Generational Wealth Gap

A recent census report disclosed that the wealth gap between seniors and younger Americans is at an all-time high.  Those over 65 have accumulated $170,494 in total assets, while those between 25-34 had a net worth of $3,662 -- a difference of 47-to-1.  Media commentators floated a variety of reasons for this supposed inequity: globalization, bad timing, and government retirement programs that supposedly transfer wealth from young to old.  The real reason, I believe, has more to do with the choices that the young have made.

One of the most important generational differences has to do with home ownership.  Those over 65 typically purchased homes at a time when prices were low and saw the value of their homes increase.  Even with recent declines, these homeowners are way ahead on their investment.  On the other hand, those who bought in at the height of the market in the mid-2000s have seen the value of their homes decline by an average of 30%.  It's not their fault, the liberal media tells us, that they're underwater and behind on their mortgages. They are the victims of the worst housing market in 50 years.

That is an argument that many would like to believe because it absolves delinquent homeowners of responsibility and helps make the case for government-mandated principle forgiveness.  Unfortunately, that argument is also largely bogus.

For one thing, most of those now underwater did not buy precisely at the market top.  They bought before or after the top, saw their home prices rise or decline, and now sit on an investment that may be somewhat above or below what they actually paid for the property.  On average, the current value of homes purchased in 2002 or 2003 is about the same as the purchase price.  Many homeowners now find themselves underwater not because they bought at the market peak, but because they purchased a more expensive home than they could afford, and because they borrowed against its value as home prices increased.

In other words, they made no allowance for risk.  They bought beyond their means, often after submitting fraudulent loan applications, and then they borrowed more as the value of the property peaked.  They were the victims not of bad timing but of their own bad judgment.

Compare this behavior with that of Americans over 65 -- those with a net worth of $170,494.  This generation purchased "starter homes" in the 1950s and 1960s, normally with a down payment of 5% to 20% on a fixed 30-year loan.  These homes were modestly priced in relation to their buyers' incomes.  (The median home price in 1950 was $7,354 compared to $172,800 in 2008.)  As their incomes grew, those now over 65 moved up to larger homes, but their ambition was always to pay off their loans before retirement.  Except in a real emergency, they did not take out home equity lines of credit.

In too many cases, younger Americans attempted to game the system by purchasing expensive homes, borrowing against the value of those homes, and hoping that home prices would continue to rise.  But it was not just housing where they were gaming the system.  They were doing much the same thing in regard to the job market.

Typically, Americans over 65 sought the best education they could afford, obtained stable employment, and worked for decades with the same employer.  Even those who completed only a high school degree were well-educated -- more so than high school graduates today.  The evidence of college entrance scores is telling: SATs scores peaked in 1963 and have declined ever since -- so much so that testing agencies have felt compelled to adjust the difficulty of exams and recalibrate scores in response to declining aptitudes.  For whatever reasons, young people today are poorly educated in comparison with those over 65.

As to why graduates are poorly prepared, it is not that they are less intelligent: they have simply not worked as hard as previous generations.  Large numbers of college students have chosen "soft majors" over more demanding fields in science, math, and engineering.  And among all students, there has been a declining commitment to study.  Among current college students, time devoted to homework has declined by half as compared to the baby-boomer generation.  The loss of 13 hours per week, over a four-year period, means that today's college graduate has studied some 2,000 hours less than a 1965 graduate.  No wonder he seems poorly prepared; he is.

This failure to obtain an education translates into lower earnings.  CEOs and human resources managers often complain that younger workers are not well-prepared.  A Business Roundtable report stressed the "overall inadequate level of education" among graduates entering the workforce.  In a workplace that increasingly requires more than a high school education (63% of new jobs will require at least some college and 45% a college degree), less than 30% are college graduates.

In the same vein, a report issued by the Conference Board noted that younger workers lack "basic knowledge and skills."  But it is not just preparation.  Managers complain that the "generational characteristics" of millennials include the need for instant gratification, unwillingness to work long hours, and a lack of respect for rules and authority.  As a group, younger workers are just not as disciplined or hardworking as their elders.    

The whole argument that the young are the unfortunate victims of bad timing, unfair trade practices, or generational wealth transfers does not hold up.  Every generation has faced challenges (the Great Depression, World War II, the Vietnam War, the severe recession and inflation of the 1970s and early 1980s), but earlier generations prepared for hard times by studying and working hard, obtaining stable employment, avoiding debt, and saving for retirement.

What separates the young today from earlier generations is their choices, not their luck.  Among past generations, taking on debt was accompanied by a sense of moral hazard.  The possibility of bankruptcy was frightening not only for economic reasons, but for moral ones as well.  Bankruptcy was considered a lifelong stain on one's reputation.  Today it is seen as a temporary hit to one's credit rating.

It's no mystery as to why younger Americans have an average net worth of only $3,662.  So far, as a group, they have made all the wrong choices.  Bad choices have consequences, and for the Millennials, the consequences will be reduced lifetime earnings, a lower standard of living, and a less comfortable retirement.  This is not the fault of their elders, and it is not a situation that can or should be addressed with a government bailout.  As a generation, those under 35 will never recoup what they have lost as a result of their poor choices.  The best they can do is to redouble their efforts, focus on saving and paying off their homes, and trust that they will be rewarded with at least an acceptable if not a prosperous retirement.

Jeffrey Folks is the author of many books on American culture, most recently Heartland of the Imagination (2011).

