It’s the hope of almost every generation in history that their children and grandchildren
will go on to live wealthier more prosperous lives than their own.
People put countless hours of thought and planning into things like their children’s education,
life insurance, and estate inheritance to make this dream
a reality, but overwhelmingly it is still not coming true.
The long-suffering generation of millennials
are now set to be significantly poorer than both baby boomers and gen X’ers.
Having entered the workforce during the fallout of the 2008 mortgage crisis and then being hit
particularly hard during this current crisis has meant that today millennials only account
for 3% of national wealth, where boomers at the same point in their lives accounted for 27%.
This trend is more than just another pity party for our fellow latte-sipping millennials.
On a wider level, the share of wealth owned by people under the age of 40
has shrunk from 13% to just under 7% over the past 3 decades.
Even if we ignore the social issues of younger families having to make do with half that
of what their parents did this can have some serious economic implications.
Young families establishing themselves in life make up a huge portion of consumer spending.
Typically speaking people between the age of 25
and 40 have been seen as the perfect consumer market. They have full-time jobs and disposable
incomes unlike younger buyers but lack a bit of the weariness of older consumers.
Therefore if this trend continues businesses
around the world might start to lose out on their Goldilocks zone of consumer spending.
so …
What is causing this downward pressure on wealth in younger generations?
What will this mean for the future growth of nations like the USA?
And could this just be a waiting game of wealth, inevitably getting passed down?
Now even without looking at the headline figures, most people would be able to
tell you that new generations are falling further and further behind financially.
What they might not be able to tell you is why… sure two major financial disasters didn’t help and
they often get the blame but if anything shouldn’t these economic downturns hit established estates
with more to lose harder than younger people with decades left in their careers to recover.
Well in theory yes. But of course, it didn’t really pan out like that.
So what are the economic headwinds blowing the younger generations
Off course.
The foundation of building wealth is being able to save money. The reality is for every
millionaire lottery winner, startup wiz or beneficiary of great aunt bergets estate
there are 100 millionaires that got there by earning good incomes,
living below their means, and saving the difference.
In a perfect world of all other things being equal,
this process naturally benefits younger investors.
Consider two colleagues, one is a baby boomer on the verge of retirement one is a millennial
who has just been promoted into their new job.
Both are earning a good income of $150,000 per year working as insurance actuaries. Both are
very sensible with their income and save $50,000 per year after paying taxes and living expenses.
Because of the age difference, the millennial worker is only just starting to build up some
wealth and has around $100,000 saved into a diverse portfolio of stocks.
The boomer on the other hand has been doing this for decades and has 2 million dollars invested in
a very similar format, as well as a family home that is fully paid off worth around $500,000.
Now lets say a major economic downturn comes around and causes a 30%
drop in financial asset and real estate prices. This means that the millennial worker will lose
$30,000 in value from their portfolio, but that baby boomer would lose $600,000
from their portfolio and be living in a home that is worth $150,000 less.
In this hypothetical example, the boomer has lost 25 times more than their millennial colleague.
Now I can hear what the comment section is about to say already. Yes
these losses are not actually felt unless either party sells off their assets and
yes the boomer is still alot richer than the millennial but consider this.
Assuming the market does not recover it will take the millennial less than a year
to recover the loss by saving their standard $50,000 per year.
The boomer on the other hand would take 15 years to make up the difference,
which might be especially difficult considering that they were on the verge of retirement.
The time series of investment returns over a long enough time frame are actually not very
important but short term they can make a huge difference. In theory people with more money take
longer to recover from downturns, which we have demonstrated with our perfect little example here.
All of this to say, that it is not enough to expain that millennials
had to go through the 2008 mortgage crisis early in their careers and use that as the
sole explanation for the growing generational wealth gap, there has to be something more.
That something more is likely to be one of the assumptions that we made we assumed that these
two colleagues from different generations were earning as much, saving as much,
and only using their regular income to contribute to their savings. Which is of course not true.
