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Is gray the new gold?

The elderly are often portrayed as an economic burden, but many see seniors as a target market.

May 1, 2004


Douglas Clement Editor, The Region
Is gray the new gold?

Editor's note: This is the fifth and final article looking at the aging population of the Ninth District. Read the first four articles in the March issue of the fedgazette.

There's gold in the Black Hills of South Dakota and Kim Benning is an avid prospector. You wouldn't know it, watching him eat lunch at a local diner while he fields calls on his cell phone, but Benning is digging for nuggets as eagerly as those who staked their claims in these parts back in the 1880s.

Benning is owner of Central Hills Real Estate in Hill City, S.D., and he's discovered gray gold: senior citizens (or those soon to be) who want a piece of the Black Hills before it's too late. "That's my classic client right there," he said. "Moved away, college-educated, had a career, took a retirement or early retirement and always wanted to live in the Black Hills."

Most of his customers aren't interested in buying a home. "But they want that perfect acreage, five to 10 acres with national forest on one or more sides, in the country, a babbling brook." So they buy the land and spend the next few years devising a floor plan for their log cabin and an exit strategy from their work life. "They want to get a piece of the Hills," Benning said, "and they're afraid that if they wait, the prices will escalate. Accurately so."

Benning is part of a coming trend in the Ninth District and the nation: businesspeople whose target market listens to Springsteen not 50 Cent, plays the market rather than GameCube and favors merlot over Mountain Dew. They're boomers, of course, the largest and most affluent generation in American history, and as they near retirement, an increasing number of businesses are trying to figure out how to capture their assets. From Botox to defibrillators, corporations have already begun to tap this market, as an aging population seeks to remain healthy and youthful.

Wooing seniors

But the private sector is not alone in recognizing the gray market. States and local communities nationwide are also trying to market themselves as retirement destinations, realizing that dollars flying south with snowbirds who land in Florida might better be spent in their backyards. Louisiana, Mississippi and other warm-weather states have launched aggressive marketing efforts in recent years to pull in retirees, but some Northern states are also hoping to siphon off their share. Wyoming Gov. Dave Freudenthal, for example, organized a meeting with local civic and business leaders in November 2003 to tout the benefits of luring prosperous retirees to the state and arguing that Wyoming's natural splendor could serve as a draw.

Ninth District states have similar appeal: beautiful forests, waters and topography, "natural amenities" that attract people of all ages and help, to some degree, sustain the economic health of those areas (see fedgazette "More than just a pretty place?" November 2002). But in recent years, district states haven't been very successful in drawing or retaining seniors. What will happen as the population ages and retirees grow as a proportion of the total remains to be seen, but some local officials suggest that while dismissing the high costs of an older population is naive, so is ignoring the wealth that aging boomers can bring to an economy.

No one would argue that the Ninth District will ever become a major retirement mecca compared to regions with milder winter climates, but district states and counties that do consider efforts to retain their local seniors and draw in the outside elderly should look carefully at both costs and benefits. Seniors are not a single shade of gray—different ages and incomes imply different cost/benefit ratios. And campaigns depicting healthy, silver-haired golden agers tend to distort the true economic story. Such strategies could pay off in the short run, but the long-term benefits may be more elusive.

Staying put

Unlike the highly transient younger population of the United States, most seniors stay put. While roughly 48 percent of Americans 5 to 64 years old in 2000 lived somewhere else in 1995, only 23 percent of seniors moved, according to the U.S. Census. And of those who moved, only 19 percent went to a different state. So at least during the late 1990s, the total fraction of seniors who actually retired out of state was quite modest, just about 4 percent. Still, that's almost 1.5 million seniors—many with pensions to burn.

Florida pulled in most of the nation's "migratory" seniors between 1995 and 2000, followed by Arizona and Nevada. (New York, Illinois and California were the big losers.) But when you calculate the net migration rate for seniors—in-migration minus out-migration, divided by the 1995 population—Florida actually is attracting seniors at a lower rate than Nevada and Arizona. Florida's governor appointed a commission "to evaluate Florida's competitive position in attracting retirees and to recommend ways to make Florida more retiree friendly."

