition for entry-level

positions, less opportunity for advancement, and less likelihood of improving

economic status relative to expectations. Contrary to these theories, we find that

the income of boomers has grown on par with that of all other age groups. However, measured consumption of boomers has risen more slowly than that of other

age groups. The possible explanations include changes over time in the tax code,

the difference between measured and actual expenditures on housing and medical

care, and perhaps increased saving by baby boomers relative to their parents.

Some fictions about baby boomers are commonly espoused but not supported

by the data. Boomers are portrayed in popular culture as wanting to have it all

now—some argue that instant gratification takes too long for the average

boomer.^ Both older and younger cohorts seem to hold this view, and organized

baby busters (born after 1964) often mention boomer profligacy when describing

the ills of the world they are inheriting. But is this characterization accurate?

Data presented in this paper suggest that it is not.

Our estimates show that boomers on average have accumulated more wealth

relative to income at this point in their lives than their parents' generation had

at the same stage of life 30 years ago.' We do not assert that significant wealth

accumulation (relative to their parents) by a group which is still on average less

than 40 years old tells us much about their future. Some researchers looking

ahead have painted a fairly dim picture of retirement for baby boomers. We would

note that minor changes in the growth rate of productivity dramatically alter

projections of future well-being. But if problems with the retirement outlook

of boomers lie ahead, and we acknowledge that some problems do exist,

the explanation does not necessarily rest on lack of frugality within the boomer

cohort.

II. Incomes: How Do Baby Boomers Compare to

Their Parents?

Most analysis of economic well-being begins with income, generally measured on a before-tax basis."* In this section we compare incomes of baby

1, See. for example, Easterlin (1987) and Welch (1979),

2, For example, Levy and Michel (1986) discuss how the middle-class American dream has expanded

to include many more material goods than the previous generation had.

3, Some readers might be concerned that comparisons of well-being in 1960 and 1989 are biased by

business cycle effects, 1960 is close to a business cycle trough while 1989 is at the end of a long business

cycle expansion. In fact, the aggregate ratio of household net worth to GDP is similar in the two years:

3,56 in 1960 and 3,61 in 1989, Further, no cyclical pattern in the ratio of household net worth to GDP

is obvious—the ratio rose from 1945 to 1960, fell from 1960 to 1975, and then rose again from 1975 to

1994,

4, Several recent studies have looked at income growth across cohorts over the last few decades,

Richard Easterlin and several coauthors (1990, 1993) have shown that, after adjusting for household

composition using the Fuchs' scale, baby boomer incomes are higher than those of their parents when

they were the same age. Levy and Michel (1991) found a similar pattern, but raise concerns about

increasing earnings inequality within cohorts.
John Sabelhaus and Joyce Manchester 793

boomers to those of their parents' generation 30 years ago. We find that incomes

of baby boomers are significantly higher than those of their parents. Moreover,

the increase is comparable to income growth for all age groups over the last 30

years. These conclusions about income growth hold under various adjustments

for changes in household composition.

Tremendous demographic differences between the boomers and their parents

imply that income-based measures of economic well-being will be sensitive to

how we control for household composition.' For example, how should we compare the income of the typical 1960s family with husband working and wife at

home with three children to the income of a typical single parent in the late 1980s?

Given measures of income at the household level, the method used to control for

underlying demographic shifts can significantly affect conclusions about economic

well-being.

Two distinct aspects of the changes in household composition influence our

measures of well-being. First, the decrease in the average number of children per

household raises the issue of how to count outlays for child rearing.* Should the

cost of raising children be counted as consumption or as foregone income of the

parents? If children are viewed as consumption goods, then no adjustment for the

number of children in the household is needed when measuring the parents' wellbeing. Even if costs of childrearing are thought of as foregone income, the cost can

be specified as being somewhat less than the cost of providing for an adult by giving

children a weight of less than 1 in adjusting for household composition.

The second aspect of household composition arises because more adults live

alone today than was the case 30 years ago.' This change is important if economies of scale in goods sharing affect the outlays needed on a per adult basis to

reach a certain level of well-being. Two adults do not need twice the outlays of

one adult to achieve a comparable level of utility because many commodities can

be shared with no congestion (a television) or used more efficiently (a car).

The two types of adjustments for household composition generate several possibilities for comparing well-being of households. By compsiring changes on a per

household basis, the underlying assumptions are that economies of scale are

infinite (two adults need the same consumption as one adult) and that children

are consumption goods. Measures of changes on a per capita basis are at the

other extreme on both dimensions, as childrearing costs are treated as foregone

income and children get a weight of 1 just as adults do. The weights do not change

as the number of adults or children increases, meaning there are no economies

of scale.

