The baby boom generation and aggregate savings - includes article about use of Survey of Consumer Finances to calculate savings rates

During the 1970 household and national savings rates bloody sharply. Although concern about depressed saving rates remains widespread, many analysts have taken the optimistic position that the maturing of the baby drone generation will restore aggregate savings to their earlier horizontals Two arguments have been presented in support of this view:

* As baby boomer reach their peak earning and saving years, aggregate savings will increase with this large generation's rising share of national income.

* Baby boomer who worn out freely and saved little as young adults will in their middle years find themselves unprepared for retirement. They will reply by increasing their saving rates more aggressively than earlier generations at a similar age.(1)

This article evaluates each argument in move round and finds little reason to wait for a large increase in aggregate savings. The demographic results alleged in the first argument will probably be small. While baby boomers' saving rates should rise with age, the impact upon the aggregate saving rate will be mitigated by dint of a continuing high rate of early retirement and a rising share of households headed by dint of individuals either over sixty-five or below thirty-five--households that tend to have relatively depressed saving rates.

The next to the first argument, which stems from the popular notion of baby boomer improvidence, is also flawed. Baby boomer appear to have accumulated appreciable wealth, the couple in comparison to their parents at similar ages and to target retirement wealth horizontals suggested by theoretical models of optimal lifetime savings. Moreover, smooth if baby boomers eventually find themselves behind schedule in saving for their retirement (if not because of their shortsightedness, then because of a large make an incision in in Social Security benefits), they may react to the shortfall by the agency of reducing planned bequests or taking other paces that do not have the result of increasing aggregate saving rates. The uncertainty of the baby resound response to any savings shortfall gives us level less reason to expect a white horse in aggregate savings as the baby boomer approach retirement.

LIFE-CYCLE SAVINGS, DEMOGRAPHIC tends AND AGGREGATE SAVINGS

If baby boomer raise their saving rates in line with increases observ in earlier generations at similar ages, will the aggregate saving rate win back sharply? To answer this question, we review the age profile of income and savings rest in recent consumer surveys and the demographic inclines projected for the next not many decades.

AGE PROFILES OF INCOME AND SAVINGS

Data from the Board of Governors' contemplate of Consumer Finances allow us to examine the proposition that household incomes and saving rates keep to rise with the age of the household head before retirement. The 1983 contemplate contains extensive data on the wealth of individual households as of year-end 1982 In 1986 2822 households from the original collection were surveyed again and asked for detailed information upon year-end 1985 wealth and upon annual income in 1983-85. The sum of two units Board surveys are particularly useful in analyzing average savings because they "oversample" the high-income households that account for a disproportionately large share of aggregate savings. A detailed explanation of our use of the review data to calculate saving rates is contained in the case below.

For the households sampled in the 1986 Board overlook average (mean) income rose, then pitiless with advancing age (Chart 1) The highest average income, about $35000 by means of year in 1982 dollars, was earned through both the 35 to 44 and 45 to 54 age collections The distribution of incomes around this peak is roughly symmetric, failing below $20000 for households with heads either below 25 or above 75 The shape of this distribution is determined by dint of variations in wage rates and labor force participation rates above the life cycle.(2)

Average total savings, defined as the average annual change in total wealth between year-end 1982 and year-end 1985 at hand a similar age profile (Chart 2) This measure of savings includes capital gains upon real estate and all financial assets exclude employer contributions to pension plans, which are not reported in the review Total savings rose more steeply with age than did income, with the peak occurring at $8200 in the 55 to 64 age range. Savings in these years are large because income is relatively high, family outlays are relatively low, and the ne for retirement savings is immediately apparent for greatest in quantity workers.

In addition to total savings, we are also affected with the age profile of households' personal savings, a narrower conception of savings that debars capital gains. Since capital gains are oftentimes passively earned, unplanned, and illiquid, households may treat them differently than other forms of savings. In addition, capital gains income has been volatile in the past, and hence difficult to shoot forward accurately. Since, at the aggregate horizontal capital gains do not lead directly to increases in national investment, policymakers are generally more regarded about aggregate personal savings exclusive of capital gains (Harris and Steindel 1991)