RETIREMENT FUNDING OUTLOOK: PERSPECTIVES ON THE "SILVER TSUNAMI"
March 15, 2024
What’s not to like about the current US economy? Major equity indices are at an all-time high; inflation continues to fall; and 3.9% unemployment remains well below its 5.7% long-term average. Of course, these metrics are just a snapshot of today and not a guarantee of future outcomes.
To evaluate longer-term trends, one might begin with Auguste Comte’s statement that “Demography is destiny”. Comte, a 19th Century French academician, believed that a nation’s fate depended upon the youthfulness of its population. How would the US fare if measured by this statement?
As shown by the graphic below, US youthfulness is diminishing, with the age 65+ cohort forecast to rise from 11.3% of the 1980 population to 20.4% in 2040. In turn, the age 0-19 cohort will fall from 31.9% to 25.9%. By 2029 the Census Bureau projects that the 71 million adults age 65+ will outnumber the 69 million children aged 0-17. This population shift has been labeled the “Silver Tsunami”.
In this report, The Mather Group LLC (TMG) will evaluate this demographic outlook; potential retirement funding sources for a growing cohort of seniors; and public policy challenges to the Social Security program.
Demographic Outlook
The projected increase in the age 65+ cohort is a result of two principal demographic factors. As shown in the table below, the first factor is a continued increase in life expectancy. In 1960, total US life expectancy was 69.7 years. By 2020, life expectancy (pre-Covid) had advanced by 7.6 years. The projected 100-year period ending 2060 shows a doubling in additional life expectancy from the 1960-2020 period.
Source: National Center for Health Statistics
There are several drivers of increased life expectancy. In healthcare, tools for better disease detection and enhanced therapeutic treatments continue to develop. Lifestyle changes, such as reduced smoking, dietary changes and increased physical activity, have all increased life expectancy. Finally, expanded healthcare coverage has broadened access to preventative care.
A second demographic factor increasing the 65+ cohort has been a drop in the US total fertility rate. This measures the number of expected births among females aged 15-44 during their lifetimes. In developed countries such as the US, a rate of 2.10 or higher—the so-called “Replacement Rate”—is thought necessary to prevent a decline in the overall population level.
As shown in the table below, after 1960 (the peak total fertility rate of the Baby Boom), the US total fertility rate has continued to decline below the Replacement Rate.
Source: Center for Disease Control and Prevention
Several reasons are offered for this decline, although the evidence supporting them is often more anecdotal than empirical. For example, the female workforce participation rate was 37.8% in 1960, rising to 51.5% in 1980 and 57.3% in 2023. The increased participation rate is often cited as a source of the total fertility rate’s decline. However, during this 62-year period, other significant factors such as contraception, delayed marriage and child-bearing, and a dramatic decline in teen births also occurred.
With fewer children born, a drop in the total fertility rate could cause the 65+ cohort to increase both in its numbers and share of the US population. As will be discussed later, this fertility rate decline could have a significant impact on the overall size of the US workforce, as well as its role as a funding source for Social Security.
Retirement Funding Sources
A longer lifespan requires sufficient funding to assure a satisfactory lifestyle in retirement. Other than continuing to work in retirement, there are at least three primary funding sources. These include retirement plans; home equity withdrawals; and inheritances. Social Security payments will be discussed later in this report.
As shown in the graphic below, the overall value of existing retirement plans is $37.8 trillion, allocated among defined contribution and defined benefit plans.
Note the significant differences in the asset classes held within each plan, especially IRAs. This suggests that differing investment horizons and risk tolerance levels may not always be supportive of achieving contributors’ retirement goals.
Of course, once an employee leaves the workforce, the opportunity to continue contributing to retirement plans ends. If the traditional retirement age of 65 does not change, then an increased lifespan means withdrawals from these plans will occur over a longer period.
A second source of potential retirement funding is the equity many homeowners have accumulated. As shown in the graphic below, The Federal Reserve Bank of St. Louis estimates that total home equity has reached $32.6 trillion, almost as much as all retirement plans combined.
During the 2014-2024 period, the Census Bureau estimates the share of mortgage-free homes in the US rose from 34% to 39%, unlocking further equity levels.
However, tapping into home equity is not without risk, as experienced during the Global Financial Crisis. From its peak of $14.2 trillion in 2006, home equity subsequently fell 42% to $8.2 trillion by 2012. Thus, careful planning may be necessary when considering using this funding source.
A final source of potential retirement funding may occur through inheritances, as shown in the graphic below. Although Cerulli Associates estimates that potential inheritances could total $72 trillion through 2045, the amount differs significantly within each generation. Baby Boomers, all of whom will have reached age 65 by 2030, appear to have far lower potential inheritances than later generational cohorts.
Source: Cerulli Associates
It is important to note that such wealth transfer projections have a significant level of uncertainty. Unforeseen events, such as a loss of employment or long-term illness, could diminish wealth levels quickly.
Public Policy Changes
Social Security marks its 87th birthday in 2024, having made its first payment in January 1937. In 2022, there were 70.6 million recipients of Social Security programs, at an annual cost of $1.24 trillion. This outflow resulted in a $22.1 billion deficit from program income received through payroll taxes. In 2023, this deficit increased to $53.2 billion, and the Social Security Fund fell to a level of $2.78 trillion. The Social Security Administration projects the Fund will be depleted by 2033.
There are two demographic forces which could challenge the level of future benefits. The first is the declining birth rate in the US. Social Security is a “pay-as-you-go” program, meaning that it collects taxes from current workers to support those in retirement.
As shown in the graphic below, the ratio of covered workers to retired beneficiaries has dropped from 8.5 in 1955 to just 2.8 in 2022, and this ratio is forecast to fall further to 2.3 in 2035. Thus, the annual deficit and depletion of the Fund may increase without significant program changes.
The second demographic force has been the increase in lifespans, both current and projected. Despite these increases, the full retirement age— based upon birthyear—has not changed since it was reset 41 years ago in 1983. For those born in 1960 or later, the full retirement age is 67.
However, in 1983 life expectancy was 74.4 years, or 4.7 years less than today’s 79.1 years. Thus, a retiree in 1983 at age 65 was projected to live an additional 9.4 years. Today, a retiree at 67 is projected to live an additional 12.1 years, or 14.1 years if retired at 65.
The choices among public policymakers and legislators to resolve these potential funding issues are not attractive. Either or both the current tax rate (6.20% for employers and employees) and maximum taxable earnings ($168,600 in 2024, adjusted annually by the national average wage index) may need to rise. In combination with these revenue increases, the full retirement age of 67 may need to change. Finally, recipients may be “means tested” in the future, adjusting payments downward or eliminating them entirely based upon household income.
When evaluating the complex question of when to begin receiving Social Security benefits, it may be important to seek additional counsel.
Conclusion
TMG recognizes the uncertainty which may occur when evaluating various aspects of retirement planning, and offers many resources to help reduce this uncertainty. TMG believes that clients who adhere to their financial plan maintain the strongest pathway through an evolving retirement planning process.
Your trusted advisor at TMG is ready to respond to any questions or concerns you might have, and to help ensure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance at any time.
Sources: Bloomberg; Bureau of Labor Statistics; Census Bureau; Center for Disease Control and Prevention; Cerulli Associates; Congressional Research Service; Federal Reserve Bank of St. Louis; Federal Reserve Board of Governors; Investment Company Institute; National Center for Health Statistics; Reuters; Social Security Administration; Statista; Wikipedia (biography of Auguste Comte); US Treasury; Wall Street Journal
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