Coming Boomer pension cuts: what impact on economy?

Overall, the report found that more than twice as many Boomers would lose income than would gain by accelerating the shift from defined benefit pensions, with the biggest losses concentrated among the middle class and Boomers currently in their late 40s and early 50s. Such gains as there would be in retirement income, the government researchers found, would offset only six percent of the losses.

And the study may even have underestimated the impact of adopting the proposals of those who are at war with defined benefit plans. The report modeled the impact of freezing such plans for only a third of state and local government workers; defined benefit critics ultimately would like to do away with guaranteed pensions for all public workers.

Remarkably, the report disappeared into a media and public policy-making void. Not a single newspaper covered the report’s projections and, according to Nexis, the news database, they have never come up in public hearings or testimony debating the future of defined pension benefits.

Drawing on more than 100,000 employee records, the report makes its forecast based on the premise that current participants in defined benefit plans would collect benefits based on their previous service, but would not accumulate additional benefits. Based on past practice, the model also assumes that employers would shift their contributions to 401(k) plans. (The assumption may or may not hold entirely true, given that the aim of cutting retirement guarantees is largely to save money.)

With 50 to 56 percent of Boomers not in line to receive defined benefit pensions — in part, a result of the abandonment of defined benefit pensions that has already occurred in the private sector — the report found that many Boomer retirees would be unaffected by the changes envisioned in the model. But among those who do receive such pensions, the changes would be substantial. The report broke its findings down by four waves of Boomers, from the eldest, born just after World War II, to the youngest, born in 1964. In each wave, there would be more losers than winners, with the repercussions for the youngest Boomers most severe: 26 percent of them would lose an average of $4,200 in retirement income, while 11 percent would see their incomes rise by an average of $2,800.

Taking the Social Security Administration report, and then drawing on census data to calculate the aggregate net impact on each cohort of Boomers, it appears that the net loss would be $2.9 billion a year among the oldest Boomers, $10.4 billion a year among the group that will turn 67 starting in 2018, $17.1 billion a year for those retiring around 2023, and $17.8 billion for those retiring between 2028 and 2032.

Allowing for deaths as the population ages, Gary Burtless, an economist at the Brookings Institution who helped develop the mathematical model used in the pension study, suggested a graduated formula for calculating the accumulated impact once all Boomers have retired. The result: a net decline in retirement income among Boomers, in 2010 dollars, of roughly $46.3 billion a year once all Boomers have retired.

That scale of loss, said Rodrigue Tremblay, an economist who has written widely of the risk of “stagflation,” would weaken the larger economy.

“Because Boomers represent some 75 million consumers, any spending cut by this group will have a profound impact on the overall economy,” Tremblay said. “This could precipitate a vicious cycle of slow growth, with fewer jobs for the young.” Boomers would not only retire with less disposable income, but — anticipating a less secure retirement — would spend less in the years leading up to retirement.

“Such a shift in pension plans represents, and will represent even more so in the future, a tremendous shift of investment risk from employers to retirees, and will negatively influence the macro economy,” Tremblay said, as retirees “spend less and save more to compensate for lower incomes and for a greater expected volatility in their income flows.”

Some of the impact might be felt from decisions made by those higher up on the income scale, where losses would be steepest, at $4,600 to $8,000 a year per household. Pam Danziger, president of Unity Marketing, whose clients sell to affluent consumers, warns of a coming “luxury drought” as Boomers leave their peak spending years, winding down into retirement with their confidence shaken, and their share of disposable income weakened from all sides.

But the impact of shaving thousands of dollars off the incomes of Boomer households would be felt beyond the purveyors of $3,000 handbags, said Tremblay, emeritus economics professor at the University of Montreal. Among some, that would mean putting off purchases that are not absolutely essential, eating out less, keeping cars longer and traveling closer to home, if at all.

From the point of view of what public policy makes sense, of course, the Social Security report has to be understood as capturing only part of the shift that has occurred since the 1980s. Over the last 25 years, the share of private sector workers covered by defined benefit plans has fallen by half (from 38 percent to 18 percent). The Social Security report made no comparison between projected retirement income had those cuts not occurred and the end point of 2032, but rather treated all of the shift that has already occurred away from defined benefit plans as not constituting “loss” for Boomer retirees. (A 2008 report by the Center for Retirement Research at Boston University has calculated that the typical middle class household lost about 10 percent of retirement income between 1992 and 2004, attributing the loss to the disappearance of defined benefit pensions.)

Scott Hoyt, senior director of consumer economics at Moody’s Analytics, offered a different assessment of the projected decline in disposable income derived from the Social Security report. He said the impact of a $46.3 billion loss — which amounts to just under one percent of all consumer expenditures on domestic and imported goods and services — would be complex to gauge, since a dollar taken from seniors in retirement benefits will likely be a gain elsewhere in the economy. But, that doesn’t mean there is no net impact.

“You give money to a retired person, it’s more likely to get spent than if it goes into corporate profits and is paid out to investors over time,” Hoyt said. “So it probably does have a bigger impact on consumer spending if the money stays with retirees.”