Skip to content

The Greatest Wealth Transfer Ever

July 16, 2012
united states currency eye- IMG_7364_web

united states currency eye- IMG_7364_web (Photo credit: kevindean)

The Greatest Wealth Transfer Ever: Undone by Demographics

Besides being the primary players in the global events that led to the United States becoming the world’s pre-eminent power of the last 60 years, the Greatest Generation was projected to make one last imprint on American history: through their productivity and thrift, the Greatest Generation as a group would leave the greatest inheritance in recorded history to their Boomer children. In keeping with the “great” rhetoric of their era, this event was deemed the “Greatest Wealth Transfer Ever” by the financial media. It was a great storyline, with a tidy, feel-good ending. And almost too good to be true…

Americans born in the early 20th century who weathered the Great Depression, won World War II, and birthed the Baby Boomers, have often been referred to as the “Greatest Generation,” referencing a best-selling book of the same name written in 1998 by Tom Brokaw. Besides being the primary players in the global events that led to the United States becoming the world’s pre-eminent power of the last 60 years, the Greatest Generation was projected to make one last imprint on American history: through their productivity and thrift, the Greatest Generation as a group would leave the greatest inheritance in recorded history to their Boomer children. In keeping with the “great” rhetoric of their era, this event was deemed the “Greatest Wealth Transfer Ever” (GWTE) by the financial media.

When the conversation about the coming Greatest Wealth Transfer Ever began about a decade ago, Baby Boomers couldn’t help but see this predicted event as a potential windfall. These generous inheritances would be a “bailout” for their own lagging retirement savings, and settle their extensive borrowing. Having given birth to the Baby Boom generation, the Greatest Generation would now fund its retirement. It was a great storyline, with a tidy, feel-good ending. And almost too good to be true…

A June 11, 2012, Wall Street Journal article by Anne Tergesen titled, “Counting on an Inheritance? Count Again.” begins:

 

For a growing number of boomers, things aren’t going according to plan. The post-war generation is living longer – and many are spending their savings along the way. And, of course, many of them also took a hit in 2008.

The result is that, as a group, boomers likely won’t be getting as much of an inheritance as they hoped. Even worse, far from receiving a bequest, a growing number are tapping some of their own savings to help their cash-strapped parents make ends meet.

 

What happened? And how did it happen so fast? Has the Greatest Wealth Transfer Ever (GWTE) vanished?

An examination of the events of the past decade can uncover a number of factors that have converged to create a pessimistic perspective on the GWTE ever coming to fruition. The bursting of the real estate bubble, the stock market’s subsequent decline, and the recent economic recession certainly played a part. Technology has been a major influence as well. The Information Age has reshaped manufacturing, expanded medical knowledge and treatment, and created a global economy; what happens in China, Russia, or Europe impacts the financial lives of Americans, and vice versa. But the variable with arguably the greatest impact has been demographics. And demographics are strong determinants of long-term economic outcomes.

The obvious demographic indicator is: the Greatest Generation substantially exceeded the life expectancies of the preceding generations. As Tergesen states, this means some would-be inheritances are either delayed or consumed. Consumption of accumulated wealth is often accelerated by longer life spans, because living longer today usually entails significant medical and healthcare expenses at the end of life.

A not-so-obvious factor is the connection between America’s financial behavior and Baby Boomer demographics. This relationship made for unique economic possibilities. But as the demographics have changed, many of these economic relationships have become unworkable. The wealth creation associated with the Greatest Generation was built on expansion, particularly of the population. During the period prior to World War II, the national fertility rate had been declining, due largely to the economic distress of the Great Depression. A March 2009 report from the Population Reference Bureau put the national fertility rate during the pre-war years at 2.3, (i.e., American women of child-bearing age averaged slightly more than two children). During the Baby Boomer period (roughly 1946-1964), this number increased to nearly 3.5.

Combine this robust population growth with a post-war economy converting from making armaments to consumer products, and the result was a powerful economic explosion. New families needed new homes, new cars, and new schools. And as technology advanced, there were new things to make, new markets to enter and new workers to make them. There was always more – more demand, more work, more money to make.

Boom times are well-suited for credit expansion. When the market seemed limitless, both lenders and borrowers believed the potential profits far outweighed the risks. And it was true.

