A Sisyphean Savings Task
Eavesdrop on baby boomers these days, and you'll hear talk of graying hair, bifocals--and mutual funds. Their aging is expected to have an economic bright side: As boomers swell the ranks of the middle aged, they could step up their woefully low savings rate. Indeed, some forecasters predict a demographic bonanza that could boost prices of stocks and other assets to further records.
But those forecasts "run afoul of simple arithmetic," warns economist Ed McKelvey of Goldman, Sachs & Co. The glacial pace of demographic change will make it hard for the personal savings rate to rise from its current 4.5%.
Look at the numbers. Over the next 10 years, the middle aged--those 45 to 64, who tend to save more than other age groups--will grow from 28% of the population to almost 35%. And since they'll be in their peak earning years, boomers' share of national income will rise by 8.1 percentage points--"a seismic upheaval," McKelvey says.
But even with that added income, middle-aged boomers would have to save three times the national average--15% of their income--to raise the overall rate by just one percentage point. In fact, the Labor Dept. reports that 45-to-64-year-olds save about 10%, a tad less than the rate for 35- to 44-year-olds.
The net: At best, demographic changes will add $27.6 billion to annual personal savings by 2005 (chart). Working against that uncertain progress is a another, more likely demographic trend that will bring down savings: rising demand for health care among the aging. Higher spending on Medicare and Medicaid is projected to push federal government spending ever higher, raising the deficit from $164 billion in 1995 to $376 billion in 2005. For every extra dime the boomers tuck away, Uncle Sam will borrow 76 cents. That's hardly the formula for a high-savings economy.