For years, economists worried by America's low savings levels have pinned their hopes for an upturn on the aging of the baby boomers. In this view, the current savings slump that began in the mid-1970s largely reflects life-cycle consumption patterns as the boomers entered adulthood and devoted the bulk of their incomes to acquiring the material possessions needed to establish families and households.
In the years ahead, however, the baby boomers will start to focus on retirement needs, and by 2010, the whole generation will be in the high-saving, 45-64 age bracket. As these big spenders become big savers, America's saving shortfall could disappear.
The problem with this scenario, contend economists Richard Cantor and Andrew M. Yuengert of the Federal Reserve Bank of New York, is that it's not very likely. Although they expect boomers' savings rates to rise sharply with age, their projections indicate that the impact will be reduced by a continuing high rate of early retirement and by rising numbers of households with relatively low savings rates.
Indeed, as the boomers' share of total U.S. households declines--by about five percentage points from 1990 to 2010 (chart)--the share of households headed by those 65 and over (who tend to spend their savings) will rise by the same amount. By 2010, the two economists conclude, demographic shifts by themselves will probably raise the personal savings rate to only 4.9% of disposable income, up from 4.1% last year. This is a far cry from the 8.5% of the early 1970s.
Cantor and Yuengert also note that baby boomers appear to be richer than their parents were at similar ages, suggesting that their need for additional savings may not be as pressing as some observers have claimed. Moreover, even if the boomers suffer future cuts in social security benefits, there's no guarantee they would respond by dramatically raising their savings rate.
None of this belies the fact that the nation as a whole has hurt its economic health by spending too much on consumption while saving and investing too little. The economists' message is simply that demography alone is unlikely to solve America's serious savings shortfall.