The per capita and per household measures are extreme, and we use these only

to bracket our estimates and to show that the basic results are not sensitive to

which adjustment is used. But the implicit assumption in the per capita calculations, that it costs as much to provide for any child as it does for any adult, is

5, The Congressional Budget Office (1993) provides information on how household composition of baby

boomers differs from that of their parents. It also presents data on household income, wealth, and ratios

of wealth to income by type of household for baby boomers and parents,

6, The average size of families has declined from 3,7 in 1960 to 3,2 in 1990,

7, The percentage of households composed of one person has risen from 13,1 percent in 1960 to 24,7

percent in 1990,
794 The Journal of Human Resources

probably unrealistic in most cases. For example, it implies that a single parent

with one child and an income of $30,000 would be just as well off if he or she

had no child and an income of $15,000. So long as the cost of raising the child is

less than providing for a single person ($15,000 in the example), the parent with

the higher income and child is better off. The per household measure is also

questionable, because it indicates that a single person and a married couple are

equally well off on the same income. Two can eat as cheaply as one, but only if

one does not eat.

Between the per capita and per household extremes are per adult and adultequivalent measures of well-being. The per adult comparisons assume that children are consumption items (kids get a weight of 0) and that no economies of

scale exist for the adults (each adult gets a weight of 1). The adult-equivalent

measure we use is based on Fuchs' scale in which the first adult gets a weight of

1, the second adult gets a weight of 0.8, all other adults get weights of 0.7, the first

child gets a weight of 0.4, and all other children get a weight of 0.3.* Economies of

scale exist for bpth children and adults, and costs of raising children are foregone

income, but the cost of providing for children is always less than the cost of

providing for adults.

Our estimates of median and average incomes for all households headed by

someone 25 to 44 years old in 1989 (baby boomers) and in 1960 (parents of baby

boomers) appear in Table 1.' The four measures described above—per household,

per adult, Fuchs' scale, and per capita—bracket the possible ways to adjust

for household compositional changes. As expected, the shift towards smaller

households with fewer children arrays the four measures from per household

measures showing the lowest increase over time to per capita measures showing

the highest.'"

Income for baby boomers in 1989 on a per adult basis was $21,141, some 55

percent higher than their parents' level 30 years earlier, a statistically significant

result at the 99 percent confidence level. This increase is surprisingly similar to

overall growth of income per adult in the United States. Real GDP per adult rose

57 percent between 1960 and 1990. The 89 percent growth in average per capita

income shown in Table 1 is also close to the growth of GDP per capita, which

was 88 percent."

8. Easterlin and coauthors (1990, 1993) refer to the Fuchs' scale applied to income as "income per adult

equivalent" or IAE. The scale is described in Fuchs (1986).

9. The income measure used in all of the tables is the standard Census cash income. It includes wages

and salaries, self-employment income, property income, and transfers. The only notable income item

not included is capital gains.

10. The weights used to compute means are adjusted for the number of adults in the household, and

this has a big effect on differentials in rates of increase using the four measures. Consider the following

example. In the base period, we have one household with $20,000 of income and two people. In the

second period, we have one household with income of $40,000 and two people, and a second household

with income of $20,000 and one person. The adjustment for the number of adults raises the per household

rate of increase from (30,000/20,000) = 50 percent to (33,333/20,000) = 67 percent. The per adult rate

of increase in this example is 100 percent and is insensitive to whether or not the household weight is

adjusted for the number of adults.

11. An alternative is to compare growth of per adult incomes for people aged 25 to 44 in the surveys to

aggregate survey income growth. The answer turns out to be the same, because the aggregate survey

income grew at roughly the same rate as GDP.
John Sabelhaus and Joyce Manchester 795

Table 1

Incomes of Baby Boomers and Their Parents at Ages 25 to 44

Measurement Basis

Per household

Parents (1960)

Boomers (1989)

Ratio

Per adult

Parents (1960)

Boomers (1989)

Ratio

Using Fuchs' scale

Parents (1960)

Boomers (1989)

Ratio

Per capita

Parents (1960)

Boomers (1989)

