What Retiring Baby Boomers Mean for the Economy

Almost 10,000 baby boomers turn 65 every day. The famed generation, defined as those born between 1946 and 1964, is causing something of a stir as they reach retirement age in droves. The Census Bureau says that in 2020, the U.S. population over the age of 65 was about 56 million (nearly 17% of the total population); by 2031, the U.S. population over the age of 65 will number an estimated 75 million, almost double what it was just in 2008. A generation of this size transitioning out of the workforce will naturally affect the economy in many ways.

Consider working with a financial advisor as you make or modify a retirement plan.

How Retiring Baby Boomers Affect Social Security

As millions of baby boomers retire, the number of people receiving Social Security benefits continues to grow while the ratio of workers paying payroll taxes to beneficiaries declines. Because the program is largely financed through payroll taxes collected from current workers, this demographic shift places additional pressure on Social Security’s finances. Fewer workers supporting a growing retiree population means less revenue is available to fund future benefit payments.

The retirement of the baby boom generation has accelerated the drawdown of the Social Security trust funds, which help cover benefits when payroll tax revenue alone is insufficient. While Social Security is expected to continue paying benefits through ongoing payroll taxes, the depletion of trust fund reserves could result in reduced benefit payments if Congress does not enact changes to the program. This has fueled ongoing discussions about the long-term sustainability of Social Security.

Policymakers have proposed a range of options to strengthen Social Security’s finances. Potential reforms include increasing payroll taxes, raising or eliminating the taxable wage cap, adjusting the full retirement age or modifying benefit formulas. While no single solution has been adopted, the growing number of retirees has made the future of Social Security a recurring focus of public policy debates.

Although Social Security is expected to remain an important source of retirement income for many Americans, future retirees may need to prepare for potential changes to the program. Building personal savings through retirement accounts, pensions and other investments can help reduce reliance on Social Security benefits alone. A diversified retirement income strategy may provide greater financial flexibility regardless of how the program evolves in the years ahead.

How Retiring Baby Boomers Affect the Job Market

Predicting the baby boomers’ impact on the job market is a tricky task. With each day bringing thousands of boomers to retirement age, many are indeed leaving the job market behind and freeing up jobs. However, many baby boomers aren’t retiring at 65. Plenty are transitioning to a part-time arrangement with their companies, and some are working into their 70s.

There are a few different possible explanations for this phenomenon. One is that many boomers haven’t saved up enough money to afford maintaining their lifestyle in retirement. So, their solution is to just not retire. Related to this is that the average life expectancy continues to rise. Not only does this mean more retirement to save for, but many Boomers may prefer to spend a few more years working than embark on a retirement that lasts 20 years and beyond.

Forecasting how many boomers retire at their full retirement age and how many continue to work can be difficult. It’s important to keep in mind, though, that Social Security benefits max out at age 70, a milestone that the first boomers have begun to hit. With less incentive to keep working at this point, more boomers will be leaving the workforce for good.

How Retiring Baby Boomers Affect Consumer Spending

A report from the Stanford Center on Longevity states that almost one third of baby boomers had no retirement account as of 2014. Six years later that percentage was approximately 40%, according to a Census Bureau report ¹ . This means that millions of people are approaching retirement without any savings to speak of. A popular rule of thumb is that you’ll need about 80% of your pre-retirement income to maintain your current lifestyle. Unfortunately, Social Security benefits supply only about half of that if you’re an average earner. If you don’t have any savings, you’re going to need to seriously cut back on spending.

That means an overall decrease in consumer spending, which is a significant component of GDP. A decrease in spending means a decrease in consumer demand for products and services. In turn, that means a decrease in revenue for businesses and a hit to the overall health of the economy. Expect the growth rate of the American economy to slow in the years to come as millions leave the workforce and find themselves with less money to spend.

How to Prepare for Your Retirement

Beginning to save as early as possible gives your investments more time to benefit from compound growth. Regular contributions to employer-sponsored retirement plans, IRAs or other investment accounts can help build a larger nest egg over time, even if you start with modest amounts. Consistency often matters more than trying to time the market or make large, infrequent contributions.

Relying on a single source of retirement income can increase financial risk. In addition to Social Security, retirees may draw income from retirement accounts, pensions, taxable investment portfolios, annuities or part-time work. Diversifying income sources can provide greater financial flexibility and help reduce the impact of changes in market conditions or public benefits.

Healthcare costs are a significant expense for many retirees, and longer life expectancies mean retirement savings may need to last for decades. Factoring medical expenses, long-term care needs and inflation into your retirement plan can help you develop a more realistic savings target. Reviewing insurance coverage and creating a withdrawal strategy can also improve long-term financial security.

Retirement planning is an ongoing process rather than a one-time event. Periodically reviewing your savings progress, investment allocation and expected retirement expenses allows you to adjust your strategy as your financial situation and goals change. Regular check-ins can help keep your retirement plan aligned with changing economic conditions and personal circumstances.

Bottom Line

The retirement of the baby boom generation is reshaping the U.S. economy by influencing the labor market, healthcare demand, consumer spending and the long-term outlook for Social Security. While these demographic changes present challenges, they also highlight the importance of proactive retirement planning and diversified savings. Preparing early and building multiple sources of retirement income can help individuals navigate an evolving economic landscape with greater confidence.

Tips for Planning Your Retirement

• Social Security benefits aren’t enough to replace having your own retirement savings. However, they can certainly help with your living expenses in retirement. Try our Social Security calculator to see how much of a benefit you can expect.
• Consider working with a financial advisor to ensure you’re ready to retire by the time you want to. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• The amount of retirement savings that you’ll need depends on many different factors. One notable factor is the expenses related to where you live. SmartAsset’s cost of living calculator can help you get an idea of how much you’ll need to live the life you want, where you want.

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