Why those born in the late 1930s and 1940s are richer than those who came before — or after.
By Kevin Williamson
One of the great American assumptions — that while individuals and families may rise and fall, each generation will end up on average better off than the one that preceded it — has been the subject of much scrutiny in the past decade. Democrats and their affiliated would-be wealth redistributors have argued that the large income gains enjoyed by the highest-paid workers threaten the American dream of ever-upward generational mobility, while others have worried that the housing meltdown and the Great Recession, which inflicted serious damage on the net worths of many American families, now stand in the way of that dream. Deficit hawks, including yours truly, have long worried that the entitlement system, with its unsustainable wealth transfers from the relatively poor young to the relatively wealthy old, would eventually leave one generation — probably mine — on the hook, having paid a lifetime’s worth of payroll taxes to support a system of retirement benefits likely to fall apart before we’ve recouped what everybody keeps dishonestly insisting is an investment. It’s fashionable to hate the Baby Boomers, who are numerous and entitlement-loving, for the problem, but in fact they may be the first generation to feel the sting of the reversal.
A new paper from the Federal Reserve Bank of St. Louis, authored by William R. Emmons and Bryan J. Noeth of the Center for Household Financial Stability, finds that when it comes to lifetime wealth accumulation, it matters — quite a bit — which year you were born in, and that those born in the late 1930s through the 1940s not only did better than the generations that came before them but also are on track to do better than those born in the postwar era and after. “After controlling for a host of factors related to income and wealth, we find that cohorts born in the late 1930s and 1940s have experienced more favorable income and wealth trajectories over their life course than earlier or later-born cohorts. While it is too soon to know how cohorts born in recent decades will fare over their lifetimes, it appears that the median Baby Boomer (born in the 1950s and early 1960s) and median member of Generation X (born in the late 1960s and 1970s) are on track for lower income and wealth in older age than those born in the 1930s and 1940s, holding constant many factors other than when a person was born.”
One of the great American assumptions — that while individuals and families may rise and fall, each generation will end up on average better off than the one that preceded it — has been the subject of much scrutiny in the past decade. Democrats and their affiliated would-be wealth redistributors have argued that the large income gains enjoyed by the highest-paid workers threaten the American dream of ever-upward generational mobility, while others have worried that the housing meltdown and the Great Recession, which inflicted serious damage on the net worths of many American families, now stand in the way of that dream. Deficit hawks, including yours truly, have long worried that the entitlement system, with its unsustainable wealth transfers from the relatively poor young to the relatively wealthy old, would eventually leave one generation — probably mine — on the hook, having paid a lifetime’s worth of payroll taxes to support a system of retirement benefits likely to fall apart before we’ve recouped what everybody keeps dishonestly insisting is an investment. It’s fashionable to hate the Baby Boomers, who are numerous and entitlement-loving, for the problem, but in fact they may be the first generation to feel the sting of the reversal.
A new paper from the Federal Reserve Bank of St. Louis, authored by William R. Emmons and Bryan J. Noeth of the Center for Household Financial Stability, finds that when it comes to lifetime wealth accumulation, it matters — quite a bit — which year you were born in, and that those born in the late 1930s through the 1940s not only did better than the generations that came before them but also are on track to do better than those born in the postwar era and after. “After controlling for a host of factors related to income and wealth, we find that cohorts born in the late 1930s and 1940s have experienced more favorable income and wealth trajectories over their life course than earlier or later-born cohorts. While it is too soon to know how cohorts born in recent decades will fare over their lifetimes, it appears that the median Baby Boomer (born in the 1950s and early 1960s) and median member of Generation X (born in the late 1960s and 1970s) are on track for lower income and wealth in older age than those born in the 1930s and 1940s, holding constant many factors other than when a person was born.”
One does feel a twinge of envy for those born in the
late 1930s and 1940s, the so-called Silent Generation. (Silent until you
mention entitlement reform, at which point they become the Generation
That Will Not Shut Up.) Talk about great timing: too young to fight in
the big war, but just old enough to be entering the work force during
the great postwar boom. The dream of constant generational improvement
did indeed hold — at least up until their time. This no doubt came as a
surprise to many of them: Having been born and raised in the shadow of
the Great Depression and wartime austerity, it must have been far from
obvious to them that they would represent a high-water mark for
generational prosperity.
When it comes to the thrifty ways of
those who suffered through the Depression, folk economics is borne out
by the data: By the end of World War II, the U.S. savings rate hit 25
percent, according to the Federal Reserve Bank of Kansas City. The
children born during that era did not save quite so aggressively as
their parents, but the savings rate from 1959 to 1984 totaled 11.2
percent of disposable income. From 1996 — the year our representative
Generation Xer (me) finished college — through today, the savings rate
ran barely more than half that: 6.1 percent. The rate in August of this
year was 4.6 percent, which is down a bit from the August 2012 rate.