Ratio

Median

25,888

37,350

1.44**

12,297

18,605

1,51**

10,394

17,356

1.67**

6,472

11,850

1,83**

Bottom

Quintile

9,327

11,659

1,25**

4,587

6,292

1.37**

3,587

5,462

1,52**

2,051

3,406

1,66**

Average

Middle 60

Percent

26,487

38,367

,45**

12,520

19,031

1,52**

10,636

17,819

1.68**

6,664

12,554

1,88**

For

Top

Quintile

56,805

85,420

1.50**

26,258

42,322

1,61**

23,672

41,059

1,73**

17,765

34,311

1.93**

All

Incomes

29,1i9

42,436

1.46**

13,681

21,141

1,55**

li,833

19,996

1.69**

7,962

15,076

1,89**

Source; Authors' tabulations using 1960 Decennial Census and 1990 (March) Current Population Survey, Two asterisks indicate ratio is statistically different from 1 at the 1 percent level using a onetailed test. See data appendix for details.

Although median and average incomes of boomers were higher than parents'

income by roughly the same amount, averages for households in the low, middle,

and high income groups show increased skewness in incomes (see Table 1).'^ All

four adjustments for household composition agree that the rise in income for the

bottom quintile was below that for the middle three quintiles, which in turn was

below that for the top income group. On a per adult basis, the incomes of the top

20-percent grew about two-thirds faster than incomes of the bottom 20 percent.

Per adult estimates for four subgroups in the baby boomer/parent populations

show income gains by age and marital status (see Table 2). The rise of average

and median incomes for young and old, or married and single, is similar." For

12, The income break-points used to split the sample across income groups in Table 1 are set so as to

keep equal numbers of adults in each of the five quintiles. The middle three quintiles are then combined

to create the middle 60 percent. The distribution break-points for each measure are created separately,

because any person's position in the income distribution is potentially sensitive to which measure is

used,

13, This result differs from the CBO (1993) conclusion that incomes for younger baby boomers have

increased less than those of older boomers. Our findings differ because we are looking at averages per

adult using per adult weights, whereas CBO computed household averages using household weights.

The CBO method will find much lower income growth when there is substantial demographic shift from

two-adult to one-adult households as occurred among the younger group.
796 The Journal of Human Resources

Table 2

Incomes of Baby Boomers and Their Parents, Specified Subgroups,

Per Adult Basis

Subgroup

Ages 25 to 34

Parents (I960)

Bootners (1989)

Ratio

Ages 35 to 44

Parents (1960)

Boomers (1989)

Ratio

All married

Parents (1960)

Boomers (1989)

Ratio

All single

Parents (1960)

Boomers (1989)

Ratio

Median

11,865

17,505

1,48**

12,800

19,650

1,54**

12,513

19,275

1,54**

10,355

16,944

1,64**

Bottom

Quintile

4,786

5,903

1.23**

4,427

6,704

1.51**

4,825

7,486

1,55**

2,048

4,476

2,19**

Average

Middle 60

Percent

11,935

17,758

1.49**

12,907

20,226

1.57**

12,486

19,678

1.58**

10,844

17,377

1,60**

For

Top

Quintile

23,179

38,051

1,64**

27,901

45,611

1.63**

25,854

41,485

1,60**

27,700

44,076

1.59**

All

Incomes

12,754

19,446

1,52**

14,210

22,599

1.59**

13,627

21,601

1,59**

12,456

20,137

1,62**

Source: Authors' tabulations using 1960 Decennial Census and 1989 Current Population Survey, Two

asterisks indicate ratio is statistically different from 1 at the 1 percent level. See data appendix for details.

married people and those ages 35 to 44, the growth of income across income

groups is similar as well. For single people, income has increased most for the

lowest income quintile, but these incomes are still substantially below those of

other groups.'''

Increased skewness in incomes occurs primarily among those who are ages 25

to 34. Income growth for the top quintile is over twice the growth for the bottom

quintile. This growth differential for young people reflects an increase in the

college wage premium arising in part from a decline in the number of entry-level

positions that do not require a college education in manufacturing and other

high-wage industries." In addition, faster income growth within the top quintiles

14, If the percentage of less wealthy young people living with their parents (and thus not counted in our

households) has risen over time, our measures of well-being could be biased by a sample-selection

problem. Evidence is difficult to find, but the proportion of people ages 25 to 44 who live with their

parents changed little between 1975 and 1989, rising from 4,99 percent to 7,85 percent,

15, Levy and Murnane (1992) present a summary of the research on expanding U,S, wage differentials

and show that much of the increase is attributable to an increase in the college wage premium for young

males.
John Sabelhaus and Joyce Manchester 797

is the result of a rapid increase in the participation in the labor force of married

women ages 25 to 34. Only 29 percent of these women were in the labor force in

1969, but the proportion rose to 70 percent in 1990.

