Baby Boomers Spending Less On Frills, Retirement Still At Risk
by Ashlea Ebeling
September 12, 2012
Baby boomers are spending less on frills than the prior generation but more on education, their adult children, and mortgage debt, putting their retirement at risk. That’s the conclusion of a study, How Are Baby Boomers Spending Their Money?” by Pamela Villarreal at the National Center for Policy Analysis. She parsed data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, comparing the spending habits of 45- to 64-year-olds in 1990 and 2010.
While Villarreal recognizes that the onus is on individuals to make the switch from spending to saving, she uses her findings to call for tax neutral policies on savings. One proposal: allowing folks to make the same annual contribution to an individual retirement account (now limited to $5,000, or $6,000 for those 50-plus) as is allowed to an employer-sponsored 401(k), which has a current annual limit of $17,000 or $22,500 for those 50-plus). Spend less; sock away more.
While real income for today’s pre-retirees and those from 20 years ago has not changed much, the portion of disposable income spent on certain things is changing, Villarreal found. Surprisingly, baby boomers are not spending more on frills. Food purchases, including eating out, household furnishings, and clothing expenditures all fell. Even transportation expenditures fell (gas went up as a share of transportation expenses but was offset by less spending on new cars and maintenance).
Education expenses increased the most of any spending category from 1990 to 2012—by 80 percent for 45- to 54-year-olds and by 22 percent for 5-5 to 64-year-olds. (That’s mostly parents putting kids through college). In addition, utility payments (blame bigger houses and higher electricity rates) and health care expenditures increased (insurance premiums nearly doubled).
But the biggest ticket item is housing. From 1990 to 2010, the share of expenditures on housing—including principal, mortgage interest, taxes, maintenance and insurance for 45- to 64-year-olds increased by 25%, Villarreal found. What troubles her the most is that for 55- to 64-year-olds, nearly half of the increase was due to the jump in the portion attributable to interest payments (even though interest rates have fallen). In 1990, the average 30-year fixed rate mortgage was more than 10% but mortgage interest payments were only 4.3 percent of expenditures. By 2010, the average 30-year fixed rate mortgage fell to 4.69 percent, but the share of mortgage interest crept up to 6.3%.
The percentage of 55- to 64-year-olds who report paying on a mortgage or home equity loan has risen from about 49 percent in 1990 to more than 56 percent in 2010. The growth in interest payments for these soon-to-be retirees creates an obstacle to retirement savings, Villarreal concludes. Her proposed solution: eliminate the mortgage interest deduction. Or buy a smaller house.