Essay No. 3: Age, Birth Year and Wealth

The Demographics of Wealth
How Age, Education and Race Separate Thrivers from Strugglers in Today's Economy
Essay No. 3: Age, Birth Year and Wealth


Hello, this video focuses on the third essay in a series that we call the demographics of wealth; how age, education, and race separate thrivers from strugglers in today's economy. The first essay examined the connection between race and wealth. The second looked at the role of education. And this one zeroes in on the links among age, birth year, and money.

Our researchers, Bill and Bryan, pored over data from more than 40,000 interviews. These were conducted with heads of households between 1989 and 2013 by the Federal Reserve for its survey of consumer finances. For simplicity, Bill and Bryan examine just three stages in the adult life cycle, young adulthood, which we define as being under the age of 40, middle age, those between 40 and 61, and old age, a category that starts alas at the age of 62.

Our assumption was that many important aspects of each stage of life remain basically the same over time. Young people are the most likely to face decisions about getting married, buying a house for the first time, and beginning to save. Middle aged people typically build wealth rapidly and begin to pay down debt. Old families are much more likely to be retired from work and may begin to spend down their wealth.

One word of caution. Many discussions about income inequality or wealth inequality ignore the life cycle. For example, in simplistic rankings of all families, the young ones often end up being portrayed as poor, but poor may be a stretch. Some of these young families will accumulate a substantial amount of wealth when they get older, such as families headed by someone with a graduate or professional degree. These young families probably don't feel or act poor. The point is that it's important to keep track of a family's demographic characteristics, like age or education, not just income or wealth at a point in time.

Similarly, old families are often stereotyped as rich. And indeed, many appear high in a simple ranking of accumulated wealth since they've had a lifetime to save. However, some old families with above average wealth may not feel or act rich because their income is low and health care and other expenses are high. Again, it's important to recognize demographic differences, in this case, where you are in the life cycle.

That said, old people today seem to be faring much better financially than old people a quarter century ago. The median wealth of old families rose 40% between 1989 and 2013 from just under $150,000 to about $210,000.

Families that were middle aged and young in 2013 fared worse than their counterparts in 1989. The median wealth of a middle-aged family in 2013 was 31% lower than 1989, declining from around $154,000 to around $106,000. The median wealth of a young family dropped more than 28% from $20,000 to just over 14,000. The same patterns were evident in terms of median family incomes too. All these figures are adjusted for inflation.

Old families have long had more wealth than younger families. One of the keys to old people's success is saving during the peak earning years of middle age. Old families also have learned enough to prudently manage their balance sheets, diversifying their assets beyond a house, which usually has a low return on investment, paying down debt, and keeping substantial cash on hand for emergencies. We found that old families are much better at saving regularly, paying their bills on time, and avoiding high cost credit. These are examples of little things that can add up over time to increase your wealth.

Young people might accumulate wealth faster if they manage their balance sheets more like older people.

Where this would really hit home for many young people is in the timing of homeownership. A young family that takes out a huge mortgage to buy a home usually doesn't have any money left to buy stocks or other assets. If that family delays a home purchase, it can pursue investments early on that will yield a much greater return than a house. The family can also save up for a big down payment, which will cut down on the debt burden. By following this path, a young family can greatly increase its chances to accumulate above average wealth.

Still this doesn't explain why the wealth gap between the typical young and old family is growing. One thing that does not seem to explain the increasing age-related wealth gap is education. Young families today are on average better educated than any previous group of young people. We would expect today's young people to be doing very well, but apparently, they are not.

Part of the explanation for why young families seem to be slipping could be that they are more racially and ethnically diverse as a group than ever before. And we know that race and ethnicity-based disadvantages continue to loom large in our society.

The era into which you were born can make a huge difference too.

For example, those born about 1970 are likely to have about 40% less wealth over their lifetimes than those born about 1940, holding everything else constant, such as education, race, and age, and after adjusting all dollar amounts for inflation. You could say that some people are just born lucky.

We don't have much data on the so-called greatest generation, those born early in the 20th century. But we do know that in general, their median wealth continued to rise into retirement.

The next generation, dubbed the silent generation, saw its wealth grow even faster at key stages of life. Born between 1925 and 1944, they seem to have benefited from their low numbers as births plummeted during the Great Depression.

Then came the baby boomers. After World War II, the birth rate skyrocketed and economic growth was strong. Still the baby boomers, once they hit middle age, saw their median wealth fall short of their predecessors when they reach the same age.

This surprising interruption in the steady upward match of wealth across generations seems to be carrying over into Generation X, those born between roughly 1965 and 1980. When looking at their median wealth in their 30s, it is clear that they are on a lower path than the baby boomers.

As for millennials, those born after 1980, there's not enough data to yet indicate how they will fare financially. However, it's safe to say that millennials, also known as Generation Y, make up the most diverse and probably best educated generation to date.

If you read our essay, you will find a discussion of many other related angles. Each could provide a clue as to why the three age groups are where they are on the wealth spectrum.

To read all the essays and watch all the videos in this series, see the website of the St. Louis Fed's Center for Household Financial Stability. There you will find other information on our research into the finances of American households. Thank you.

Executive Summary

Although there may be downsides to old age, those 62 and older can take heart in knowing that the odds are in favor of their being wealthier than younger people. And the gap has widened considerably over the past quarter-century—in favor of old people.  That said, being old isn’t what it used to be.  Baby boomers, who are now retiring in droves, are likely to be less well-off than their “old” counterparts in the two previous generations. And it looks as if members of the next two generations — Generation X and Generation Y (the millennials) — might also end up less  wealthy than the generation before them.

These are just some of the connections between age and wealth that were found in researching this  essay—the third—in our “Demographics of Wealth” series. (The first looked at the link between race/ethnicity and wealth. The second examined the connection between education and wealth.) All of the essays are the result of our analysis of data collected between 1989 and 2013 by the Federal Reserve for its Survey of Consumer Finances. More than 40,000 families were interviewed by the Fed over those years.

For this essay, we looked at age in two ways: where a person stands in the life cycle (young, middle-aged or old) and how birth-year cohorts stack up against one another.  This latter approach allows us to make some comparisons of  generations, from “the greatest generation” of WWII fame to the millennials of today.

Among our findings:

  • The median wealth of old families (headed by someone at least 62) rose 40 percent between 1989 and 2013, from just under $150,000 to about $210,000. The median wealth of a middle-aged family (40-61) in 2013 was 31 percent lower than in 1989, declining from $154,000 to about $106,000. The median wealth of a young family dropped more than 28 percent, from $20,000 to just over $14,000.  (All figures are adjusted for inflation.)   
  • The explanations for this growing gap are difficult to pin down.  The lack of education does not appear to be to blame, given that each succeeding generation is better-educated than the previous one. Younger families could be losing ground, in part, because they are more racially and ethnically diverse than ever before—and  we know that race- and ethnicity-based disadvantages continue to loom large in our society.
  • Baby boomers could be faring worse (not just in wealth, but income) because there are so many of them.  They’ve had to compete more for jobs, housing, investment opportunities, etc., than did the less-numerous generation before them. That so-called silent generation (born 1925-1944) was relatively small because birth rates dropped during the Great Depression; the “scarcity” of people then worked to their advantage during the post-WW II economic boom.

Read all the essays and watch all the videos in this series »

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