Why baby boomers will need to work longer
Most US baby boomers are not prepared for their retirement, and neither are the US and world economies. Boomers can help mitigate the consequences by remaining in the workforce beyond the traditional retirement age.
The twilight of the US baby boom generation is approaching, and with it deep, structural economic shifts whose impact will be felt for decades to come.1New research from the McKinsey Global Institute (MGI) shows that there is only one realistic way to prevent aging boomers from experiencing a significant decline in their living standards and becoming a multidecade drag on US and world economic growth. Boomers will have to continue working beyond the traditional retirement age, and that will require important changes in public policy, business practices, and personal behavior. These adjustments have become even more urgent with the recent financial turmoil, which has sharply reduced the home values and financial investments of millions of boomers just as they approach retirement.
Underlying the need for change is a reversal of trends that have been in operation since the 1960s. For decades, boomers swelled the ranks of the US labor force, driving up economic output as they earned and consumed more than any other generation in history. Now, as the boomers age and retire, US labor force participation rates are declining. Without an unexpected burst of productivity growth or a significant upsurge in investment per worker, the aging boomers’ reduced levels of working and spending will slow the real growth of the US GDP from an average of 3.2 percent a year since 1965 to about 2.4 percent over the next three decades. That long-term growth rate is 25 percent lower than the one the United States and the world have long taken for granted.
MGI research highlights a further problem: two-thirds of the oldest boomers are financially unprepared for retirement, and many are not even aware of their predicament.2 This lack of sufficient resources will not only mean a less comfortable retirement for tens of millions of households but also depress spending in the overall economy.
Yet the boomers’ retirement need not be such a major dislocation. We estimate that a two-year increase in the median retirement age over the next decade would add almost $13 trillion to real US GDP during the next 30 years while cutting roughly in half the number of boomers who would be financially unprepared for retirement.
Our research shows that many boomers actually do want to continue working. Nonetheless, a number of institutional and legal barriers—health care costs, labor laws, pension regulations, and corporate attitudes toward older workers—could prevent them from prolonging their careers. Overcoming these barriers will require the government to reallocate health insurance costs for older workers, businesses and boomers to agree on more flexible work arrangements, policy makers to reform private pensions, and Social Security to remove disincentives to remaining in the workforce.
We reached these conclusions by combining three complementary research methods. First, MGI surveyed 5,100 households with members aged 50 to 70 to better understand and compare the attitudes of boomers and members of the previous (“silent”) generation toward aging, retirement, saving, consumption, and work. Second, we assembled a comprehensive database of boomer household finances and collected similar data for the preceding and following generations. Third, we used the survey and the database to build an economic model that projects boomer household finances through 2035 and to study how their evolution would affect the wider economy. (For details on the research methodology and results, see “Talkin’ ’bout my generation: The economic impact of aging US baby boomers.”)
Last year, MGI and our colleagues in McKinsey’s marketing practice drew on this research to show business leaders how they should prepare for the changing needs of older boomers.3 In this article, we examine the implications for the living standards of boomer households and for the economy as a whole.
One-time factors that boosted boomers’ incomes
The basic facts about the baby boomers are well known. This age cohort (79 million strong) ranks as the richest in US history; is 50 percent larger than the silent generation, which preceded it; and represented, at the time of its birth, a larger share of the US population than the succeeding cohorts (Generation X and the Millennials) did at the time of theirs.4
Far less well understood are the reasons for this generation’s economic success. Boomers have collectively earned more than twice as much as members of the silent generation did at the same age—$3.7 trillion versus $1.6 trillion. Our research shows that 80 percent of the difference resulted from three factors quite specific to the boomers. (The remaining 20 percent reflected economic growth from which the boomers benefited as much as other generations did over their working lives.)
The first exceptional source of these income gains was the boomer cohort’s sheer size, which raised output and growth rates. Second, the boomers lived quite differently from the way previous generations did. As women poured into the workplace and social mores changed, boomers married and had children later, as well as divorced and remained single at higher rates. These changes in turn raised the number of households and therefore the number of wage earners relative to the total population. Third, boomers had higher returns to both education and work at a time when the labor force was shifting from industrial to service and knowledge jobs. In particular, the boomers’ higher levels of education enabled them to capitalize over the course of their careers—to a degree greater than other generations did—on economic changes stemming from productivity growth, technological innovation, and globalization.
In all likelihood, the factors driving the boomers’ exceptional income growth won’t recur. Subsequent generations, though large in numbers, represent a smaller share of the total population; the size of households has stabilized; and gains in educational attainment and the workforce participation rates of women have largely topped out.