Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit on finance.org. Over the next five years, the largest cohort of the baby boomer generation will reach
retirement age. And while it's broadly assumed that they'll have a comfortable retirement, a recent analysis of their assets shows that more than half of this final group of boomers are not financially prepared to retire whatsoever. Younger viewers might be shocked to hear this. After all, much has been made of the data showing that while retirees make up only 17% of the population, they hold more than
half of America's wealth. This is, of course, to be somewhat expected, as a group who have worked their whole lives should have more accumulated wealth than those just starting out in the workforce. The baby boom generation is usually defined in the United States as the group born between 1946 and 90, 64 during a post World War Two period of growing American affluence.
The group now approaching retirement age are described in a new study as peak boomers, which are the group born between 1959 and 1964. This younger group of boomers are less financially secure than their siblings, who are often just a few years older, and many don't have sufficient savings to cover the cost of a comfortable retirement.
A 2022 Federal Reserve study found that 43% of 55 to 64 year olds had no retirement savings at all, and the 30% of Americans over the age of 65 were economically insecure, which was defined as bringing in less than $27,000 per year per person. The fact that this younger cohort of boomers are less financially prepared than the group already of retirement age means that this problem is only going to grow.
The new study from the Retirement Income Institute shows that based on an analysis of their assets, 2/3 of peak boomers will be financially challenged in retirement. This group or a group who mostly entered the workforce right at the time when defined benefit or traditional retirement plans disappeared. A defined benefit plan is a retirement plan that guarantees a fixed monthly payment to retirees, which is usually protected by federal insurance.
When an employee dies, their beneficiaries often receive additional payments depending on the plan. This type of retirement plan has mostly been replaced by defined contribution plans, where a defined amount is contributed each month, but the eventual payout is unknown and depends on a combination of how much was set aside and investment
returns. According to the study, just under 1/4 of peak boomers have defined benefit plans, and the group with these plans mostly had union jobs for private employers or worked for state and local governments.
The most common retirement plans amongst peak boomers are defined contribution plans like 401 KS. 48% of peak Boomer men have defined contribution plans with median holdings of just under $100,000 and 41% of peak Boomer women have these plans with median holdings of just under $60,000. The greatest disparity within this group is explained by
educational attainment. 55% of peak Boomer college graduates have defined contribution accounts with assets worth $117,000, compared to 40% of high school graduates having these accounts at all with assets of only $31,000. Only 13% of those without high school diplomas have defined contribution accounts whatsoever, and these accounts have a median balance of around $10,000. Boomers, of course, own assets other than just retirement
accounts. Many own homes, cars, collectibles, cash savings and things like that. According to the study, more than half of peak boomers have total assets of $250,000 or less and can be expected to rely primarily on Social Security as their main source of income in
retirement. One of the co-authors of the study, Robert Shapiro, writes that America has never seen so many people reaching retirement age over a short period, and well over half of them will find it challenging to meet their needs through their retirements, let alone maintain their current standard of living. They lack the protected income that many older boomers have from solid pensions or higher savings. So how did American retirees find themselves in this position?
And how much do you need to save to have a comfortable retirement? In the United States? Until very late in the 19th century, pensions were pretty much unheard of. There were some benefits for Union Army veterans who had been injured, but retirement as a distinct phase of life devoted to leisure just didn't exist. Nor did unemployment. People worked their whole lives and as they age they can continued to work but worked a bit less and if needed turned to their family and friends for
food and shelter. Back then people didn't live as long as they do today. In 1900, only 4% of the population was over the age of 65. With medical advances and the introduction of modern plumbing, people started to live a lot longer and due to industrialization and the appearance of the factory, people didn't work on farms anymore where they could slow down as they aged. Factory 4 men weren't interested in having less productive workers slowing down production
lines. American Express, which started out as a freight forwarding company in 1850, introduced the first private pension plan in 1875, providing benefits for employees 60 years of age or older who had served 30 years of service with the company. The railroads, which were the high technology companies of the day, followed suit.