I'm outta here

Not surprisingly, Ninth District states don't pull the kinds of retiree numbers that Southern states do. In fact, the district (including all of Wisconsin but not Michigan's Upper Peninsula) had a net migration loss of 11,000 seniors between 1995 and 2000. (We actually drew in nearly 6,800 hardy seniors from Florida, Arizona and Nevada during that time, but we sent back three in exchange for every one we attracted.)

But some district states have done better than others (see table). Over 6,000 Montana seniors left the state between 1995 and 2000. But Montana also brought in over 6,900 seniors from elsewhere, especially California and other Western states. Most of the retiree influx is to Montana's western counties. Ravalli, Broadwater and Meagher did very well in terms of net migration rates for those 65 and over, which include migration to and from other Montana counties. Steve Seninger of the Bureau of Business and Economic Research at the University of Montana-Missoula said that "Montana's winter climate [isn't] a big attraction, but some winter recreation communities like Flathead County's Big Mountain and Whitefish plus Flathead Lake and Gallatin County's Bozeman with the Big Sky resort and condo developments are certainly attractions for retirees."

Photo: Couple packing car

Net Migration

Net Migration Rate*

North Dakota
South Dakota

*Net migration rate is in-migration minus out-migration divided by 1995 population, multiplied by 1,000.

Source: U.S. Census Bureau, "Internal Migration of the Older Population: 1995 to 2000," August 2003

Charlie Rehbein of the Montana Aging Services Bureau agreed. "People are moving into those areas to retire in," he said. "They want their home in the mountains or by water. Some were born here and had to go elsewhere to work, but now that they're retiring, they're moving back home."

Senior exports

North Dakota has tried that exact strategy. In the early 1990s, the state Legislature financed a program designed to help towns across the state trace the graduates of their high schools back to the 1950s and ask them to return for their golden years. Whatever success it might have had is belied by current numbers indicating that the state isn't just losing its young, it's exporting seniors, too. The state had a net loss of 1,546 seniors from 1995 to 2000, for a net migration rate of -16. It's the worst in the district, but better than New York, with a rate of -45, or Illinois at -28.

Minnesota hasn't fared well either. It had a net loss of over 6,100 seniors and a net migration rate of -10. Some Minnesota counties have done far better though. Wadena, Hubbard and Crow Wing all experienced net migration rates above 60 (by comparison, Florida's was 57 and Arizona's 87). Over the next several decades, demographers are anticipating major retiree influxes into Itasca, Beltrami and other counties in the northern lakes area. "We know that there are some areas of Minnesota that attract older people, or at least younger older people," noted Martha McMurray of the State Demographic Center. "And those are basically northern, north-central Minnesota, the lakes area. And there are similar areas in Wisconsin, amenity areas that attract older people."

But the Minnesota counties that are likely to see the greatest percentage growth in retiree population in the next 20 years are actually metro suburban areas like Washington County, just east of the Twin Cities, which is fairly young now but will see its senior population increase by 75 percent by 2020.

According to LaRhae Knatterud with the Minnesota Department of Human Services, "A lot of boomers are saying they want to age in place. They want to stay exactly where they're at." But real estate developers are coming up with attractive options to entice them out of their homes; Washington County is home to a number of high-end retirement communities and Knatterud said, only half-jokingly, "people are just waiting to turn 55 so they can move into them."

Changing focus

Back in South Dakota, the seniors moving in nearly balanced out those moving away in the late 1990s, for a net loss of 246 in that five-year period. Custer County saw an inflow, as realtor Benning knows, and property values have climbed because of it. The beautiful scenery, temperate climate (for South Dakota) and proximity to Rapid City make it an attractive spot. "A 'natural capital attractor' is what we call it," said demographer Dave Olson at South Dakota State University.

Many areas of northwestern Wisconsin and the Upper Peninsula of Michigan also have substantial "natural capital" or amenity value. And they too attract retirees. "What we've seen, and it's been true for a couple of decades, is counties like Oneida, Vilas and Iron, more what we call the recreational counties [are probably still] going to see ... an in-migration of people as they start to retire," observed David Eagan-Robertson of Wisconsin's Demographic Service Center. The state as a whole actually saw a net loss of nearly 4,000 seniors in the late 1990s, for a net migration rate of -5.6.

