Between the inevitabilities of death and taxes one would like to hope there’s room for a comfortable, perhaps a long, retirement. Alas, the data on that possibility is rather depressing for an awful lot of Americans. For example, the Economic Policy Institute notes that the average savings for all U.S. families is just $95,776. Even that figure exaggerates the broader health of retirement savings because some high savers skew the figures; the median savings of families with retirement savings is $60,000 and for all families is just $5,000.
Such figures are all the more striking when you consider the rapid aging of the population. In 1990, those 55 and older represented 25.5 percent of the U.S. population. Today that figure is 34.7 percent and by 2030 will rise to 36.7 percent. The median age of the U.S. was 37.8 in 2015. By 2030, it will climb to 39.3 and to 42 by 2045 per Census Bureau projections.
These off-putting statistics go hand in hand with an economic stress that warrants more attention than it gets. The bottom line is that an aging population tends to consume less than the younger cohorts. What this means is that overall consumption (especially of discretionary non-necessities) is likely to moderate as the population gets older. Given the state of the retirement accounts one hopes that given the opportunity they will save more, too. That will be an increasingly attractive option if interest rates inch higher and a vital one if politicians change Social Security or Medicare rules. Presumably changes won’t be to boost payments to retirees, but rather means testing large co-payments, perhaps extending the age of eligibility.
The fact that older people tend to spend less, especially on discretionary items, makes sense. By the time they’re in their 50s they’ve bought homes, furnished them, probably have their kids out of the house and on their own, and basically have accumulated all the goods they need. The spending uptick starts with the 23-34 year cohort as they start their journey to household formation and peaks for the 45-54 year cohort steadily declining into the ensuing years.
According to the Bureau of Labor Statistics, total annual average expenditures come to about $65,000 for the 35-44 age cohort and represents 93 percent of the overall average expenditures. That rises to near $70,000 for the 45-54 group for 125 percent of the average, then drops sharply thereafter. The 75+ cohort is spending just 68 percent of the overall average expenditure. (Retailers take note.)
Two related items come to mind when looking at this. First, when you think about the potential for lower taxes in the Trump Administration know that the wealthy tend to save it. It’s the middle and lower classes that spend most of their income. Though with higher medical costs post Obamacare there might be less to spend on "things." "Things," in this context, tend to help the economy. Second, in September Liberty Street Economics (i.e. the New York Federal Reserve Bank economic blog) wrote an article titled, “U.S. Real Wage Growth: Slowing Down With Age.”
To wit, the post showed there’s a life-cycle pattern to real wage gains such that it’s high early in a career, shows little to no growth by mid-career, and negative (yes, negative) gains as workers near retirement. To this the authors noted (as if it needed to be said) that “a growing fraction of the U.S. adult population is transitioning into the flat to negative real growth phase of their careers.” This is all more fodder for the point I made above that the aging population will spend less with the various bits of research advising that they have less to spend to start with and are earning less as they postpone retirement. Early-bird dinners never looked so appetizing.
This article originally appeared in Barron’s.
David Ader is the Chief Macro Economist with Informa Financial Intelligence.