This allowed them to attract the best workers and incentivize the workers to stay on the job, as they only got a pension after 30 years of service, and it allowed companies to retire the older workers and replace them with younger, more productive workers. The railroads were soon followed by banks, insurers and utilities, the kind of companies interested in attracting and keeping a stable and skilled
workforce. Changes to the tax code meant that money put into pension plans was tax deductible, so by the late 1920s a significant minority of employers offered pension plans of some sort. Some of the biggest factories in the United States were the car companies in Detroit, who paid their workers well but were adamantly opposed to trade
unions. In 1927, when the Model T Ford was discontinued, 100,000 workers around the world were put out of work for months while the factories were retooled for the Model AA. Few years later, the Great Depression saw wage cuts and layoffs on a much larger scale. Life was not easy for an an auto worker. Labor unions grew in power during the Great Depression as workers turned to them to find work and protection.
An out of work physician in California, Dr. Francis Townsend, began agitating for a national retirement scheme where the government would distribute $200 per month to each American over the age of 60 and pay for it with a sales tax. He argued that the increase in consumption would boost the economy. Millions of Americans joined Townsend clubs, and to a certain extent, Social Security was enacted in 1935 as a response to this agitation.
The businesses who had been early adopters of pension plans like the railways, hadn't done much analysis on the long run cost of these programs. They simply paid benefits from general funds. As business conditions worsened during the Depression, the railroads in particular came under stress. The Pennsylvania Railroad, whose pension expense had been $235,000 in 1900, had reached $8 million by 1931. The railways were less profitable and we're dealing with competition from long
distance trucking. They discovered during this slow down that pension expenses, unlike wages, could not be reduced with the business cycle. It got so bad as the railroads fell into bankruptcy that railroad pensions had to be bailed out by Congress with the Railroad Retirement Act. By the end of the Second World War, around the time the first of the Boomers were being born, America's demographics had
changed. Now 7% of Americans were over the age of 65, twice the percentage from 1900, and experts projected that this percentage would double again by 1980. 2 Government policies enacted during the war had incentivized the growth of pension schemes. The first was a tax on excess profits, which made the tax shelter offered by retirement plans more attractive to
employers. The second was a government freeze on cash wages which incentivized businesses to offer non cash benefits like pensions to workers to attract talent. By the end of the war, 1/6 of the US workforce now had pensions, but they were mostly offered to professionals, not blue collar workers. The National Labor Relations Act of 1935 had given workers the right to form unions and the
right to collective bargaining. Its effect was muted during the Great Depression and during the war, but the unions erupted once the war ended, as workers had been squeezed by wartime inflation combined with pay freezes. There was a series of crippling strikes against steel mills, coal mines, shipping companies, refineries and auto manufacturers, which almost ground the US economy to a halt. President Truman took control of the coal mines and railroads to
keep the economy alive. He threatened to use the Army as strike Breakers and asked Congress for the power to draft strikers into the military to then make them work. We'll be back. After a quick break. It's like our brains have a mind of their own when it comes to money, right? Yeah. It's crazy. We're diving into that today, how our brains really deal with money. We're going deep on this one, looking at money and how we decide behavioral research. This stuff is like eye opening.
Seriously, it turns out our brains aren't always rational, especially with money. No kidding. So what's the deal with that? Why are we so bad at making, you know, sensible financial decisions? Well, our brains are kind of lazy in a way. They love taking shortcuts. As a part of this temporary emergency legislation, I request the Congress immediately to authorize the President to draft into the Armed forces the United States workers who are on strike against their government.
The strike lasted for 21 months, and the unions finally accepted Truman's terms and returned to work. As inflation ebbed and the Cold War escalated, public opinion was less sympathetic to organised labour unions, reduced their demand for pay raises and instead asked for pensions and other benefits that employers were more willing to agree to.