III. Consumption: An Alternative Measure

of Economic Well-Being

Changes in the economic environment during the last 30 years may

bias the assessment of well-being based on income for several reasons. Changes

in the tax system have somewhat reduced the real consumption possibilities for

any given level of income, especially for young people whose income is primarily

from working. And increases in actual expenditures for housing and a rise in

compensation outside of wages and salaries also affect well-being separately from

income.

Two alternative methods for measuring well-being that allow for these changes

in the economic environment during the last 30 years could be considered. First,

we could estimate tax liabilities for boomers in 1989 and parents in 1960 in order

to compute disposable income. Unfortunately, the data sets on income do not

contain the information needed to estimate tax liabilities. Even if we could impute

missing pieces for a tax calculator, the incidence assumptions might dominate

the outcomes.

The second strategy is to measure consumption directly. We do this by employing four more survey data sets from the early 1960s and late 1980s that have

information on household expenditures and the value of owned housing. The

measure of consumption we present is primarily household expenditures measured on a cash basis, but with an adjustment for housing consumption to avoid

any bias that results from trends in housing prices or changes in the rate of

homeownership.'* The adjustment for housing replaces the outlays for owneroccupied housing (mortgage interest, property taxes, and maintenance) with an

estimate of the value of space rent for the house.'^ Space rent is specified to be

6 percent of the value of the house, which comes from dividing owner-occupied

space rent from the national income and product accounts (NIPA) by the value

of housing in the Flow of Funds accounts.'*

16. The appendix to Bosworth, Burtless, and Sabelhaus (1991) describes what we mean by a cash-basis

measure of consumption. Cash consumption is National Income and Product Account (NIPA) consumption less spending imputations to the household sector, and includes almost all goods and services which

the household directly pays for. It excludes some items, such as medical care provided by the govemment, for which the household does not directly pay.

17. For example, consider a homeowner with $30,000 in expenditures, $5,000 of which go to mortgage

interest, property taxes, and maintenance of the home. The homeowner lives In a house with a market

value of $200,000. Measured expenditure is just the $30,000, but our measure of consumption is ($30,000

- $5,000) + (.06 » $200,000) = $37,000. The consumption measures are comparable over time, and

also between homeowners and renters at a point in time.

18. The space rent factor has been stable at .06 over time for the following reason. If rental markets

are in zero-profit equilibrium, the rent per dollar of capital is just the real interest rate plus property tax

rate plus maintenance per dollar rate. Since the NIPA uses observed rents to estimate the unobserved

owner-occupied rents, the space rent factor is stable as long as the sum of the three components is

stable.
798 The Journal of Human Resources

Measured consumption for baby boomers and parents using the four adjustment

methods and across four subgroups rose about half as much as did income (see

Tables 3 and 4)." Consumption of baby boomers on a per adult basis was about

27 percent higher than that of their parents' generation in 1960. For the United

States as a whole, however, consumption per adult increased over 60 percent

between 1960 and 1990.

Consumption growth across income groups using per household, per adult,

Fuchs' scale, and per capita measures are more closely bunched than the comparable rates of growth in income. This in part reflects the extent to which differential income taxation transfers resources across households. Big differences in

overall growth across the four measures remain, and the ordering from small

increases on a per household basis to larger increases on a per capita basis is still

evident. The per capita consumption increase for boomers of 53 percent is well

below the national per capita increase of about 90 percent over the period.

The rise of consumption within subgroups is always less than half the increase

in income for the same group (see Table 4 and Table 2), and some of the increases

are not statistically discernible from no change. Again, the increase is more uniform across the income distribution for married households. Single baby boomers

in the bottom income quintile have consumption which is only 6 percent above

the level of their parents' generation, and statistical tests show this growth rate

is not different from zero at the 95 percent confidence level. At the other end of

the income distribution, single boomers in the top quintile have consumption that

is 43 percent higher, statistically significant at the 99 percent confidence level.

