Why is Retirement so Expensive?

Here is an interesting article by Pamela Villarreal concerning Boomers and retirement.  Having retired early, I can concur with many of her statements.  This is only the Executive Summary of the article.  You can read the complete article at: http://www.ncpa.org/pub/st341

 

How Are Baby Boomers Spending Their Money?

For a number of years now, retirement and financial experts have bemoaned the fact that baby boomers and others who should be thinking about retirement saving are nowhere near ready to retire. Some blame the failure of 401(k) and Individual Retirement Account (IRA) retirement plans to fill in the gaps left by elimination of corporate pensions. Others argue that American adults of all ages are simply not saving enough.

Using data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, it is possible to compare the preretirement spending habits of today’s middle-aged workers (45 to 54 years old) and today’s older workers (55 to 64 years old) with the spending habits of those age groups 20 years ago. What, if anything, changed over the past 20 years?  Real incomes for these age groups have not changed much. But the portion of disposable income households spent on certain categories of goods and services has increased.

Baby Boomers Are Spending More on Education. From 1990 to 2010, education expenditures increased the most — by 80 percentfor 45 to 54 year olds and 22 percent for 55 to 64 year olds. As with health care, the cost of a college education has grown faster than income for decades. Thus it is not surprising that a recent analysis by the New York Federal Reserve Bank found that one-third of the nation’s student loan debt is held by individuals over the age of 40.

Though some individuals choose to further their own education during midlife, it is likely that many baby boomers are helping their college-age children with college expenses and loan payments.

Baby Boomers Are Spending More on Adult Children. A recent survey from the National Endowment for Financial Education found that more than half of parents are helping to support their adult children. Among parents of 18-to-39 year-old children:1

Fifty-nine percent of parents are providing financial support to adult children who are no longer in school.

This support takes the form of living expenses (48 percent), transportation costs (41 percent), spending money (29 percent), medicals bills (28 percent) and paying back loans (16 percent).

Another survey found that two out of five parents have paid off debt for their adult children, including 29 percent who had paid off student loans for their children.2

Baby Boomers Are Spending More on Mortgage Debt. Housing, however, is typically the largest monthly consumer expenditure. Home mortgages comprise almost three-quarters of all consumer debt, and three-fourths of middle-aged and older workers’ households have mortgages. From 1990 to 2010 the share of expenditures on housing — including principal, mortgage interest, taxes, maintenance and insurance — for these age groups increased about 25 percent. For 55 to 64 year olds, nearly half of this increase was due to an increase in the interest portion of housing expenditures — even though mortgage interest rates have fallen over time. The portion of income they spend on mortgage interest increased 47 percent, from 4.3 percent to 6.3 percent.

Are baby boomers buying more home than they can afford or are prices for a basic home simply outpacing income growth?  The median house size has increased from 2,080 square feet in 1990 to 2,392 square feet in 2010. Since the mid-1990s, the Federal Housing Authority allowed more borrowers to qualify for loans with lower down payments. This action began a proliferation of loans that required little or no down payment. Furthermore, after 2000, home price growth outpaced income growth, peaking in 2004 and 2005. Home prices began falling dramatically by the end of 2008, but many households were underwater, owing more on their mortgages than their homes were worth.

Moreover, the average age of the first-time homebuyer increased from age 28 in 1985 to age 35 in 2011. As the age of the first time homebuyer increases, the probability that a household will carry a mortgage into its preretirement years also increases. In addition, due to the availability of home equity loans, many boomers who were previously close to paying off their homes could be refinancing or tapping into home equity. In fact, it is estimated that 15 percent of all baby boomers will not get out of debt in their lifetimes.

Baby Boomers Are Not Spending More on Entertainment. Contrary to some perceptions, baby boomers have not increased their spending on frills, such as entertainment or dining out. Indeed, their spending on some consumption categories fell from 1990 to 2010:

• Food purchases (including restaurant spending) fell 18 percent for 45 to 54 year olds and 20 percent for 55 to 64 year olds.
• Household furnishings fell nearly one-third for 45 to 54 year olds and one-fourth for 55 to 64 year olds.
• Clothing expenses showed the steepest decline, falling 42 percent for 45 to 54 year olds and 70 percent for 55 to 64 year olds.

 The decision to forgo present consumption for future retirement savings is a matter of individual choice. Contrary to the belief that the savings rate has been stagnant, or even declined, retirement accounts appear to be playing a larger role for baby boomers. However, retirement savings is nowhere near the 10 percent that is often recommended as the share of income that should be dedicated to savings.

Policy Recommendations

Saving for retirement is more than a public policy problem: it is a cultural issue. Public policies could be amended so that all forms of saving are tax-neutral (no preference for one investment over another), and consumption subsidies are eliminated. For instance:

• Reform the income tax system by applying lower, broad-based rates, coupled with the elimination of consumption subsidies, such as the home mortgage interest deduction, sales tax deduction, energy efficiency credits and so forth.
• Treat tax-deferred 401(k) and IRA plans equally; allow the same annual contribution limit to IRA plans as is allowed for 401(k) plans — the 2012 annual limit is $17,000.
• Treat investments equally by either taxing proceeds and interest at one low rate, or eliminate the tax altogether. This includes dividends, capital gains on housing purchases, stocks and mutual fund purchases, and earned interest on savings accounts.

Public policy changes alone cannot incentivize people to become better prepared for retirement, but government has a compelling interest in promoting saving behavior with tax reforms.

My "suggestion" is to do away with income tax altogether.  Tax consumption instead of income or savings.  Right now the government encourages consumption and discourages savings.  The less you consume, the more you save.   This would help the poor and the middle class (if there still is one).   A value-added tax or sales tax on non-essential purchases (exempting food, gas, medical, etc.) could be collected by the states and we could shutdown the IRS. :)

All Americans would pay this tax.  We would no longer have 50% of the population paying no taxes and voting for bigger government programs.  "When you rob Peter to pay Paul, you can always count on Paul's vote."  

Everyone would know how much of each dollar we spend goes to fund the government.  We would also see how limiting the size of government reduces that amount.  Thus, a return to our original Constitution and self-sufficiency.   Before income tax, Americans were able to accumulate real wealth and hand it over to the next generation.  We could do that again.