Savings
is the key to personal and national financial stability, not only
because it is the means through which wealth is accumulated over the
course of one’s lifetime in order to fund retirement, but for other
reasons as well. It provides a cushion against economic turbulence
during one’s working years, for example by ensuring that if you lose
your job you have the ability to sustain yourself while looking for a
new one and the means to relocate for work, which is so often necessary.
It means that you have the ability to take advantage of economic
conditions, for example by buying a house when prices are low, with a
substantial down payment that reduces your interest expenses. It means
you can avoid high-interest propositions such as car loans and
credit-card financing. Money makes money.
When we talk about savings, we usually talk about the benefit to the
saver. That’s significant, but there’s another, arguably more
significant benefit: Money saved is money invested, providing capital to
an advanced techno-industrial economy that utterly depends on it.
Investors create prosperity beyond that which they personally enjoy.
But
let’s not come down too hard on the Generation Xers just yet. If your
working years spanned 1957 to 1997, then your career covered an era in
which real economic growth was almost 20 percent higher than it has been
from 1996 to the present. If you happened to enter this vale of tears
in 1973 and are proud to be the home of a Y chromosome,
then you should be aware of the fact that, as Jeffrey Sachs calculates
it, men’s incomes peaked before you had moved on to Gerber Graduates.
(Household incomes have gone up because women work more and earn more
than they did in the 1970s.) That stinks for Generation X, but it isn’t
much better for the Baby Boomers, who were early in their careers when
wages began to stagnate.
Members of the Silent Generation have weathered economic storms,
notably the Great Recession, better than most, in no small part because
they had more savings, less debt, and less of their net worth tied up in
their homes. That may be because they are smarter and thriftier than we
are (I am open to that possibility). It may also be because it was
easier for them to save, to forgo debt, and to pay down their mortgages.
Part of that is lucky timing: If you were 70 when the housing meltdown
happened, there’s a good chance that your house was paid for and any
losses you experienced were on-paper abstractions; if you were 30,
chances are that the tanking value of your house was complicated by the
fact that it was a leveraged asset. (Regardless of age, an important
variable is whether you were dumb, e.g., if you took out a nothing-down
variable-rate interest-only mortgage on a house you could not possibly
afford because you believed that a house was a magical asset, the price
of which moves only in one direction.)
In theory, older
households should do worse during a severe economic downturn because
asset prices are pro-cyclical, meaning that they rise when the economy
is strong and decline when it is weak. But the authors of the St. Louis
Fed paper found the opposite: “A key differentiating factor between
young and old families is the overall strength and resilience of their
income sources and balance sheets. Older families indeed were affected
more severely when asset prices fell sharply, but many older families
had diversified assets, low or no debt, sufficient liquid assets, and
adequate net worth before the crisis in order to ride out what turned
out to be a temporary downturn.”
A final piece of the puzzle is
that entitlement overhang I mentioned above. For the Silent Generation,
the New Deal and Great Society programs redistributing money from the
relatively poor young to the relatively wealthy old have been a
resounding success — call it the Great Deal — but one that is ultimately
unsustainable. Today’s young people already are seeing diminishing rates of return
on Social Security, and, as the authors of the St. Louis Fed paper
argue, it is likely that those going into retirement now and in the
future will see less redistribution in their favor than did members of
the Silent Generation.
What to make of this? The first is a point
that legions of policymakers and politicians fail to — or simply refuse
to — acknowledge, which is that the immediate postwar era was a unique
period in our economic history shaped by the fact that most of the
world’s surviving industrial capacity was located in the United States,
while most of Europe and Asia were struggling to recover from the
ravages of the war. The United States was responsible for about 60
percent of the world’s manufacturing output in those years and 61
percent of the economic output of what are now the OECD countries.
The
second point is that it pays to live like a member of the Silent
Generation, even if you have less in the way of resources to do so.
Beyond date of birth, their income and wealth correlates strongly not
only with obvious factors such as education but also with being married —
and, interestingly enough, with having more than the average number of
children. They are responsible investors with diversified holdings,
relatively little debt, and sufficient cash on hand. They are (and have
been) unlikely to have a car loan or credit-card debt that is large relative to their income or wealth.
The
difference now is that if you want to be the beneficiary of a wealth
transfer from the young to the old, it’s going to have to be from the
young you to the old you via savings and investment, because the
government of these United States already has indentured your future to
pay for past indulgences.
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