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 post-war 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 post-war 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 post-war 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.
— Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome: How Going Broke Will Leave America Richer, Happier, and More Secure.