Boomers are on average further into their respective careers and therefore attract
higher salaries, whats more is that even at the same point in their working lives
boomers were earning 20% higher real take-home incomes.
This was all despite paying significantly less for their education. The average mathematics or
statistics degree that would qualify one to become an actuary would cost just over $12,000 in 1980.
That same degree today would cost a student around 80,000
which is more often than not, paid for with debt.
Even in this very generous example with two very high-income earners
that puts the millennial 2 years behind their boomer colleague in terms of saving money,
and for most people on more average salaries this difference could take decades to make up.
Saving is another big one, if we were to take our example of
a boomer and a millennial in the same role earning the same salary
it is going to be significantly easier for that boomer to save the prescribed $50,000 per year.
A fully paid off family home means that not only is the boomer benefiting from appreciating real
estate prices, but they are also avoiding having to pay rent. Which in the major
cities that actuaries tend to habitat tends to cost around $1,500 a month conservatively.
This either means the boomer can live a nicer lifestyle while saving the same, or
can save an extra $19,000 a year tax-free.
One of the largest determinants of wealth
is home-ownership. With the median net worth of homeowners being $231,400
compared with the median net worth of US renters not even breaking 5 figures ($5,020).
A quick disclaimer here is that of course wealthier people are naturally more likely
to be homeowners because they can save a deposit and qualify for a home loan,
so this correlation is not 100% causation. But on the flip side
people that are able to become homeowners, almost always greatly benefit from being able to do so.
And in fact, this weird quirk of statistics gives us some insight
into one of the underlying causes of this discrepancy.
There were undoubtedly some big wins for boomers, and some strong headwinds for millennials,
but this generational wealth gap is actually just a sign of a problem on a larger scale,
a regular wealth gap.
Ask yourself, would you rather be in the bottom 10% of millennials or baby
boomers in terms of net worth. The correct answer is that it doesn’t really matter,
both of these groups are worth pretty much nothing.
At the other end of the spectrum is where this difference becomes staggering.
The collective net worth of all 80 million millennials in the USA is 6 trillion USD.
that is including everybody from the recent med graduate with nothing but a cup of noodles and
half a million dollars in student loan debt all the way up to Mark Zuckerberg
who personally contributes about 1.5% of the total wealth to this collective net worth pool.
6 trillion dollars is certainly an impressive figure
but just the top 3,000 richest baby boomers are worth more.
These 3,000 billionaires alone make the arguments of,
student loan debt, housing affordability, job opportunities and financial instability
almost completely irrelevant to the generational wealth gap.
These factors do have implications on the economy
but when we are looking at why one generation has such a large collection of total wealth,
its because it just so happens to be stacked with massively wealthy billionaires.
Talking about the fallout of the financial crisis in the context of the generational
wealth gap would be like talking about a bad referee call in a little league soccer game
where one team has lionel messi. Sure those other factors aren’t helping but at the end of the day,
it aint gonna make much difference.
Now uber-wealthy people are nothing new but never in history have they claimed so much wealth,
and simply by virtue of the fact that boomers are in the age group that have had enough
time to found major companies or have had those companies passed down to them by their parents
they tend to claim a larger portion of these statistical wealth outliers.
Ok but one last thing, wouldn’t this have been the case when boomers were starting out too?
Despite this their generation claimed 27% of national wealth
at the same median age that millenials only claimed 3%.
Well, this is actually due to 3 main factors.
1 the concentration of wealth that tends to pool in the hands of 40 - 70 year olds has swelled
to extreme levels off the back of continued growth in financial markets over the past 100
years. This means that even a modest nest egg accounts for a larger slice of a smaller pie
2 yes admittedly baby boomers did enjoy a period of good incomes and low costs of living,
there is no getting around the fact that this did help.
But maybe not as much as the third point
Which is that there were alot of them. The baby boom is reference to a figurative boom in the
number of babies that were born after the end of world war 2 when this generation went on to join
the workforce they collectively accounted for a much larger portion of the total population.