In the U.P., several counties have seen an influx of seniors. Keweenaw, one of the state's oldest counties, is that way partly because of retirees moving in. But it's not just there. "Take my own home town, for instance, Munising," said Kathy Salow of the Michigan Department of Labor and Economic Growth. "There are a lot of people who have built retirement homes there, actually nicer than many of the local homes. They're coming from the Chicago area. In our marina we have several [boat slots] rented by people from Chicago."

As to their impact on the local economy, Salow, a labor market analyst, is circumspect. "I guess those people would certainly take advantage of the local goods and services that are available," she said. "But I'm sure that it [doesn't] create as many jobs as if they moved their factory out here."

Salow's comment touches on a key question: To what degree do retirees really benefit the community they settle into? Does a strategy to attract seniors make sense as an economic development scheme?

After all, seniors tend to need more health care than younger people. And just as with any population movement, their influx into a small community or a rural setting can put a strain on the local infrastructure and environment. In Montana, the state's in-migrants during the 1990s have affected construction patterns, electoral outcomes and school enrollment, according to research by the Bureau of Business and Economic Research at the University of Montana-Missoula.

Transfer payments

When Richard Rathge of the North Dakota State Data Center argues that seniors are a boon to the state economy, you get the impression that he's trying to make lemonade out of lemons; after all, North Dakota has an extremely old population. But Rathge has done his homework.

"I've been trying to convince legislators to think of seniors as an economic asset to the state," he said. "Oftentimes when you get in conversations, the first thing they say is, 'Ah, cost for care for seniors is extremely expensive.' And we say that's true. However, the assumption there is that all these seniors are needing care. Which is not true."

Rathge suggests that not only are the costs exaggerated, but the benefits ignored. "Look [at] what seniors are economically bringing to the state. [These are] some really fascinating numbers," he said. In a back-of-the-envelope calculation (by a very exacting demographer), Rathge totaled North Dakota's Social Security and transfer payments: $1.3 billion; Medicaid, $529 million; veterans' benefits, another $55 million. His estimate of private pensions: close to $1 billion. "So add that all up, that creates almost $3 billion, $2.9 billion. If we look at income generation by all sectors, that would be number one, [exceeding] the income earned by all government employees." The numbers surprised Rathge. "If we had known this earlier, we would have put something out that really explains the economic value of our senior population to North Dakota."

Minnesota's Knatterud echoed Rathge's argument. "When you have a lot of retired people, you're getting lots of Social Security checks and that's actually good for economic development. It's a stable source of money, and we know from a lot of studies that older people tend to spend their money locally. ... So it tends to be good for the local economy to have that transfer payment. Medicare is the same kind of thing."

No free lunch

Such perspectives, while understandable, have a "beggar thy Florida" quality about them. Whatever funds show up in North Dakota's plus column appear in someone else's minus column. Even for seniors, there's still no free lunch. So the person who moves from California to Montana when she turns 65 and spends her Social Security check in Kalispell rather than Salinas isn't really adding to the nation's wealth.

Of course, state development campaigns aren't much concerned about cost-benefit at the national level. They want to design policy and programs so seniors (with their assets) pick their particular state. But an economic war among the states (or counties) doesn't contribute to an overall improvement in national well-being.

Moreover, a benefit check draws on the national Social Security trust fund, which takes a cut from every worker's paycheck each month. So the transfer, ultimately, is from one generation to the next. Beggar thy future.

Still, state and other governments are naturally focused on their local situation (geographically and temporally), and from that somewhat narrow perspective, seniors may be seen as an asset, particularly if the bulk of the transfer payments is picked up by the federal government. If Rathge is persuasive enough, North Dakota could join other states in seeking out retirees in order to bolster the economy.

Indeed, many states have special retirement income exclusions in their tax codes for "one or both of two purposes," according to the National Conference of State Legislatures, "to protect the income of taxpayers who are no longer in the workforce, and to serve as an economic development tool by attracting retired people to, or retaining them in, a state." South Dakota, of course, doesn't have a personal income tax, but the other five district states give a variety of full or partial tax exclusions to seniors for their federal, state or private pensions.

So, is gray the new gold?

Measuring the net economic impact of a retiree population is not easy, and most studies of the phenomenon allow only limited conclusions. "All the literature points to a net benefit," said Stephen Golant, a geographer at the University of Florida at Gainesville. But, he pointed out, most of that research—and most retiree attraction strategies—focuses on the affluent old. "If you're targeting a better-educated, higher-income population to your destination," said Golant, "there's every reason to believe that consumer spending by this group on all kinds of stuff will be relatively robust."