The increase in consumption of older boomers is stronger than that of younger

boomers, perhaps reflecting the fact that many older boomers became homeowners in the (good old) days of inflation and rising home values.^°

Increased saving rates by boomers could explain the gap between incomes and

consumption, but evidence from Bosworth, Burtless, and Sabelhaus (1991) does

not support this view. Rather, a shift in the tax burden toward the young may

explain some of the gap. Though the ratio of federal taxes to GDP has risen only

slightly since 1960, social insurance taxes, which fall more heavily on young and

middle-income households, have more than doubled as a share of GDP. In 1960,

the Social Security tax rate for employees was 3 percent, and only the first $4,800

of income (roughly $19,200 in 1989 dollars) was taxable. By 1990, the tax rate

19, The averages for all incomes reflect an important adjustment made to avoid bias in comparing

expenditures over time, Bosworth, Burtless. and Sabelhaus (1991) showed that the measured expenditures in the 1980s Consumer Expenditure Surveys (CEX) were lower relative to NIPA controls than the

aggregates in the 1970s data, and the same is true for the 1960s data. The reason is that the CEX does

not impute incomes or expenditures, so CEX incomes are lower than CPS incomes, where extensive

imputations are used. We implicitly correct for the lower incomes by measuring overall average consumption (column 5) as a weighted average of consumption across the income distribution (columns 2, 3, and

4) using the appropriate weights of 0,2. 0.6. and 0,2, This adjustment yields overall CEX expenditure

growth which is in line with CPS income growth and overall NIPA expenditure growth. Unfortunately,

the same problem may bias the median (though not nearly as much), and we know of no way to correct

for that,

20, Homeownership rates for married couples with children and for single parents with children have

dropped over the last two decades. Other groups continue to experience increases. See the Joint Center

for Housing Research (1993),
John Sabelhaus and Joyce Manchester 799

Table 3

Consumption of Baby Boomers and Their Parents at Ages 25 to 44

Measurement Basis

Per household

Parents (1960)

Boomers (1989)

Ratio

Per adult

Parents (1960)

Boomers (1989)

Ratio

Using Fuchs' scale

Parents (I960)

Boomers (1989)

Ratio

Per capita

Parents (I960)

Boomers (1989)

Ratio

Median

23,407

25,410

1,09**

11,468

12,400

1,08**

9,487

11,555

1,22**

5,823

8,160

1.40**

Bottom

Quintile

13,857

16,475

1,19**

6,761

8,120

1,20**

5,305

7,440

1,40**

3,021

AJ(A

1,58**

Average

Middle 60

Percent

24,178

28,108

1,16**

11,752

14,192

1,21**

9,935

13,140

1,32**

6,179

9,448

1,53**

For

Top

Quintile

40,634

52,744

1,30**

19,532

27,239

1,39**

17,043

25,128

1.47**

13,131

20,081

1,53**

All

Incomes

25,405

30,708

1,21**

12,310

15,659

1,27**

10,430

14,397

1,38**

6,938

10,638

1,53**

Source: Authors' tabulations using 1960-61 and 1989 Consumer Expenditure Surveys (CEX), 1962-63

Survey of Financial Characteristics of Consumers (SFCC), and 1989 Survey of Consumer Finances

(SCF), Two asterisks indicate ratio is statistically different from 1 at the 1 percent level. See data appendix for details.

had more than doubled to 7,6 percent, and income was taxed up to $51,300,

These changes raised the inflation-adjusted tax paid by high earners by a factor

of almost seven,^' The change in payroll taxes alone could significantly affect

comparisons between boomers and their parents at the same age on an after-tax

basis.

The difference between actual and measured expenditures for housing services

may explain another chunk of the gap. The Consumer Expenditure Surveys show

higher expenditures paid out for owner-occupied housing services in 1989 than

in the early 1960s.

The increasing proportion of compensation in benefits other than wages and

salaries may be another reason why measured incomes increased faster than

measured consumption. In 1960, other labor costs such as health insurance and

21, This calculation does not include the implicit Medicare cost-shifting tax paid by young people, which

is subject to debate, but probably very large. Other changes in the tax code over the last few decades,

including changes in IRA eligibility, eliminated deductibility of sales taxes and nonmortgage interest,

and expansion of standard deductions have had differential generational impacts. It would be interesting

to explore how comprehensive average and average-marginal tax rates across age groups have changed.
800 The Journal of Human Resources

Table 4

Consumption of Baby Boomers and Their Parents, Specified Subgroups, Per

Adult Basis

Subgroup

Ages 25 to 34

Parents (1960)

Boomers (1989)

Ratio

Ages 35 to 44

Parents (1960)

Boomers

Ratio

All married

Parents (1960)

Boomers (1989)

Ratio

All single

Parents (1960)

Boomers (1989)