Post war welfare states were emerging in Europe, where Britain had nationalized coal, rail, gas and electricity and built public housing such that 40% of the population lived in government housing up until the 1980s. In France, Charles de Gaulle nationalized the energy, transportation, aviation and financial industries, absorbing Air France, the country's eleven largest insurance companies, and
most of the banks. France's largest automaker, Renault was confiscated and its founder and owner Louis Renault died in prison while awaiting trial for producing trucks for the enemy during the occupation. By 1946, the French government directly controlled 98% of coal production, 95% of electricity, 58% of the banking sector, 38% of automobile production and 15% of total GDP. This is not what the Americans
wanted. In 1950, the United Auto Workers Union, after a crippling strike at Chrysler, struck a deal with the big three automakers known as the Treaty of Detroit, which gave auto workers pensions equivalent to around $1500 per month in today's money. A few business journalists at the time recognized the danger of these deals, noting the incalculable nature of pension obligations and asking if the businesses would even be around in the distant future when these
obligations came due. The plans endowed pensions to all employees for whom no money had been set aside, some of whom were already nearing retirement. At Ford, which was still a privately held company, the estimated liability on day one was a staggering $200 million. After their success with the automakers, other unions were successful and American workers now had defined benefit pension plans. In 1955, the United Auto Workers Union pushed even harder.
The car companies negotiating hand was weakened by the fact that they were rolling in money. General Motors had just been the first American company to ever earn a billion dollars in a year. The union wanted protection from layoffs and pushed for guaranteed wages whether an employee was working or not. Pensions were boosted 50%. Disabled workers got double pensions. Workers got 7 holidays and three weeks of paid vacation per year.
They also demanded an even costlier benefit, healthcare for retirees. By nineteen, 6040% of American workers had worn or been granted pensions, and fewer men than ever before were working after the age of 65. In 19, twenty, 60% of seniors were still working. By 1960, only 30% were. The unions next began demanding early retirement with full pensions. This was the era of the rise of the American middle class, where a factory job could provide a good living for an American
family. There was, however, a black spot on the horizon. In 1954, Packard had failed, wiping out a chunk of pensions owed to their employers. Studebaker, who had been struggling for years, agreed to it's 4th pension hike in eight years. In 1961, the union was able to celebrate another big win and Studebaker could hang on to it's scarce cash. After all, pensions wouldn't need to be paid out for years, unlike wage hikes which were immediate.
Two years after this agreement, Studebaker failed and thousands of employees lost the bulk of their pensions. By the mid 1960s, automobile profits began to slow, and in 1967 the first Datsun was sold in the United States. Americans loved the new Japanese imports, which were much cheaper as labor costs were a lot lower in Japan. The unions were at the height of their powers, however, and kept pushing. It was, after all, their job to get as much for their members as they could.
In 1973, the UAW negotiated full pensions for early retirees, which was known as the 30 and out. Any worker could retire as soon as they'd served 30 years on the job. Many started working at age 17, which meant that they could retire at age 47 with a full pension, which included a top up to compensate them for the fact that Social Security wouldn't kick in until they turned 65.
This was disastrous for the auto industry as apart from the early retire, Americans were living much longer than ever before and the actuarial cost of these pensions was exploding. This wasn't just happening in automobiles either, it was happening in steel, and in rubber too, where pension costs had risen at three times the rate of wages.
American manufacturers were unable to compete with foreign competition when the cost of pensions and healthcare alone were higher than the margins on a Japanese car. Even a Japanese car that was being built in the United States cost thousands less to build per unit as the Japanese factories
were not unionized. By the late 1990s, General Motors had 180,000 employees and 400,000 retirees that it was paying pensions to. In 2001, Bethlehem Steel had eight times more retirees than workers, and it's pension fund was $3.7 billion in the hole. No investor would have put money into the company if it involved taking on that obligation.
So the firm went bankrupt, and the pension obligation went to the Pension Benefit Guarantee Corporation, a federal agency set up in 1974 to ensure pension benefits up to a reasonable limit. A wave of bankruptcies like the airlines in the early 2000s meant that this federal agency, which was backing pension plans itself, had a serious deficit, and the US auto industry, with its massive obligations, was on
the rocks. By 2005, Starbucks was spending more on healthcare than on coffee beans, which partially explains their terrible coffee. In 2006, the average compensation of an auto worker, including benefits, was $81.00 per hour. It wasn't just big industry that faced these problems either. Government employers had started offering pensions before private industry did. At first for hazardous lines of work, police, firefighters, jobs like that, and initially the benefits were only for people
injured on the line of work. Roger Lowenstein's book While America Aged While Almost 20 Years Old is probably the best history of American pensions and how everything went wrong. I'm leaning quite heavily on it in researching this video. He describes how the Transport Workers Union in New York negotiated massive salaries and benefits out of politicians almost unopposed, as the elected officials negotiating with union leaders were well aware that the unions could sway elections.
