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posted on 26 August 2017

An Even Wider Generational Wealth Gap?

from the St Louis Fed

Recent studies have shown that many younger generations are likely to be worse off financially in their retirement years than older Americans are now. And it’s possible this wealth gap is even wider than originally thought.

Demographics of Wealth

The St. Louis Fed’s Center for Household Financial Stability highlighted this generational wealth gap in its series, “The Demographics of Wealth." Based on data from the Federal Reserve’s triennial Survey of Consumer Finances (SCF), the series of essays explored the role of demographic factors in determining family wealth and financial stability. The third essay of this series showed that the median inflation-adjusted wealth of American families headed by someone aged 62 and older leapt 40 percent from 1989 to 2013. At the same time:

  • The typical net worth of younger families plunged by 31 percent for the middle-aged (40-61 years old).
  • It dropped 28 percent for families younger than 40.

The next SCF will include data through 2016 and will be released this fall, and the Center will release an updated version of the series soon thereafter.

Underreporting Income in Retirement

Meanwhile, new research from the U.S. Census Bureau highlighted the inadvertent underreporting of a significant portion of retiree pension income. This research has renewed interest in the extent of the wealth gap in financial security between the old and young.

According to the Census report, when administrative income and tax data are matched to responses from the Census Bureau’s Current Population Survey Annual Social and Economic Supplement (CPS ASEC), the resulting median household income estimate for households aged 65 and over was about 30 percent higher than in the CPS ASEC survey results alone.

Misclassifying Retirement Account Withdrawals

The Census report explained this large discrepancy was attributable mainly to underreporting of retirement income from defined benefit pensions and individual retirement account (IRA) withdrawals. Because CPS ASEC survey responses are not verified, it is possible many retirees considered the proceeds of pensions and IRAs as withdrawals from savings, not income. Administrative income and tax data allowed the researchers to correct this underreporting.

However, while the Census report provides more accurate information about current retirees, it is important to remember that it does not eliminate concern that future retirees may have more difficulty maintaining their living standards, as pointed out in the Demographics of Wealth series.

Mind the Widening Gap

As detailed in the Demographics of Wealth essay, for many decades, defined benefit pensions helped millions of Americans build a stable source of income for retirement. Especially for family heads born in the 1920s, 1930s and 1940s, pensions supplemented the relatively higher incomes they earned than family heads born before or later, holding constant a host of demographic, idiosyncratic and period-specific factors.

In addition, this generation (born 1925-1944) was relatively small because birth rates dropped during the Great Depression. This appears to have contributed to strong wealth accumulation for this group.

Conversely, baby boomers (born 1945-1964) fared worse in earning income and building wealth because there are so many of them. They’ve had to compete more for jobs, housing and investment opportunities than have those from smaller generations.

For instance, compared with younger and middle-aged families, today’s older families have:

  • Maintained the strongest balance sheets1 since 1989
  • Earned stronger financial-health scores since 1992
  • Achieved median income and median wealth that have withstood the economic and financial shocks of the Great Recession better

The strong post-WWII economy played a particularly important role in generating strong incomes for retirees born in the 1925-1944 period.

Given that the landscape of retirement has significantly changed and continues to change, it is important for younger generations to robustly manage their balance sheets to accumulate wealth and build financial stability. This is best accomplished by assembling a diversified portfolio of assets, saving regularly, maintaining an emergency fund and keeping debt to a minimum, as summed up in the Demographics of Wealth essay.

Notes and References

1 Measured as an adequate amount of safe and liquid assets, broad asset diversification and low debt.

Additional Resources

Source

https://www.stlouisfed.org/on-the-economy/2017/august/even-wider-generational-wealth-gap

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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