Baby Boomers Stuck in the Middle

Unprepared Baby Boomers face a bleak decision as they enter their mid-60s—work beyond the traditional retirement age or risk running out of money down the line.

Orlando Ashford, president of the Talent business at Mercer, says it’s becoming increasingly common to see retirees attempt to rejoin the work force due to the prospect of depleting previously accumulated assets. In a recent analysis from Mercer on the “four generations at work,” Ashford suggests the United States’ economy-wide shift in career and retirement savings arrangements is having the greatest impact on the generation of workers born between 1946 and 1964, widely known as the Baby Boomers.

Put simply, many Boomers are stuck between the fading defined benefit-dominated retirement system and the still-developing defined contribution system. Entering the later stages of their working lives, Boomers have spent long portions of their careers under the defined benefit (DB) paradigm—and while many Boomers expect to receive some lifetime pension benefits from a current or former employer, many are not saving enough in supplementary defined contribution (DC) accounts to adequately supplement future income streams.

Mercer’s research suggests Baby Boomers are also stuck between the need to save for their own retirement and other pressing daily financial concerns—especially the need to support both children and elderly parents. Other primary challenges facing Baby Boomers include lingering recessionary impacts, lengthening lifespans, and increasing health care expenses, according to Mercer.

“Boomers are moving from the age of dependence and support, whether it was government support or corporate support, into an era of individual accountability,” Ashford says. The combined force of these pressures makes taking charge of retirement savings quite a challenge for Boomers, he adds (see “Personal Accountability in a DC World”).

“The implications for employers are quite fascinating,” Ashford says. “How are you going to help retirees re-enter a changing work force? How are you going to manage people in their second or third career, while engaging people who are in their first career at the same time?”

The Mercer analysis suggests these pressures are already reshaping retirement for the modern individual. Retirement is no longer necessarily a one-time event for many workers, as it once was for earlier generations. More workers, especially Boomers, will continue to work part-time or attempt to re-enter the work force after a short break, Mercer says, making retirement a phase, not a single date.

Shams Talib, a senior partner and leader of Mercer’s retirement business in North America, says Baby Boomers are not oblivious to the challenges they face. Many are feeling financially vulnerable and insecure about retirement, he tells PLANADVISER, and their worries are playing out against the background of mounting funding challenges for Social Security.

Most Boomers are planning to rely at least in part on supplemental retirement income from the federal government, Talib explains. But whereas younger generations have time to prepare for any cutbacks in promised Social Security benefits, late-career workers would find it more difficult to replace anticipated income without delaying retirement.

Indeed, Tablib predicts the aging of the Baby Boomer population will bring a lot of long-standing predictions about the potential shortcomings on the DC retirement system to a renewed public focus. He points to the 2014 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), which shows nearly a quarter of workers age 55 and over have saved less than $1,000 for retirement. A third of this same age group thinks an individual can retire comfortably on less than $250,000 in savings. (According to Fidelity Benefits Consulting research, a 65-year-old couple retiring this year will need an average of $220,000 in today’s dollars to cover medical expenses alone throughout retirement.)

“This issue is starting to have some interesting consequences on the broader work force,” Talib says. “If senior employees can’t afford to retire, it creates increasing frustration in the work force, resulting in a lack of focus and lost productivity among younger workers who feel their advancement opportunities are limited.”

What’s more, those born in the later part of the Baby Boomer generation are not assured to get Social Security payments, Mercer says. The sheer size of the Baby Boomer generation threatens the viability of the federal safety net program. Mercer cites the U.S. Census Bureau to suggest there will be 84 million people in the 65-and-older age category by 2050—meaning nearly double the number of people could be drawing benefits from Social Security than do so today (see “It Is Difficult to Factor Social Security into Retirement Planning”).

“This generation is still expecting to get Social Security,” Talib says. “The nuance is the eligibility will change. So they may have to wait longer before they can get it, if at all.”

Even in the face of these obstacles, plan sponsors and advisers have the opportunity to maximize employee productivity and give employers a recruiting edge through superior benefits offerings, Mercer says. For example, taking a proactive stance to help Baby Boomers make informed caregiving decisions regarding an elderly parent could have a positive residual impact on an entire work force, the analysis suggests.

Mercer cites a recent report from the National Alliance for Caregiving to show employees with elder care responsibilities are more likely to report missed days of work. The same study suggests there’s an 8% differential in increased health care costs between caregiving and non-caregiving employees. When extrapolated to the overall business sector, this increased health care bill would cost U.S. employers an estimated $13.4 billion per year, Mercer says.

Employees providing elder care—most of them are Baby Boomers, Mercer says—were significantly more likely to report depression, diabetes, hypertension, or pulmonary disease. In addition, these employees were more likely to report negative influences of personal life on their work.

Offering some sort of elder care support or education could help mitigate some of these effects, Talib says. Other challenges may require other tools. For instance, if the plan participants cite the challenges of funding a child’s college costs, the plan officials could look into establishing a supplementary 529 college savings plan to bring more formality to Boomers’ efforts to save for their kids’ college expenses.

“One of the main goals of the sponsor and adviser has to be building a sense of personal accountability among the Baby Boomer employees, and indeed among all generations,” Talib adds. “The challenge of plan sponsors and advisers is a little different for older generations. They need to build an immediate focus on retirement income adequacy and preparedness for health care in retirement.”