GuidePost - Vol. 4, Issue 4 2008

The GRABot BAG
by Sherrie E. Grabot, CEO

April 2008
The Savings Gap Meets the Generation Gap

We Baby Boomers have always been told that Generation X is different. Members of this generation are more skeptical, pessimistic, and questioning of authority than those born before them. Or wait; is it that they’re more self-directed, iconoclastic, and innovative?

I can never remember. There’s so much anecdotal evidence, pop-psych nonsense, and consumer marketing spin out there that it’s difficult to get any idea of what generational differences might really amount to. What’s more, the Boomers and X-ers you actually know tend to confound any and all stereotypes. So it’s refreshing when some actual statistics come along to shed light on the generational debate – and doubly so when they concern retirement savings.

Decades, Demography, and DC Plans

According to a recent industry survey, members of Generation X have some very pessimistic views about their prospects for retirement. Among respondents between the ages of 27 and 42, 26% are unsure about their ability to retire, and fully 43% feel that they will never be able to stop working. That leaves just 31% who are confident of having an adequate retirement income.

The survey’s sponsors describe this generation as stressed and fearful, particularly about recent economic bad news, and explain that retirement “looks like a black hole to them right now.” Perhaps. But given the numbers we’ve all seen on workers’ actual preparations for retirement, I’d say Generation X may have got it just about right. It’s a simple fact that many people are not saving nearly enough to retire – according to a Boston College study quoted here, 49% of them are indeed at risk. Which may lend credence to what some X-ers have been saying all along: “you call it pessimism; we call it realism.”

Some of the survey’s other findings, however, add interesting details to what otherwise might be a rather bleak attitude. 40% of those surveyed said they were actually saving more today to balance their uncertainty about ever receiving Social Security. Compared to other age groups, X-ers were also found to be spending less and paying off existing debts faster.

But wait, it gets more complicated. A comprehensive 2006 Hewitt study of generational attitudes to retirement found that X-ers were less likely to participate in their 401(k) plans than their Boomer colleagues (63% versus 72%), and contribute at lower rates (7.2% versus 8.5%). The report also found that despite what we hear about Gen-X gloom, this generation was actually more optimistic about retirement than their elders: 76% were either somewhat or very confident about maintaining their standard of living, versus 69% of Boomers.

Given these conflicting statistics (and many more like them), what can we know for certain about generations and retirement? Not much. So maybe a few speculations based on anecdote and psychology aren’t so far out of line after all.

It has often been said that each generation’s early economic experiences shape its lifelong attitudes and expectations about money. People who grew up during the Depression never forgot it. Half a century later they still took home the leftovers when dining out – even when they went home in a Cadillac – and maintained savings rates to match their frugality.

Their children, the argument goes, were conditioned by postwar prosperity to expect boom times to go on forever, and their unreasonable expectations have created a retirement savings gap. Generation X grew up during more volatile economic times, from 70’s “stagflation” to the exuberance of the 80’s. Perhaps this helps explain why their attitudes are more difficult to pin down.

It’s not at all too soon to start sizing up the next wave: Generation Y, the Echo Boom, or whatever you choose to call them. Born between 1979 and 1988, or thereabouts, many of them have already joined the workforce. They bring with them their own set of attributes, such as a strong sense of entitlement and “specialness,” balanced by an unprecedented flexibility and openness to change. The Hewitt study shows some equally contradictory statistics: while they have an astoundingly low 401(k) participation rate (31%), 89% still believe they will maintain their standard of living in retirement.

Those expectations will have to face reality at some point. It’s unclear how this next generation – supposedly so tracked, scheduled, and fussed-over by their Boomer parents – will warm to the idea of taking responsibility for their own retirement savings. But if the X-ers are right, they’d better start now.

~~ Sherrie