Temporal Market Subordination of Near Term Baby Boomer Retirees: The Effects of Asset Price Volatility on Health and Retirement Satisfaction

The United States is facing a socioeconomic crisis as the Baby Boomer generation reaches retirement age without adequate savings. This problem is not unique to the U.S., as many other large countries in the developed world, particularly in Western Europe, have recognized future budgetary constraints they will face created by an elderly population that will rise dramatically from 2010 to 2030 (Rechel et al., 2013).

In terms of retirement preparedness research and U.S. savings policy, the Baby Boomer generation is interesting for three reasons. One, Baby Boomers are members of a large demographic cohort represented by approximately 78 million people born in the United States between 1946 through 1964 (approximately 25 percent of the U.S. population). Two, a large percentage of the cohort can be identified by the type of retirement plan they have: defined benefit, defined contribution, or no plan at all. And finally, because Baby Boomer retirement outcomes became increasingly subordinate to the performance of financial markets throughout their lifecycle, the efficacy of their retirement in terms of satisfaction and solvency provides policy makers evidence of the deleterious effects of financialization.

The concept of financialization is based on evidence that during the latter half of the 20th century financial markets and financial institutions became increasingly integral to the overall economy as the United States transitioned away from manufacturing and other types of industrial production. One of the primary examples of financialization was a change in the type of retirement plan offered by corporations to their employees. Defined benefit pension plans were common when first wave Baby Boomers entered the work force in the early 1970s - a retirement benefit managed by a corporate employer that guarantees a fixed monthly payment in retirement for the balance of the employee’s life. However, when late stage Boomers entered the work force in the early 1990s, defined benefit plans were being replaced by defined contribution pension plans, the success of which was dependent on stock market performance, and characterized by a transfer of responsibility for plan management and solvency to the individual - thereby removing pension liabilities from corporate balance sheets. Defined contribution plans were promoted as superior alternatives to defined benefit plans, supported by the fact that as Boomers aged, stocks, bonds, real estate, and other risk-based assets appreciated at historic levels. The growth in these types of assets engendered a growing variety of financial products that were designed to ensure an adequately funded retirement experience.

However, as the first wave of Boomers reached retirement age in 2011, 75 percent had less than $30,000 and were faced with the prospect of an underfunded retirement. The aggregate state of Baby Boomer retirement preparedness helps to illustrate a clear incongruence when one considers the appreciation of various asset types throughout their lifecycle, the growth of wealth building products available to Boomers, and the aggregate level of wealth they achieved as a cohort. It was also clear as Boomers reached retirement age in 2011 that the odds of experiencing a satisfactory retirement outcome had become increasingly subordinate in a temporal context to the appreciation of housing prices and other asset classes. The notion of increasing subordination is supported by the dramatic increase in asset price volatility experienced by first wave Boomers in 2011 during an economic crisis that wiped out in a single year 22 percent of accumulated U.S. wealth - an unprecedented level of wealth destruction that left nearly 66 percent of Boomers unprepared for retirement. Whereas the wealth destruction created by the financial crisis is well documented, the longer-term effects of asset price volatility on health and retirement satisfaction remains unexplored in the literature. Moreover, the financial crisis demonstrated that retirement outcomes can be subordinate to market performance in a temporal sense as well – indicating that when an individual retires is just as important as how much wealth has been accumulated.

It seems counterintuitive that so many Boomers would be unprepared for retirement when one considers the extent to which various assets appreciated during the Baby Boomer lifecycle, and the historically high level of home ownership that Boomers achieved. This dichotomy creates a central organizing question that informs the present study: how does retirement unpreparedness and market volatility impact the health and retirement satisfaction of Boomers?

This dissertation seeks to demonstrate the interaction effects between various periods of asset price volatility, the use of various types of financial products (including home equity loans), increasing levels of market subordination, and post-retirement satisfaction and health status. These interaction effects will be examined primarily by dividing Boomers into a three saver group typology: (1) those with a defined contribution pension plan, or IRA, that are dependent on asset price appreciation for retirement capital requirements, (2) those with a defined benefit pension plan that generates guaranteed monthly retirement income and do not rely on market performance for retirement income, and (3) those without a retirement plan.

The present study is based on a custom dataset comprised of multiple explanatory variables derived from the Health and Retirement Survey Database (hereafter, HRS), and historical price data for various types of assets. The HRS (Health and Retirement Study) is sponsored by the National Institute on Aging (grant number NIA U01AG009740) and is conducted by the University of Michigan. This analysis (a) examines a portion of the research literature that compares the retirement preparedness of Boomers nearing retirement age with earlier same-aged cohorts at various times, and during different types of market conditions; (b) identifies the effects of growing market subordination on retirement outcomes and health; (c) estimates the impact of these effects on composite measures that reflect retirement satisfaction, mental health, and physical health; and (d), identifies individual level characteristics that may inhibit or promote vulnerability. The findings from this research will inform policymakers seeking to improve the retirement outcomes of individuals at varying SES levels. It will also provide evidence of the impact of financialization and finance culture on health and retirement satisfaction.

Some of the key findings of this study were: (1) a statistically significant increase of negative mental sentiment, and a decrease in retirement satisfaction in male HRS respondents after periods of market volatility, (2) the demonstration of reduced negative mental sentiment and higher levels of retirement satisfaction exhibited by retired individuals with monthly pension income, versus those individuals without monthly pension income, and (3) the demonstration of variation between SES groups in terms of their ability to recover lost capital after periods of market volatility.