This statistically meant that even if they were all worth as much individually
they would account for a larger portion of the wealth collectively
because they accounted for a larger portion of the people.
This chart here does highlight some very serious issues in the economy,
but it is not nearly as scary as it’s publishers would like you to believe.
Consider it like this say you start playing a video game like world of warcraft.
If you had started playing this game when it was first released in 2004
you would have been doing alright for yourself.
Theoretically, if you so happened to axe the very first pig or whatever in the game you would have
accounted for 100% of the total net worth of the player base even if it only was very briefly.
If you were to start playing the game 1 day later and slay that same bore chances are it would only
account for a tiny fraction of a percent of the total wealth in the economy because
thousands of players have been hard at work for 24 hours leveling up and making themselves wealthier.
If you start playing the game now, you are going to end up on a server with the same
people that have been playing the game for 16 years, if you were to axe that very same
pig it would account for an infinitesimally small portion of total in-game wealth because
this virtual economy is millions of times wealthier than it was back in the day.
A quick side note is that we are terribly sorry
for inevitably butchering some of the finer details about world of warcraft.
The research phase hasn’t started yet but a video on the economy of Azeroth is coming soon.
Either way
Millennials have started playing the game of life,
leveling up and grinding for income decades after the largest growth period ever.
Which all begs the question about what this means for the
Future of this wealth
Amongst all of this there is the comfort that eventually this wealth
will be passed down from boomers as they eventually well uhhh hmm you know die.
Unfortunately this does not mean that we can put our feet up,
start the clock ticking and call it problem solved.
A lot of this wealth is in the form of private companies that
won’t be worth nearly as much under the stewardship of their eventual heirs.
We covered this in-depth in our video on the great wealth transfer, and in many ways,
this video is an unofficial part 2,
so if you are curious about this topic go and watch that video once you are done here.
Shameless plug aside and even if we assume that this wealth transfer goes flawlessly
it doesnt solve the issue. Wealth keeps getting created and most people
leave their assets to their children who are normally around 50 - 60 years old.
When this happens it is likely gen X will be the new wealthiest generation
in history and then gen Y and so on and so forth, all while the youngest
generation which is just starting out from zero or more likely starting out in debt
will continue to account for a smaller and smaller slice of a bigger and bigger pie.
But is this a problem? Well maybe not,
in many ways the dream of children being richer than their parents does come true, it’s just that
they need to wait until an inheritance cheque comes to them when they are 60 years old.
On a larger scale it could be though. If more and more wealth pools amongst older generations
it could seriously impact the potential for growth amongst people in their prime years.
These are the people between the ages of 25 and 55
that are out there buying bigger homes for their families, sending their kids to college,
buying new cars, going on holidays and overall being good little consumers.
If a larger chunk of wealth is sitting dormant with older people who have a
lower propensity to go out and spend it, this may exacerbate the entire problem by
denying young go-getters the opportunity to grab that money while it is being circulated around.
Final thoughts
The generational wealth gap is real and it is a problem
but as with everything it might not be as big of a problem as people would have you believe.
In the same way that I would rather own 3% of amazon than 30% of wish.com... a generation should
be happier owning 3% of modern-day America rather than 30% of the USA in the 1970’s.
All of that being said these statistics are perhaps little
more than a scary looking outcome of a much larger issue within the USA.
The arguments around wealth inequality are endless and very divisive but people on both sides of
the debate need to realize that this wealth squeeze is just one outcome of this reality.
Would policies like student loan forgiveness, increased minimum wages, and affordable housing
policies help to alleviate this? Well, sure they would certainly alleviate the symptoms.
But anything short of completely resetting the growth of the economy
is not going to stop the generational wealth gap from growing wider and wider.
But if we can’t solve this wealth gap, maybe there is one that could be addressed, so stay tuned,
like, subscribe, comment, and all of that good stuff if you want to see us address that one soon.