More Assets Tied to Stock Market Could Spell Trouble with Social Security Reform
New research from the University of Missouri-Columbia shows that the first generation of baby boomers, who are now in their fifties and approaching retirement, have accumulated more wealth at the same age than the pre-boomer generation. The researchers also found that the boomers have more of their wealth tied to the stock market, a condition they say could lead to trouble if Social Security reform encourages even broader investment in equities.
"Social Security is a hedge against increased exposure to stock market risk," said Michael Finke, assistant professor of personal financial planning in the College of Human Environmental Sciences (HES). "Exposure to stock market risk seems to be greater for boomers in this study at every wealth level."
Finke and HES professors Sandra Huston and Deanna Sharpe compared the financial records of the first generation of baby boomers, born between 1945 and 1957, with the last generation of pre-boomers, born between 1933 and 1945, using numbers corrected for inflation. They found that the first generation of baby boomers had greater average wealth than the pre-boomers at the same age. But net worth among early boomers with less wealth declined. One surprise finding was that early boomers pay no more of their income toward debt repayment than pre-boomers, and they also appear to be saving more for retirement, Finke said.
"The data do not support the commonly held stereotype of the free-spending boomer," Finke said. "In fact, boomers have much more wealth in financial assets than pre-boomers, more than tripling the amount of savings in stock funds compared to their predecessors."
Finke said this shift in the proportion of wealth held in financial assets, such as stocks, makes the boomers more vulnerable to shifts in the market.
"Since Social Security can serve as a hedge against possible losses in defined-contribution retirement plans, this increase in vulnerability is noteworthy," Finke said. "Boomer-generation investors have chosen to accept greater financial risks, and their net worth in 2001 reflected the potential rewards. A decrease or stagnation of the market over the next decade, however, will have a comparatively larger impact on the retirement prospects of boomers than on previous generations."