Ratio

Median

11,382

11,446

1,01

11,778

13,113

1.11**

11,682

12,720

1.09**

10,894

11,554

1.06

Bottom

Quintile

7,226

8,057

1,11**

6,436

8,255

1.28**

6,774

8,439

1.25**

7,020

7,413

1,06

Average

Middle 60

Percent

11,439

13,458

1.18**

12,037

14,818

1.23**

11,739

14,477

1.23**

10,691

13,356

1.25**

For

Top

Quintile

17,940

22,867

1.27**

20,553

30,444

1.48**

19,601

27,315

1.39**

18,673

26,774

1.43**

All

Incomes

11,897

14,260

1.20**

12,620

16,631

1.32**

12,318

15,837

1.29**

11,553

14,851

1.29**

Source; Authors' tabulations using 1960-61 and 1989 Consumer Expenditure Surveys (CEX), 1962-63

Survey of Financial Characteristics of Consumers (SFCC), and 1989 Survey of Consumer Finances

(SCF), Two asterisks indicate ratio is statistically different from 1 at the 1 percent level. See data appendix for details,

pension contributions were 4 percent of wages and salaries. By 1989, these other

labor costs had risen to 10 percent of wages and salaries. To the extent that

health insurance premiums should be included in both consumption and income,

this rising share of nonwage benefits means that our measures of both consumption and income are more severely understated in 1989 than in 1960. The increase

in consumption would be higher relative to the increase in income if these benefits

were properly included in our measures.

IV. Wealth Accumulation: A (Guarded) Look Ahead

at the Weil-Being of Baby Boomers

Measures of economic well-being based on both income and consumption indicate that baby boomers are doing better than their parents in midlife. But can baby boomers expect the same degree of well-being in retirement

as their parents? Private wealth accumulation, the measurable part of retirement

preparation, shows that boomers are generally accumulating wealth at a faster
John Sabelhaus and Joyce Manchester 801

Table 5

Wealth/Income Ratios, Baby Boomers and Their Parents

Subgroup

Ages 25 to 34

Parents (1960)

Boomers (1989)

Ratio

Ages 35 to 44

Parents (1960)

Boomers (1989)

Ratio

All married

Parents (1960)

Boomers (1989)

Ratio

All single

Parents (1960)

Boomers (1989)

Ratio

Median

0.30

0.28

0.95

1.22

1.37

1.13

0.85

1.14

1.34**

0.29

0.18

0.61

Bottom

Quintile

1.07

0.91

0.84

.78

.89

.06

.44

.54

.07

1.56

0.11

0.07

Average

Middle 60

Percent

0.74

1.32

1.79**

1.71

1.96

1.15

1.32

1.90

1.44**

1.16

1.14

0.99

For

Top

Quintile

2.53

4.64

1.83

3.71

4.94

1.33**

2.87

4.41

1.53**

6.70

5.39

0.80

All

Incomes

1.42

2.60

1.83**

2.50

3.16

1.26**

1.92

2.84

1.48**

3.64

2.95

0.81

Source: Authors' tabulations using I960 Decennial Census, 1990 (March) Current Population Survey

(CPS), 1962-63 Survey of Financial Characteristics of Consumers (SFCC), and 1989 Survey of Consumer Finances (SCF). Two asterisks indicate ratio is statistically different from 1 at the 1 percent

level. See data appendix for details.

pace than their parents. However, this does not necessarily mean they will remain

better off as they get older.

Ratios of wealth to income, calculated on a per adult basis, are generally higher

for baby boomers than they were for their parents 30 years ago, with some notable

exceptions (see Tables 5 and 6).^^ Single people in 1989 generally have less wealth

rejative to income in 1989 across all income levels, though the limitations of the

wealth data preclude strong inferences about the drop in wealth. Young people

in the bottom income group also have a lower wealth ratio. But, especially when

22. Wealth includes liquid as well as illiquid financial assets such as IRAs or Keogh plans; the value

that can be borrowed against employer-provided pension accounts: the value of any housing, land, and

automobiles owned less the debt owed on them; less other nonhousing liabilities such as credit-card

debt. We include housing wealth, defined as the value of the home less outstanding mortgages, in our

calculation of wealth. Others, such as Bemheim (1992), do not include housing equity in measures of

retirement preparedness, arguing that most people do not draw down the value of housing wealth as

they age.
802 The Joumai of Human Resources

Table 6

Wealth/Consumption Ratios, Baby Boomers and Their Parents

Subgroup

Ages 25 to 34

Parents (1960)

Boomers (1989)

Ratio

Ages 35 to 44

Parents (1960)

Boomers (1989)

Ratio

All married

Parents (1960)

Boomers (1989)

Ratio

All single

Parents (1960)

Boomers (1989)

Ratio

Median

0.31

0.43

1.39

1.33

2.06

1.55**

0.91

1.73

1.89**

0.28

0.26

0,95

Bottom

Quintile

0.71

0.66

0.93

1.22

1.54

1.26

1.02

1.36

1.33

0.46

0.07

0.14

Average

Middle 60

Percent

0.77

1.75

2.26**

1.84

2.68

1.46**

1.40

2.58

1.84**

1.18

1.49

1.26

For

Top

Quintile

3.27

7.72

2.36

5.04

7.40

1.47**

3.79

6.70

1.77**

9.94

8.87

0.89

All

Incomes

1.52

3.54

2.33**

2.82

4.30

1.52**

2.12

3.87

1.82**

3.92

4.01

1.02

Source: Authors' tabulations using 1960-61 and 1989 Consumer Expenditure Surveys (CEX), 1962-63

Survey of Financial Characteristics of Consumers (SFCC), and 1989 Survey of Consumer Finances

(SCF), Two asterisks indicate ratio is statistically different from 1 at the 1 percent level. See data appendix for details.

attention is focused on the middle of the distributions, ratios of wealth to income

are about the same or significantly higher than in 1960."

Because consumption grew more slowly than income for people ages 25 to 44,

ratios of wealth to consumption (Table 6) grew faster than ratios of wealth to

income. Ratios of wealth relative to consumption may be more meaningful than

those of wealth relative to income because they indicate how many years of

current consumption a person's wealth will support. The only groups which show

consistent declines in the ratio of wealth to consumption are single people in the

bottom and top quintiles, and these decreases are not supported by the statistical

tests.

23, There is good reason to focus on the middle 60 percent and/or the median wealth values. The two

wealth data sets used in this paper are small, each about 3,(X)0 total observations. Because wealth is a

highly skewed variable, statistical tests for certain groups are tenuous. The probability of discernible

change in the ratios (given a level of change) is much higher in the middle 60 percent and median values,

because the very wealthy show up with either very low income (which distorts the bottom quintile) or

very high income (which distorts the top quintile).
John Sabelhaus and Joyce Manchester 803

Higher wealth accumulation does not offer much solace, however. In both 1960

and 1990, and for all but the top quintiles, people ages 25 to 44 generally have

wealth to support only one or two years of consumption. Simulation-based forecasts of retirement prospects for the baby boomers by Bernheim (1992, 1993)

based on a different source of data indicate that the cohort needs to save more

to maintain the level of living standards to which they have grown accustomed.^''

Aggregate trends also point toward problems in the future. Both personal and

government saving rates have fallen to less than half the postwar averages, and

we are probably already experiencing some of the effects of lower investment.

Moreover, the role of personal saving in providing for retirement has been

dwarfed by other fortuitous circumstances in the case of current retirees. The

parents' generation did not create their bountiful retirement outcomes through

diligent saving.^' Bosworth, Burtless, and Sabelhaus (1989) show that the decline

in U.S. personal saving in the mid 1980s occurred because the group of people

approaching retirement saved less than half of what their parents had saved at

the same point in life in earlier decades. The need to save was substantially

mitigated by unexpected capital gains in housing and by net intergenerational

transfers. These transfers occurred explicitly through expanded Medicare and

Social Security benefits and implicitly through government deficits. Government

policies that expanded tax preferences for retirement saving subsidized some part

of the saving that remained.

Predicting retirement outcomes for the baby boomers is very difficult because

it is too early to know what trends will most affect future well-being. Thirty years

or so remain before the middle boomers will enter retirement, and a lot will

happen between now and then. [Imagine, in 1960, having predicted retirement

outcomes for the parent cohort in 1990!] The two economic factors which dominate the retirement well-being of the parents' cohort—bountiful generational

transfers and copious returns to wealth—could never have been forecast.

But the fact remains that baby boomers are unlikely to get windfalls similar to

those of their parents. Moreover, baby boomers face a number of new challenges,

ranging from the possibility of lower benefits or higher taxes for Social Security

and other government programs to the strains on families created by the increased

incidence of two-earner couples. Should these factors be taken as evidence that

the outlook for future retirees is bleak? Boomers are behaving the way their

parents did before their elders learned about the windfalls from housing and Social

Security, so it seems wrong to assume they will follow in their parents' footsteps

the rest of the way towards retirement if we expect them to be confronted by

different economic circumstances. How baby boomers respond to the changing

24. Whether the increase in saving Is significant depends on whether housing wealth is included in total

wealth. When housing wealth is excluded from total wealth, Bernheim finds that baby boomers are

saving only 34 percent as much as they should if they wish to maintain the same level of consumption

after retirement as before. Including housing wealth raises that percentage to 84 percent.

25. Several indications of considerable well-being of current retirees can be found. Rates of labor force

participation for males ages 55 to 64 have dropped nearly 20 percentage points over the last few decades.

Older people are not obtaining additional leisure with foregone consumption since expenditures for

people over 55 have increased faster than for any other age group.
804 The Journal of Human Resources

economic circumstances that will shape the future will provide many opportunities for interesting and informative research.

Data Appendix

The data used in this paper come from six public-use survey data sets covering

income, expenditures, and wealth for each of the two time periods. The income

data come from the 1960 Decennial Census file and the March 1990 Current

Population Survey (CPS). The expenditure data come from the 1960-61 and

1988-89 Consumer Expenditure Surveys (CEX). Finally, the wealth data come

from the 1962-63 Survey of Financial Characteristics of Consumers (SFCC) and

the 1989 Survey of Consumer Finances (SCF). The sample sizes for the 25-to-44

age groups we focus on are shown in Table Al.^*

All values are converted to 1989 dollars using the consumption (PCE) deflator

in the national income and product accounts. Household weights are adjusted for

the number of adults. Quintile breaks are set to preserve equal numbers of adults

in each group. The 1988-89 CEX differs from the 1960-61 CEX in that households

are interviewed over four consecutive quarters, rather than at one sitting as in the

earlier surveys. To construct annual records which are conceptually equivalent to

the 1960s data, we matched the four quarterly interviews for a household, then

adjusted the sample weights (by age and homeownership group as in the original

CEX stratification adjustment) to reflect attrition for those who did not complete

the survey. The households in the 1980s CEX can start and finish in any of the

four calendar quarters. Any household with data that pertain to 1989 is included

in our sample.

All of the measures except income (Tables 1 and 2) used data from two or

more data sets in each period. Consumption levels (Tables 3 and 4) are constructed using nonhousing expenditures in the CEX data sets and value of owned

home (multiplied by the space rent factor) in the SCF data sets. For example,

average per household consumption for all parents in 1960 ($25,405) is the sum

of nonhousing expenditures per household in the CEX ($23,535) and the space

rent factor (.06) times the average value of owned homes in the SCF ($31,165).

The wealth-to-income ratios (Table 5) use income data from the Census and CPS

in the denominator and wealth data from the SCFs in the numerator. The ratios

of wealth to consumption (Table 6) use the same CEX/SCF combination described for consumption levels (Tables 3 and 4) for denominators, and wealth

comes from the SFCC/SCF.

We used the bootstrap technique to infer statistical significance for the differences between parent and baby boomer values. Bootstrap standard errors for

each value were estimated using 1,000 replicates. In the case of average incomes

where a sample standard deviation could be calculated, we checked that bootstrap

estimates were consistent. The same approach was then used in the cases where

26. The sample sizes across quintile breaks are not shown because they vary by type of adjustment

(e.g.. per adult or per household). As expected, the sample sizes across the three income cells in each

row are roughly 20 percent, 60 percent, and 20 percent of the total.
John Sabelhaus and Joyce Manchester 805

Table Al

Sample Sizes across the Six Data Sets and Subgroups

Data Set/Subgroup

Incomes (1960 Census, 1989 CPS)

All households, head age 25 to 44

Head age 25 to 34

Head age 35 to 44

Married head

Single head

Expenditures (1962-63 and 1988-89 CEX)

All households, head age 25 to 44

Head age 25 to 34

Head age 35 to 44

Married head

Single head

Wealth (1962-63 and 1989 SCF)

All households, head age 25 to 44

Head age 25 to 34

Head age 35 to 44

Married head

Single head

Parents

(1960-63 Data)

21,471

9,708

11,763

18,263

3,208

5,525

2,449

3,076

4,788

737

884

362

522

760

124

Boomers

(1989 Data)

26,372

12,768

13,604

15,564

10,808

2,651

1,304

1,347

1,587

1,064

1,137

452

685

798

339

we could not construct a sample standard deviation. Consumption, for example,

required draws from the data sets on both expenditure and wealth (to obtain

housing values).

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