Baby boomers are financially tapped out

March 6, 2009
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Even if the stock market makes a turnaround later this year, there apparently are a large number of potential investors nearing retirement who won’t be able to buy into a mutual fund at that time — not because of their age, but because much of their accumulated wealth has vanished.

That dismal news for millions of Americans comes from the Center for Economic and Policy Research, a nonpartisan think tank in Washington, D.C., which has reported that the meltdown of the housing market and the collapse of the stock market is threatening the retirement wealth of millions of baby boomers.

“The collapse of the housing bubble, which led to the current recession, has already destroyed almost $6 trillion in housing wealth for homeowners. This reality is compounded by the recent collapse of the stock market. The result is that many baby boomers will only have Social Security and Medicare to rely on in their retirement,” said Dean Baker, co-author of the CEPR report, in a release.

The report divided baby boomer households into two age categories: 45 to 54 and 55 to 64. The study analyzed the 2004 wealth holdings of these households by using data from the Federal Reserve Board and projected those holdings into 2009 through a Standard & Poor’s composite index.

The CEPR projections, which include home equity, paint a gloomy financial picture for both age groups:

**The median household with someone between the ages of 45 to 54 saw its net worth fall by more than 45 percent between 2004 and 2009, from $150,500 five years ago to just $82,200 this year.

**The median household with someone between the ages of 55 to 64 saw its net worth fall by almost 38 percent during those five years, from $229,600 in 2004 to $142,700 in 2009.

**As a result of the plunge in housing prices, many baby boomers now have little or no equity in their home, even if they have been homeowners for decades.

The report said that last finding will make it very difficult for many boomers to leave their current homes and buy housing that might be more suitable for their retirement, and renters in those age groups are likely to have more wealth this year than homeowners.

CEPR said another important factor led to the decline of wealth for both groups.

Because the values of their homes rose at a multiple rate of inflation for years, tens of millions of boomer families didn’t save during what would typically be their peak-saving years, which the report defined as age 40 to 49 in 2004. And many may have borrowed on the equity they had built up in their home.

“In short, it is entirely possible that the homeowners in this group engaged in dis-saving over this period, as they were content to allow the bubble-driven build-up of wealth in the form of home equity to substitute for savings out of disposable income,” read the report, titled The Wealth of the Baby Boom Cohorts after the Collapse of the Housing Bubble.

“In short, as a result of the collapse of the housing bubble, the vast majority of baby boomers will be approaching retirement with little wealth outside of Social Security.”

For the financial markets, that finding means there will be millions fewer investors that will buy stocks when the economy becomes stabilized.

For the nation and its taxpayers, that finding means cutting back Social Security and Medicare from current levels will impose serious hardships on these boomers.

“Now that tens of millions of families have just seen much of their wealth disappear, it is especially important to pursue policies that ensure retirement security for those on the brink of retirement,” said Baker, who questioned seven years ago whether the rise in home prices was legitimate.

The report also concluded that homeownership should no longer be seen as an effective way to accumulate wealth.

“Homeownership during a housing bubble was a route toward losing wealth, not accumulating it,” read the CEPR report. “While typical homeowners cannot be blamed for not recognizing the bubble, the economists and policy professionals who designed policies that pushed homeownership certainly can and should be blamed.”

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