Boomer retirees are safe but will cost later generations

By Kristi Keck
CNN

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(CNN) -- The more than 78 million baby boomers approaching retirement face a financial landscape that offers reasons for hope, but the generations following them have reasons to worry.

There are signs of trouble on the horizon: Retirement costs are going up as life expectancy increases; the long-term solvency of Social Security is in question; traditional pension plans are disappearing; and the national savings rate has been negative since early 2005.

Yet, real estate and private retirement plans -- for those who have access to them -- give many people solid investment options.

Baby boomers -- the post-World War II generation born between 1946 and 1964 -- make up about 29 percent of the population, according to the U.S. Census Bureau. They are turning 60 at a rate of 330 per hour this year and constitute the bulk of impending retirements.

"Generally speaking, they are in pretty good shape," said Edward Wolff, an economics professor at New York University. "Pretty good shape" means a person can replace 75 percent of their pre-retirement income, which about three-quarters of impending retirees can do, Wolff said.

Other analysts, however, suggest the number of people who are prepared is more in the neighborhood of 50 percent. For the rest of the population, the golden years look lackluster.

The state of Social Security

The possible insolvency of Social Security is not going to affect baby boomers or current retirees, economists said.

Social Security accounts for 40 percent of the average income for Americans 65 and older. For those in the lowest income quartile, the number jumps to more than 90 percent, according to the Employee Benefit Research Institute.

Social Security will see cost increases with the retirement of baby boomers because more people will be using the program, but that's been planned for, said Christian Weller, a senior economist with the Center for American Progress, a non-partisan think tank.

The next round of retirees, however, face an uncertain future. Tax revenues are expected to fall below program costs in 2017 and the trust funds will be exhausted by 2040, according to the 2006 Trustees Report.

Without reform, those who retire in 35 years could see a benefit reduction of 26 percent, with cuts each year after, the report said.

Additionally, there might not be enough workers to cover future costs of benefits because the birth rate is shrinking. In 1950, there were 16.5 workers for each beneficiary, the report said. Today, the ratio is 3.3 workers for each beneficiary. In 40 years, that ratio will fall to 2-for-1.

Some reform proposals include raising the retirement age, raising payroll taxes, reducing benefits and allowing younger workers to divert Social Security into private savings accounts.

Pension pinching

Meanwhile, the traditional pension plan with defined benefits is disappearing. "My guess is that 15 or 20 years from now about the only sector that will have these plans left is the public sector," Wolff said.

Bankruptcy proceedings have reduced or terminated plans from industries such as steel and airlines during the past 30 years. Concerns have also risen over companies not funding pension plans adequately or freezing them when financial trouble arrives.

President Bush signed the Pension Protection Act of 2006 into law this August with hopes that it would force companies to better fund their plans.

Retirement plans are trending more toward individual retirement and 401(k) accounts, in which employees make contributions and employers match them. The contributions are then placed in a variety of investments including stocks and bonds.

Currently, about 58 percent of retirement assets are in defined contribution plans, leaving 42 percent in traditional pensions. Ten years ago, 52 percent of retirement assets were in the traditional defined benefit plans and 48 percent were in contribution plans.

The risk with contribution plans is it is "up to the employee to put money away and to invest it wisely and to hopefully make a good rate of return," Wolff said.

However, more than half of the population does not have access to any kind of pension -- whether it's a traditional one or the contribution plans -- according to Keith Bender, an economist and an associate professor at the University of Wisconsin-Milwaukee.

Re-evaluating real estate

Current and soon-to-be retirees have one thing going for them -- the housing boom of the late 1990s, which raised real estate values.

Nearly eight in 10 boomers own their homes and almost nine in 10 have owned a home at some time, according to a recent study by the National Association of Realtors.

More than 80 percent of people 65 and older are homeowners, according to Wolff's research.

"The increased value of their homes in principle provides them with the option [of] taking out home equity loans against the value of their property," Wolff, the NYU professor, said.

But home equity can create a false sense of security. "You can't sell off the shingles of your house and then the bathroom ... because you need to pay the rent or you need to pay health insurance or you need to pay for living expenses," said Weller, the economist at the Center for American Progress.

The savings issue

The biggest problem facing the next round of retirees might be a lack of savings. The retiring class of 2001 was as prepared as anyone could expect, Weller said. "From there on, I think it's only been downhill," he said.

A person who works for 40 years needs to store up about 12 percent each year. With a collective negative savings rate, Americans are clearly not there.

"We are in a very, very big hole and it will take some time to get out of that hole," Weller said. "I think working within the confines of a voluntary system -- my best guess is that we won't see many improvements."

In the larger view, it's a glass-half-full, glass-half-empty scenario in Bender's opinion. There are going to be plenty of people who have no problems going into retirement, he said.

But, he added, "There's going to be a significant number of people that just haven't had the opportunity or the ability to be able to save in the right ways."