French philosopher Auguste Comte (1798-1857) is purported to have said that, “Demography is destiny,” meaning that a country’s future is determined by the size and age distribution of its population. The concept also helps explain how individuals within a given generation fare throughout their lives.
America’s Generation X includes those born from 1965 through 1980, now aged 45-60. They number 65 million individuals, representing 19.5 percent of the entire US population, somewhat fewer than those in the older Baby Boomers at 20.9 percent, or the younger Millennials at 21.7 percent. They are now entering leadership roles in public and private sectors of the economy, and are often caring for both their children and their own aging parents. Some are sending their children to college at historically-inflated tuition levels for what is increasingly questionable indoctrination rather than genuine education. The oldest of the group are in their peak earning years, contemplating their retirement in a few short years, while the youngest may be just becoming aware of the importance of retirement planning.
A Shift in Pension Plans
The transition from defined-benefit pension plans to defined-contribution 401(k) plans occurred during Gen X’s working years, uniquely affecting the generation’s retirement planning. Both types of pension plans typically deduct employee contributions from paychecks, sometimes matched by employers, but the similarity ends there.
Traditional defined-benefit plans entrust these retirement monies to employer pension managers who invest the funds to generate sufficient funding to pay the promised pensions. Thus employers bear the risks associated with investing the retirement funds. Defined-contribution plans, on the other hand, allow employees to self-direct their retirement funds, usually within employer-approved investment options. These plans place investment risk on employees. Most Gen X individuals entered the labor market during the economy-wide transition from defined-benefit pension plans to defined-contribution 401(k) accounts.
Some defined-benefit plans, especially in the public sector, are struggling with sizable unfunded liabilities, meaning that the plans have promised more pension benefits than they have in reserves to pay these benefits. This means that employers—that is, taxpayers in the case of public sector retirement plans—will have to cover the shortfall in order to pay the promised benefits. Courts have typically found defined-benefit plans to be contractual obligations that cannot be altered if employers have unfunded liabilities.
Gen X’s experience demonstrates that significant changes in employer practices and federal law can affect the wherewithal of an entire generation of Americans. The two primary laws that affect 401(k) plans are the Employee Retirement Income Security Act (ERISA) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act. ERISA—passed in 1974—outlines the rights of consumers whose assets are invested in retirement accounts, including 401(k) accounts. The SECURE Act—passed in 2019—is intended to encourage retirement savings and provides annual increases in employees’ tax-free contributions to 401(k) accounts.
As a generation so directly impacted by the transition from one retirement paradigm to another, Gen X-ers missed out on some of the automatic features in the early days of 401(k) plans, such as automatic enrollment at time of employment and annual increases in deferred contribution limits.
Recent Surveys of Gen X Reveal Conflicting Results
It is not entirely clear how prepared for retirement Gen X-ers may be. On the one hand, the 2024 Annual Retirement Study from Allianz Life Insurance Company of North America reveals some disconcerting results on Gen X’s retirement saving and on retirement itself:
- Many of the Gen X-ers surveyed say that they can’t afford to retire at 65; and a quarter of those without a 401(k) account don’t expect to ever retire at all
- 44 percent say they currently have a plan for how they will take income in retirement
- 48 percent worry they will be forced to live too frugally and not enjoy retirement as much
- 45 percent worry about how to best take distributions from their retirement savings for income during retirement
- 35% worry that they will outlive their retirement plan assets
- Nearly half have done no retirement planning
- They predict they will need an average $1,069,746 in savings in order to retire comfortably, yet they expect to have just $602,944 saved by then
On a more positive note, the Bank of America Institute has found that, although Gen X discretionary spending has been weak compared to that of other generations, Gen X-ers are saving more as they age. Interestingly, Gen X’s investments per household are now 40 percent higher than those of the overall population.
Social Security: The Elephant in the Room
In addition to their employment pensions and other retirement savings, Gen X-ers hope to receive some Social Security benefits—as those in previous generations have and future generations should anticipate having. Yet—with the projected insolvency of the Social Security Trust Fund and resulting reductions in benefits within ten years if Congress fails to act—the retirement survey findings summarized above are disconcerting. While Social Security was never designed to provide all of America’s retirement needs, it has for nine decades provided a backstop to prevent poverty among retired seniors.
Social Security is best viewed as an intergenerational redistribution of income from younger working Americans to older retired Americans, accomplished with a 6.2 percent payroll tax levied on all earned income up to an annual wage-base limit, $176,100 in 2025. Employers are similarly assessed at 6.2 percent of their employees’ earned income. Those who are self-employed must pay both their own 6.2 percent payroll tax and the 6.2 percent employer tax, a total of 12.4 percent, since they are effectively their own employers.
Payroll tax revenues go into the Social Security trust fund, where they are then directly disbursed as benefits to eligible retired individuals. For this reason, some have cynically described Social Security as a Ponzi scheme, in which the later contributors (younger working generations) are taxed to pay for benefits paid to earlier contributors (older Americans receiving benefits).
Misconceptions about Social Security
Social Security was never designed to be a pension plan, yet employees contribute to the program during their working years as they might to a proper pension plan. Employees could probably have accumulated more retirement funds through a defined-contribution plan than with a mandatory Social Security payroll tax, but the program has historically conveyed to the nation an appealing aura of shared social welfare.
After his re-election in 2004, George W. Bush announced his support of individually-managed accounts within Social Security, similar to 401(k) accounts, but the public response to individual accounts was so negative that he never pursued it in his second term, nor have subsequent presidents followed up on the notion.
Paying the payroll tax is a necessary, but not sufficient, condition to receive Social Security benefits. A 1960 Supreme Court decision in Fleming v. Nestor clarified that Social Security was meant to be a form of long-term social insurance, not a contractual government benefit, therefore, merely having contributed payroll tax does not entitle an individual to benefits. It had been—and still is among many Americans—a common misconception that paying the tax is sufficient to receive benefits, but the 1960 decision still governs, and the Court has never revisited the matter.
Gen X and Social Security
If Congress takes no action, the projected insolvency of the Social Security trust fund will affect Gen X. The oldest of the generation—born in 1965, currently age 60—will be eligible to apply for benefits at age 62 in 2027. The youngest Gen X-ers will not be able to apply until 2042. Benefits for all generations could be reduced by about 25 percent, imposing hardship on many seniors.
Elected officials remain mum on plans to assure Social Security’s future viability. The 2024 presidential candidates vowed not to cut benefits, yet offered no plans such as increasing the benefit eligibility age, revising benefit calculations, or increasing the payroll tax, measures most recently taken by the Reagan administration in 1983 to assure Social Security’s future. One can make an educated guess that—rather than overseeing a 25 percent benefit reduction—most politicians would opt to fund benefits from general tax revenues if the trust fund is inadequate. This would require Congressional action.
Once again, comparable to the transition from defined-benefit pension plans to defined-contribution 401(k) plans, Gen X will likely be affected by political action to assure the future of Social Security. Such is the fate of Gen X-ers as the old adage that “demography is destiny” impacts their lives in real time.
