Bust of the Baby Boomer Economy: "Generation Spend" Tightens Belt

With millions of Baby Boomers entering or nearing retirement in the coming years, a three-decade old pattern of consumer spending is likely to change dramatically, as disposable income not only declines but shifts from discretionary areas such as retail to more essential ones like health care.


The aging population will make it more difficult to grow consumer spending the way the U.S. did in the 1990s, or anytime since World War II.

Pam Danziger, founder of Unity Marketing, a firm specializing in consumer insights, says it is a predictable shift. “As people age, they move out of that period of acquiring, or materialism, into a post-material life stage,” she says. Notorious for being the spending generation, most boomers have acquired lots of “stuff” during their lives.

“Once you reach 60, the question becomes, ‘what do you want to do with the remaining twenty or so years of your life?’ I guarantee you nobody answers that question, ‘I want to buy another diamond ring or another Mercedes,” Danziger says.

"People, by the time they get to their mid-sixties, are interested in consuming experiences," says Matt Thornhill, founder and President of the Boomer Project and author of Boomer Consumer: Ten New Rules for Marketing to America's Largest, Wealthiest, Most Influential Group.

Interestingly, as people get older, their view of time changes. Younger people have what Danziger calls a “daily life span.” “As you age, the demands on your daily time magically disappear and it is not about the 24/7. It’s about the limits of your eighty-year life span,” she says. That is what drives people to travel the world, or do the things they couldn’t or didn’t when they were young.


According to the U.S. Blue Chip Consensus forecast, real consumer spending, which not long ago grew by an average of 3.7 percent annually for the ten years ended in 2000, is projected to grow by only 2.0 percent, on average, for the decade ending in 2015. This represents the slowest long-term growth rate of real consumer spending since the 1940s.

Real after-tax personal income is also expected to decelerate, from 3.3% in the period ended 2000 to 2.4 percent in the period ending in 2015. The comparably faster growth of income relative to spending for the ten years ended 2015 signals an increase in savings that should benefit financial services.

The recession and collapse of asset values have caused boomers to immediately cut back on spending and increase savings. “While some of them have saved money for retirement, a vast majority of them haven’t,” says Thornhill. Even those who have saved, have seen a big dent in their 401k and retirement plans. Self-reported data shows anywhere from a 5 percent to a 30 percent cut in spending by the boomer generation, Thornhill points out. He also mentions a survey done by AlixPartners LLP, which indicates that Americans expect their “new normal” spending levels to be 86 percent of pre-recession levels.


Likewise, according to the Bureau of Economic Analysis, personal savings as a percentage of personal income was 4.5 percent in third quarter 2009, up from 1.7 percent 2007. Though this statistic represents the entire population, boomer led households are one in three in the U.S.

Boomers who can afford to save more will save more, Thornhill says, if only to replenish depleted 401ks. “If they don’t have money to save they are going to pay down debt,” he says.

What will they cut out? Less of each boomer dollar will go toward luxuries and more will go to necessities in the coming years. Personal luxuries like expensive clothing, fashion accessories, jewelry, and watches are most vulnerable, Danziger says. The Bureau of Labor Statistics Consumer Expenditures Survey also points to a 27 percent overall drop in spending on decorative items for the items for the home.

“Everyone is hunkering down,” says Timothy Smeeding, Distinguished Professor of Public Affairs at the University of Wisconsin-Madison, and co-author of The Economics of an Aging Society. “If you are not sure, you’re not going to buy whatever that next big thing is.” In addition to cutting out luxuries, Smeeding says that the housing market is going to be particularly hard hit, as second home purchases have moved off the table.

New home sales in the fourth quarter of 2009 trailed their average of the three years ended 2006 by 68 percent, which helps to explain the accompanying 8 percent drop for furniture and appliance store sales. Also, unit sales pace of new cars and light trucks for 2009’s final quarter plunged by 35 percent from its average pace of the three years ended 2006. The aging of the giant baby-boom cohort makes it unlikely that any of these major categories of consumer spending will come roaring back to their respective long-term trend.


The expected deceleration of consumer spending will contain a significant exception.

The health and wellness industries will thrive in the years to come. According to projections by the Centers for Medicare and Medicaid Services, by 2018, national health spending is expected to reach $4.4 trillion and comprise just over one-fifth (20.3 percent) of GDP. This is up from 2009’s $2.5 trillion and 17.6 percent.

Doctor with stethascope
Doctor with stethascope

Over time, spending on healthcare will accelerate relative to overall economy. The annual growth rate of outlays on health care will jump from 2010’s 4.6 percent to 7.2% by 2018, where the latter increase will far exceed GDP’s forecasted increase of 4.6 percent.

Travel, dining, and things the boomers can “experience” will also do well. Home renovation and improvements will also be strong, says Thornhill, as boomers will opt to retrofit their houses for their new lifestyles. Financial services should also fare well as retirement planning becomes increasingly critical.


Another important note on boomer psychology is the different way they are looking at retirement. “Boomers are much, much less likely to retire,” says Smeeding. “If you look at the labor market the only group where employment is up is 55 and over.”

They recognize that work and all the things that work means, growth and challenge to their mental capabilities is something that will keep them vital into their old age.

Though delayed retirement may marginally offset spending and saving patterns, it’s questionable whether the boomer’s children, the millennials, born after 1980, will step up to plate and spend in place of their parents. Thornhill thinks it is unlikely due to the fact that millennials came of age during a time of economic duress and because they themselves can’t find jobs.

“It will take time for the millennials to get their careers underway and their incomes on the rise,” Danziger adds. “2020 will be the time.”

It’s kind of ironic. Here is a generation who had grown accustomed to an ever-increasing standard of living, and just as they are about to retire, the boomers find themselves poorer. They face the first nationwide collapse of home prices since the 1930s, and those who were banking on the possibility of financing their retirement on the increased value of their homes can’t do it. And, though people may point the finger at the lack of available credit, the bust of the boomer-driven economy will pack a more lasting punch. In the end, all of the fiscal and monetary stimuli in the world won’t make the U.S. young again.

Watch "Tom Brokaw Reports: Boomer$!", Thursday, March 4 at 9pm ET on CNBC. The program will also air Saturday, March 6 at 7pm ET; Sunday, March 7th at 9pm ET; and Monday, March 8th at 8pm ET.