Ben Steverman
An epic four-decade boom in housing and stock prices made Baby Boomers the richest generation in US history. A new study shows just how difficult it will be for younger Americans to copy that success.
The wealth boom since 1980 widened the gaps between rich and poor and young and old to record levels, the research finds. While the gains were concentrated at the top, bypassing the poorer half of the age group, the average older Boomer reached retirement age 65% richer than the generations born before World War II.Millennials and other young Americans now face a steep climb. Even before stock markets tumbled this year, younger generations were lagging behind Boomers. In the working paper’s most recent data, the wealth gap between adults over 60 and those under 40 has more than doubled since the 1960s and 1970s.As millennials buy real estate and stocks at elevated prices and the elderly tap into nest eggs, there’s been a “transfer of resources from the young to the old,” said Luis Bauluz, an economics professor at Madrid’s CUNEF University, who conducted the research with University of Bonn graduate student Timothy Meyer.
For younger generations to match Boomers’ retirement wealth, asset valuations will need to keep rising — and do so in an era marked by higher inflation and interest rates.
Using a recently developed dataset of US household finances, the research tracks the generations born since 1900 as they worked, saved, invested, retired and died. The study measures wealth as a share of income to compare nest eggs across widely varying economic conditions.
“Wealth in the US is aging,” the study concludes. In the past several decades, all generations started their careers with approximately the same amount of wealth, roughly 1.5 times income. But Americans born from 1940 to 1960 have significantly outperformed: By age 60, older Baby Boomers accumulated 10 years of income on average – up from five to six years of income in previous generations.
Inequality among members of the same generation has also risen. The richest 10% of Americans 60 or older have about 40 times income in savings, while the poorest half have barely the equivalent of a year of income to rely on in retirement.
Inequality is even higher for younger Boomers and Generation X, the cohort born between 1960 and 1979. The richest 10% of these middle-aged Americans hold more than two-thirds of their age group’s overall wealth, Bauluz and Meyer estimate, up from about half for the generation born 60 years earlier.
The study tries to identify what caused this unequal rise in wealth by disentangling the effects of capital gains – rising asset prices – from the decision to save money in the first place. The authors conclude rising income inequality and investment gains produced a unique synergy for the richest 10%.
By earning more, they could afford to save a greater amount in middle age. In the two decades before 1983, the richest 10th of Americans aged 40 to 60 saved about 4% of national income per year. More recently, from 1995 to 2018, wealthier middle-aged adults have saved 9.3% of national income.
Once the money was set aside, rising markets did the rest.
“More and more, the accumulation of wealth takes place through the boom in asset prices,” Bauluz said.
By contrast, generations older than the Baby Boomers weren’t as lucky timing the market. Hit by inflation and stock losses in their middle and later years, they couldn’t rely on capital gains to inflate their wealth – and needed to be far more conservative about spending in retirement.
The study found Americans born in the first two decades of the 20th century lost money in equities and housing overall, especially in the 1970s. They had to build up wealth the old-fashioned way: by setting aside money from each paycheck and saving it.
Will millennials’ wealth path resemble that of the Boomers, or earlier generations? Bauluz worries the post-1980 boom was a one-off event that won’t repeat itself.
“There’s not a lot of room for this mechanism to be as powerful in the future,” Bauluz said. “My intuition is that we are close to the limit.”
More stories like this are available on bloomberg.com.