A 2003 article reviewing numerous studies in the United States and Canada on the impact of "retiree concentrations" confirmed Golant's view. "The near-term implications of retiree inmigration ... tend to be overwhelmingly positive from an economic or fiscal perspective," wrote William Serow, an economist at the Center for Demography and Population Health at Florida State University.

But both Serow and Golant caution that the long-term impact is less clear. There is "a paucity of knowledge regarding the longer-term effects of such population movement," noted Serow. While retiree expenditures can create jobs, those jobs tend not to pay well and may not provide a solid base for sustained economic growth. Little effort has gone into the analysis of "the failure of the retirement migration process to generate other than a plethora of opportunities for comparatively low-skill, low-wage service employment," wrote Serow.

The ability of an older population to generate local economic development depends, in part, on its level of savings. As Golant pointed out, "a lot then depends on a basic economic question really, and that is, to what extent, over the life span, are these savings sufficiently high to maintain a reasonably high level of consumer spending." Most studies to date have studied young retirees, age 65 to 74. Little is known about the long-range impact of the older old, those 75 and above. "As this population ages, it's more likely, depending on its amount of savings, to deplete those savings," said Golant, "and more likely to fall into the ranks of the lower income."

That's especially relevant to Ninth District states, since census data show that in Minnesota, Montana, South Dakota and Wisconsin, older retirees—those 75 years and above—have much higher net migration rates than younger retirees, those 65 to 74. In other words, the older old may be coming home after their years in the sun.

Older and poorer

"Not all retirees can be described as high-income or footloose," observed Steven Deller at the University of Wisconsin-Madison, in a recent analysis of the economic impact of retirees in Wisconsin. "Often overlooked [are lower-income] elderly who age in place." But Deller's research suggests that even seniors with lower incomes—like many of the older old—may in fact provide a net economic benefit to their community, though the net benefit is lower than that provided by younger, more affluent seniors.

Deller and his colleagues use a mathematical model to simulate the economic impact of relocating 500 households age 65 and over into a rural region in north-central Wisconsin. According to their model, both low-income and high-income households have positive net economic impacts because their local spending, job creation and government revenue generation exceed the costs they impose locally. Still, he noted, the more affluent old do have a higher positive impact. "Communities seeking to maximize the employment and fiscal benefits provided by retirees may want to focus efforts on attracting high- income elderly households."

Missing the points

But most retiree impact studies ignore some fundamental points. Consumer spending is not, in and of itself, an economic benefit. Indeed, expenditure by seniors may simply bid up prices and increase the cost of living for others, just as retirees are bidding up land prices in South Dakota's Custer County and Montana's Ravalli County. Increasing demand without adding to supply doesn't grow an economy.

The real economic benefits of seniors moving to a local community—whether from another state or another county—result from either of two sources. First, if the seniors actually join the local labor force—and some suggest this will be a growing trend (see fedgazette, "Welcome to Retirement," March 2004)—and add to local output, then they've enlarged the economic pie. That is, they've increased the gross domestic product of that community.

Secondly—and this is a point that Deller's model recognizes—if seniors' income (from pensions, work or other sources) is taxed and that tax revenue exceeds their fiscal demands on local government expenditure, then they've contributed resources to local public goods. Seniors tend not to bring children into a community, so they don't incur public expenditures for schooling, often a local government's major budget line. As they age, however, they do need more in the way of health and long-term care.

A natural laboratory

The economic research thus remains inconclusive as to the long-term impact of a retiree population. While the short-run benefits from retirees appear to be positive, "we know practically nothing of the consequences of the aging in place of the erstwhile newcomers," observed Serow. And while the Ninth District is unlikely in coming decades to attract thousands of affluent seniors from other states—regardless of campaigns with that aim—it will inevitably become a natural experiment in the study of relative benefit and loss due to an older population, an aging-in-place laboratory in which the alchemic transformation of silver into gold may—or may not—take place.

See also: "Graying of the District", fedgazette, March 2004


Douglas Clement
Editor, The Region

Douglas Clement was a managing editor at the Minneapolis Fed, where he wrote about research conducted by economists and other scholars associated with the Minneapolis Fed and interviewed prominent economists.