The American economy was so productive it overwhelmed most of the dubious financial decisions made by individuals, businesses and governments. Prior to the emergence of the Baby Boom, American consumers were cautious about personal debt; within a decade, financing became an accepted practice for automobiles, furniture, washing machines and TVs. Unions could negotiate generous pensions from corporations because projected expansions could overcome unreasonable assumptions. Although Social Security, implemented during the Great Depression, failed to meet its actuarial assumptions in response to increased life expectancies, an expanding population kept the program solvent. And governments at all levels could borrow, confident the growing next generation would pay for it all.

A lot of the “conventional” paradigms of personal finance were formed from this expansion mindset. The standard retirement age of 65 was intended to make room for an increasing cohort of younger workers to support the previous generation. Retirement planning was a “three-legged stool” of Social Security, a company pension, and personal savings. You bought more house than you could afford, with the longest mortgage, knowing market values would rise. These ideas presumed a growing population.

The credit-fueled expansionist financial model works – as long as there are ways for the economy to expand, like markets overseas and new technologies. But a primary engine of economic growth is new babies. And for a variety of reasons, the Baby Boomers have not reproduced like the Greatest Generation – and neither have the generations that have followed them.

A February 16, 2012, USA Today article, citing the Population Reference Bureau, found “The U.S. population is growing at the slowest rate since the Great Depression,” and that the U.S. fertility rate “is estimated to have fallen to 1.9.” This drop below the replacement rate of 2.1 is attributed to the recession, and is expected to inch up slightly. But it is a far cry from the expansive birth rates of five decades ago. Population demographics in the United States have changed.

And if the demographics have changed, it means many of the financial assumptions will have to change as well – for everyone. Need confirmation of the necessity of a new financial perspective? Look at the European Union. Aging, stagnant populations cannot support their country’s social programs, pay their national debts, or expand their economies. And there is a growing awareness that “stimulus spending” – a concept designed for expanding populations – may no longer be a solution.

Bringing the impact closer to home, fewer American workers today have institutional “automatic” programs for financial security. Two of the three legs of the Greatest Generation retirement stool – Social Security and pensions – are wobbly or vanishing for the Boomers and successive generations.

Going forward, government-administered social welfare programs will struggle because there won’t be enough people working to support the recipients. The Social Security Administration reports that today 19% of Americans currently receive a monthly benefit check; that’s almost one in five. As the first wave of Baby Boomers approach their mid-60s, the percentage is going higher – with proportionately fewer workers left to pay the bill.

At the same time, employers and governments are unloading their pension and other “legacy” benefit programs as fast as they can. In June, General Motors announced it was transferring a portion of its pension plan to a private insurer, giving 42,000 retirees the option of receiving a lump-sum distribution or a monthly annuity check from the insurance company. GM management indicated the decision was due to a desire to see its “pension obligation reduced significantly.” A front-page headline from the June 23, 2012 Wall Street Journal announced “More than 40 states have moved to trim pension costs since the financial crisis.”

Over time, national economies will adjust to these demographic changes, and establish new working models for profitability. Some optimistic observers see the recent financial turmoil as a shake-out that will usher in an era of sustainable growth, i.e., a stabilized population coupled to a slow, steady rate of expansion. But the transition to this financial paradise may be bumpy.

For the present, the most effective responses to these demographic-influenced changes are at an individual level. By their sheer size, governments and large corporations are often slow to adjust to changing paradigms, but individuals don’t face the same restrictions. While the details will vary with individual circumstances, there are general ways in which changing demographics may reshape your financial perspectives.

If you want an inheritance or a retirement fund in your financial future, you will have to plan for it. You can’t expect to work 30 or 40 years, then stroll down to Human Resources at age 65 and say “So, what are my retirement options?” And the likelihood of leaving or receiving an “accidental inheritance” is slim to non-existent.

Beyond taking greater responsibility, the new demographics may fundamentally alter many important long-term financial decisions. The biggest change: that most Americans will work longer. The financial feasibility of owning a home (and where you choose to live) may need to be re-evaluated. Borrowing should be re-thought as well, for a house or other items. Changing demographics will influence your choice of retirement accumulation formats. Business models for capitalizing, starting and maintaining a profitable business will be different. And addressing the medical expenses and living arrangements of aging family members will require greater financial attention.

The economic impacts of changing demographics are slow-moving but inevitable. For aware individuals, these trends can present great opportunity. In contrast, those who persist on operating from old assumptions based on the demographics of the past are exposing their financial futures to greater risk.

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: