THE BABY BOOM generation -- the roughly 76 million people born between 1946 and 1964 -- has been reshaping American society for five decades. From jamming the nation's schools in the 1950s and 1960s to crowding labor markets and housing markets in the 1970s and 1980s to affecting consumption patterns almost continuously, boomers have altered economic patterns and institutions at each stage of their lives. Now that the leading edge of the generation has turned 50, the impending collision between the boomers and the nation's retirement system is naturally catching the eye of policy-makers and the boomers themselves.
Retirement income security in the United States has traditionally been based on the so-called three-legged stool: Social Security, private pensions and other personal saving. Since World War II the system has served the elderly well: The poverty rate among elderly households fell from 35 percent in 1959 to 11 percent in 1995.
But the future is uncertain. Partly because of the demographic bulge created by the baby boomers, Social Security faces a long-term imbalance. The solution, even if it involves privatization, must in some way cut benefits or raise taxes. The private pension system has changed dramatically in ways that give workers increased discretion over participation in contribution and investment decisions and easier access to pension funds before retirement -- thus raising questions about how well future pensions can help finance retirement. Personal saving, also problematic, has remained anemic for more than a decade. Net personal saving other than pensions has virtually disappeared.
The developments would be enough to raise concern about retirement preparations under the best of circumstances. But the pros-pect of a huge generation unprepared for retirement raises worrisome questions about the living standards of the baby boomers in retirement, the concomitant pressure on government policies and the stability of the nation's retirement system.
Are the baby boomers making adequate preparation for retirement? In part, the answer depends on what is meant by "adequate." One definition is to have enough resources to maintain pre-retirement living standards in retirement. A rule of thumb often used by financial planners is that retirees should be able to meet this goal by replacing 60 percent to 80 percent of their pre-retirement income. Retired households can maintain their pre-retirement standard of living with less income because they have more leisure time, fewer household members and lower expenses. Taxes are lower because retirees escape payroll taxes, and the income tax is progressive. And mortgages have, for the most part, been paid off. On the other hand, older households might face higher and more uncertain medical expenses, even though they are covered by Medicare.
From a public policy perspective, assuring that retirees maintain 100 percent of pre-retirement living standards might be over ambitious. But should policy makers aim to ensure that they maintain 90 percent of their living standards? Or that they stay out of poverty? Or use some other criterion? Retirement planning takes time, and these issues need to be addressed sooner rather than later.
A second big question is how to measure how well baby boomers are preparing for retirement. Studies that focus only on personal saving put aside for retirement yield bleak conclusions. One found that in 1991 the median household headed by someone age 65 to 69 had financial assets of only $14,000. But expanding the measure to include Social Security, pensions, housing and other wealth boosts median wealth to about $270,000.
A third issue -- crucial but as yet little explored -- is which baby boomers are not providing adequately for retirement and how big the gap is between what they have and what they should have. Some boomers are doing extremely well, others quite poorly. Summary averages for an entire generation might not be useful because, as a society, we as yet understand little about the dynamics of retirement. Only one or two generations of Americans have had lengthy retirements, and the crucial retirement issues -- health care, asset markets, Social Security, life span -- keep changing rapidly, making long-term predictions even harder.