A recent census report disclosed that the wealth gap between seniors and younger Americans is at an all-time high.  Those over 65 have accumulated $170,494 in total assets, while those between 25-34 had a net worth of $3,662 -- a difference of 47-to-1.  Media commentators floated a variety of reasons for this supposed inequity: globalization, bad timing, and government retirement programs that supposedly transfer wealth from young to old.  The real reason, I believe, has more to do with the choices that the young have made.

One of the most important generational differences has to do with home ownership.  Those over 65 typically purchased homes at a time when prices were low and saw the value of their homes increase.  Even with recent declines, these homeowners are way ahead on their investment.  On the other hand, those who bought in at the height of the market in the mid-2000s have seen the value of their homes decline by an average of 30%.  It's not their fault, the liberal media tells us, that they're underwater and behind on their mortgages. They are the victims of the worst housing market in 50 years.

That is an argument that many would like to believe because it absolves delinquent homeowners of responsibility and helps make the case for government-mandated principle forgiveness.  Unfortunately, that argument is also largely bogus.

For one thing, most of those now underwater did not buy precisely at the market top.  They bought before or after the top, saw their home prices rise or decline, and now sit on an investment that may be somewhat above or below what they actually paid for the property.  On average, the current value of homes purchased in 2002 or 2003 is about the same as the purchase price.  Many homeowners now find themselves underwater not because they bought at the market peak, but because they purchased a more expensive home than they could afford, and because they borrowed against its value as home prices increased.

In other words, they made no allowance for risk.  They bought beyond their means, often after submitting fraudulent loan applications, and then they borrowed more as the value of the property peaked.  They were the victims not of bad timing but of their own bad judgment.

Compare this behavior with that of Americans over 65 -- those with a net worth of $170,494.  This generation purchased "starter homes" in the 1950s and 1960s, normally with a down payment of 5% to 20% on a fixed 30-year loan.  These homes were modestly priced in relation to their buyers' incomes.  (The median home price in 1950 was $7,354 compared to $172,800 in 2008.)  As their incomes grew, those now over 65 moved up to larger homes, but their ambition was always to pay off their loans before retirement.  Except in a real emergency, they did not take out home equity lines of credit.

In too many cases, younger Americans attempted to game the system by purchasing expensive homes, borrowing against the value of those homes, and hoping that home prices would continue to rise.  But it was not just housing where they were gaming the system.  They were doing much the same thing in regard to the job market.

Typically, Americans over 65 sought the best education they could afford, obtained stable employment, and worked for decades with the same employer.  Even those who completed only a high school degree were well-educated -- more so than high school graduates today.  The evidence of college entrance scores is telling: SATs scores peaked in 1963 and have declined ever since -- so much so that testing agencies have felt compelled to adjust the difficulty of exams and recalibrate scores in response to declining aptitudes.  For whatever reasons, young people today are poorly educated in comparison with those over 65.

As to why graduates are poorly prepared, it is not that they are less intelligent: they have simply not worked as hard as previous generations.  Large numbers of college students have chosen "soft majors" over more demanding fields in science, math, and engineering.  And among all students, there has been a declining commitment to study.  Among current college students, time devoted to homework has declined by half as compared to the baby-boomer generation.  The loss of 13 hours per week, over a four-year period, means that today's college graduate has studied some 2,000 hours less than a 1965 graduate.  No wonder he seems poorly prepared; he is.

This failure to obtain an education translates into lower earnings.  CEOs and human resources managers often complain that younger workers are not well-prepared.  A Business Roundtable report stressed the "overall inadequate level of education" among graduates entering the workforce.  In a workplace that increasingly requires more than a high school education (63% of new jobs will require at least some college and 45% a college degree), less than 30% are college graduates.

In the same vein, a report issued by the Conference Board noted that younger workers lack "basic knowledge and skills."  But it is not just preparation.  Managers complain that the "generational characteristics" of millennials include the need for instant gratification, unwillingness to work long hours, and a lack of respect for rules and authority.  As a group, younger workers are just not as disciplined or hardworking as their elders.    

The whole argument that the young are the unfortunate victims of bad timing, unfair trade practices, or generational wealth transfers does not hold up.  Every generation has faced challenges (the Great Depression, World War II, the Vietnam War, the severe recession and inflation of the 1970s and early 1980s), but earlier generations prepared for hard times by studying and working hard, obtaining stable employment, avoiding debt, and saving for retirement.

What separates the young today from earlier generations is their choices, not their luck.  Among past generations, taking on debt was accompanied by a sense of moral hazard.  The possibility of bankruptcy was frightening not only for economic reasons, but for moral ones as well.  Bankruptcy was considered a lifelong stain on one's reputation.  Today it is seen as a temporary hit to one's credit rating.

It's no mystery as to why younger Americans have an average net worth of only $3,662.  So far, as a group, they have made all the wrong choices.  Bad choices have consequences, and for the Millennials, the consequences will be reduced lifetime earnings, a lower standard of living, and a less comfortable retirement.  This is not the fault of their elders, and it is not a situation that can or should be addressed with a government bailout.  As a generation, those under 35 will never recoup what they have lost as a result of their poor choices.  The best they can do is to redouble their efforts, focus on saving and paying off their homes, and trust that they will be rewarded with at least an acceptable if not a prosperous retirement.

Jeffrey Folks is the author of many books on American culture, most recently Heartland of the Imagination (2011).