The federal reserve just came up with some sobering statistics of a “wealth gap” which is becoming more pronounced as time goes by. It appears that younger generations may not do as well as their parents generation going forward. This could have some very significant impacts going forward. What is ironic is that the younger generations feel somehow that they are entitled to have as much or more than their parents. Consider the following:
The growing divide between the rich and poor in America is more generation gap than class conflict. The rich are getting richer, but what’s received little attention is who these rich people are. Overwhelmingly, they’re older folks.
Nearly all additional wealth created in the USA since 1989 has gone to people 55 and older, according to Federal Reserve data. Wealth has doubled since 1989 in households headed by older Americans.
Not so for younger Americans. Households headed by people in their 20s, 30s and 40s have barely kept up with inflation or have fallen behind since 1989. People 35 to 50 actually have lost wealth since 1989 after adjusting for inflation, Fed data show.
Older people have always been wealthier than younger ones. What’s changed is the disparity between the generations. Old people have been racing ahead, helped by government retirement benefits. Young people are running in place, partly because they’re delaying careers to get more education.
Much attention has focused on the multimillion-dollar paychecks of corporate chief executives and hedge fund managers, who’ve enjoyed windfalls at a time when the wages of ordinary workers have stagnated. But the graying of wealth and income may be the most important twist in the new inequality.
The implications are far-reaching and can turn conventional wisdom on its head. Social Security and Medicare increasingly are functioning as a transfer of money from less affluent young people to much wealthier older people.
Because the older generation hasn’t set aside enough money to cover promised government benefits, young people will have to make up the difference or older people will face benefit cuts. The financial shortfalls of Social Security and Medicare over the next 75 years are so large — $340,000 per household — that they dwarf the wealth of every age group. This hidden debt will make it a challenge for young people to accumulate as much wealth late in life as their parents have.
In the USA, income typically peaks at age 57 and wealth tops out at 63, according to the Fed’s Survey of Consumer Finance. Wealth describes a person’s net worth — assets minus debts — and reflects a lifetime’s accumulation of income, investments and inheritances. Income measures how much a person earned in a single year.
Inequality within age groups hasn’t changed much. People in their 30s or 60s have roughly the same wealth distribution among themselves as in 1989. What’s changed is inequality between age groups.
Older people are thriving in wealth and income. Younger people are not. How wealth and income have changed for two age groups, after adjusting for inflation:
•Ages 55-59: Median net worth — the middle point for all households — rose 97% over 15 years to $249,700 in 2004, the most recent year for which data is available. Median income rose 52%.
•Ages 35-39: Median household net worth fell 28% to $48,940. Median income fell 10%.
The increase in the wealth of older people tracks a sharp reduction in elderly poverty that began in the 1960s, when Medicare was introduced and Social Security benefits were improved.
The wealth gap between young and old is about to grow even more extreme. Baby boomers — 79 million people born from 1946 to 1964 — are entering their years of greatest wealth and maximum government benefits.
Today, the oldest baby boomer is 61. The youngest is 43. As tens of millions of people head into their years of peak wealth, inequality could soar until baby boomers pass on inheritances to their children or grandchildren.
The inequality debate has focused mostly on the super-rich, who have been getting super-richer. The top-earning 1% of taxpayers — those who make more than $310,000 annually — collected 17% of total income in 2005, up from 13% in 1989 and 8% in 1975, according to Internal Revenue Service data analyzed by economists.
Most wealth accumulation happens rapidly and late in life — after the kids leave, when income is high, debts drop, 401(k) accounts fatten and home equity swells, according to Fed data.
The safety net — Social Security, pensions and Medicare — also has resulted in big increases in income for the elderly and a sharp decline in the rate at which they dissipate their assets in old age. Most people over 60 have no mortgage debt, no credit card debt and no car loan.
Trends for younger people have gone in the opposite direction. Mortgage debt peaks for people in their late 30s, the same time they have the most kids at home. About 11% are at least 60 days behind paying on some debt.
Younger generations now delay the start of wealth accumulation. They postpone careers to get more education. They marry later (delaying the financial benefit of a shared household), have children later (delaying the arrival of lower-cost, kid-free days) and inherit money later (their parents live longer).
Younger people may not look poor. They have more stuff than ever — more valuable houses, cars and other assets. But they are so much deeper in debt than their parents — student loans, credit cards, mortgages, car loans — that their net worth has shriveled.
What’s not clear is whether today’s younger people will catch up. Will they reap financial rewards late in life as their parents did?
The poor have been helped by expanded government programs, including the Earned Income Tax Credit, which provided $36 billion to 21 million poor households in 2006. The wealthiest have been helped by lower tax rates on income and capital gains.
Other factors besides age contribute to income inequality.
So far, though, the return on education has paid off for older people, but not for younger generations.
The net worth of households headed by a college-educated person ages 55-59 rose to $526,300 in 2004, up from $271,515 in 1989, adjusted for inflation.
This group has enjoyed enormous income gains, too, and had a median annual income of $100,634 in 2004.
By comparison, wealth and income have declined for college-educated people in their late 30s and risen only slightly for college grads in their early 40s. In short, age has mattered more than education in widening the wealth gap in recent years.
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