Thursday, May. 14, 2009

Why Boomers Can't Quit

Even before the financial crisis, many baby boomers hadn't saved enough for retirement. Then stocks plummeted. In 1998, the average 50-year-old who had been working for at least 10 years had a 401(k) balance of $85,000, according to the Employee Benefit Research Institute. Factor in the recent market drop, and more than a decade later, that worker's 401(k) has grown to just $93,000. In short, we keep getting older, but our 401(k) balances, they stay the same.

Investment firm T. Rowe Price calculates that the oldest boomers will have to delay retirement by nearly nine years in order to recover what they lost in the market. The somewhat good news is that if they defer Social Security and save 25% of their salary, they can reach their golden years in half the time. And it's not just boomers. With the expectation that stocks and real estate will yield less in the future, all of us will have to push back our retirement. Bottom line: "We will have to work longer and harder than we had planned," says Steven Davis, visiting scholar at the American Enterprise Institute. (See how Americans are spending now.)

In the next year or so, older workers hanging on will make things worse. Retirement waves usually smooth recessions, as 60-somethings quit, start spending pensions and savings, and make room for younger workers. This time, though, economists think the unemployment rate will surpass 10% for the first time in decades — in part because the normal retirement cycle has been disrupted.

But once the downturn is done, the presence of older workers could be a positive. When more people work, more people spend freely, and that creates jobs. For example, women entering the workforce in the 1960s and '70s didn't cause permanently higher unemployment. There were positive offsets instead: demand for child-care workers took off, the prepared-foods industry boomed. And unemployment rates in the following decades hit new lows. What's more, as jobs in traditional corporate America filled up, more people struck out on their own. New companies were formed. New industries popped up.

A healthy supply of older workers can be the salve for one of the worst types of economic poison — inflation. That may make it harder to get a raise, but it will also lead to higher profits, lower-priced goods and a stronger economy.

Boomers will try to hang on to their jobs en masse. This isn't just any generation — it's the largest, making up 38% of the workforce. Some believe that the U.S. economy is too mature to rapidly create great numbers of new jobs — or at least the traditional kind. Already, older workers are crowding out the younger generation. According to the Center for Labor Market Studies at Northeastern University, employment rates for teens and 20-somethings this decade have fallen, while the number of Americans 55 and older who have jobs has gone up.

That's not all bad either. Young workers are much more flexible when it comes to finding work. They will be more likely to start businesses, embrace new technologies and industries, come up with new ideas to make money and take lower wages. "In downturns, there's more grumbling when the Old Guard is not exiting at the usual rate," says Claudia Goldin, an economics professor at Harvard University. "But the economy has great absorptive capacity. As long as no one is being forced, more people participating in the workforce is better for everyone."

So, over the next decade, have some respect for those working graybeards. By choosing not to retire, they may be doing you a favor.

See TIME's graphic "Happiness on the Job."