This led to deals where subway workers with a high school education earned more than the average New Yorker and could retire after 25 years, making more in retirement than they earned when on the job, and often spending more of their life retired than working. Lowenstein looks at the pension crisis in San Diego, where by 2005 the municipal pension fund was $1.7 billion in the hole, a dead equivalent to $6000 for
every family in the city. The press had begun referring to San Diego as Enron by the Sea. This massive debt came from labour unions ringing higher benefits from weak politicians for decades, forcing the eventual expense on to later generations. Eventually, the SEC had to investigate the city's municipal bond disclosures regarding its pension and retiree healthcare obligations, sanctioning both the city for securities fraud and its auditors.
Many workers today bemoaned the disappearance of defined benefit plans, which have mostly been replaced with defined
contribution plans. But when you look at the history of these pensions, you can see that they can to a large extent be blamed for the decline of large scale manufacturing in the United States. When we blame foreign competition and outsourcing for the decline of manufacturing, we need to add to that list labour unions, who negotiated the deals for workers that crippled the businesses that employed them.
In the mid 1950s, General Motors was the most profitable business in the world, churning out innovative products that people lined up to buy. When they became unprofitable, mostly due to terrible labor deals, Japanese manufacturers were not only able to undercut them in price, but because they had significant profits, they were able to reinvest in improving their cars while US manufacturers stagnated.
As the pension problems of the US auto industry became glaringly obvious, other big American firms like Hewlett Packard, Verizon and IBM saw the writing on the wall and froze their defined benefit pension funds such that employees would no longer accrue benefits. The only pensions being offered now were defined contribution plans.
The new companies that began to rise in the 1990s like Walmart, Amazon, and Microsoft didn't provide pensions to their employees and were able to hire and fire as they needed and pay a market wage. Well, many of the boomer generation did well out of the high pay and good pensions that existed when they entered the workforce. Many of the younger boomers will not have done nearly as well as their older siblings, as these deals were already on their way out by the time they started working.
Unfortunately, they'll have seen the people a few years older than them retire comfortably and figured that things would just work out for them too. But those older boomers had very different finances. When we look back at the disappearance of middle class manufacturing jobs, we have to remember that this really only existed for a short period of time, and the high pay and benefits eventually bankrupted the companies that agreed to these deals.
It's not obvious that those days are ever coming back, despite what politicians might tell you. Many workers who have not planned well for retirement may plan on simply working deeper into old age, but health issues can often prevent that from
being a viable plan. If you remember from the start of the video, the least educated workers are usually the ones without good retirement plans, many of whom will have earned a living doing physical work, which can be harder to do as you age and your health deteriorates. Roger Lowenstein sums up his book by pointing out that financial debacles usually involve some sort of borrowing, and borrowing is essentially an arrangement between the present
and the future. The pension schemes that blew up or the retirement plans that failed were predictable in the way that the outcome of overspending on a credit card is
also predictable. A report from the US Senate Health, Education, Labour and Pensions Committee from earlier this year found that about half of American households will not be able to maintain their pre retirement living standard, and that 56% of low income households and 45% of those who are middle income are at risk of not maintaining those pre retirement standards at age 65. Federal programs like Social Security, Medicare, and Medicaid are of great importance to
retirees, but they're often insufficient, meaning that the burden of caring for older people falls on younger family members who are often still supporting their own children. As the boomer generation leaves the workforce in the next 5 years, it can be expected to have an impact on the economy. Retirees typically spend less money and spend it on different things than the employed do. As an example, they spend a lot less on transportation and more on healthcare.
To offset the lower spending. Economists highlight that productivity can be expected to grow as young people replace the elderly in the workforce. So how much should you be setting aside or have set aside for retirement today? Well, according to T Rowe Price, by age 35 you should have set aside a year to a year and a half's income as retirement
savings. By age 50, you should have 3 1/2 to six years of salary as savings, and by retirement you should have 7 1/2 years to 13 1/2 years worth of salary set aside. Their assumptions are that this money is in a tax deferred retirement account and is invested to earn 7% per year, which means it's mostly allocated to stocks rather than bonds or real estate. Thanks for tuning into this week's podcast.
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