What are your odds of being a millionaire, do you think? One in 10? One in 50? One in 100?
If you’re over 62, your odds of having at least $1 million in net wealth (your total assets minus your total debt) are relatively achievable -- about 1 in 7. But if you are under 40, your odds are low: 1 in 55.
In the last 25 years, the odds that an old person is a millionaire have improved slightly. But for young people, they have gotten much worse.
These figures come from a new paper by economists at the St. Louis Fed’s Center for Household Financial Stability, which shows evidence of a growing wealth gap that few people are talking about -- the gap between the young and the old.
The paper, by William Emmons, Bryan Noeth and Ray Boshara, draws on surveys of 40,000 families that the Fed carried out between 1989 and 2013 to examine the all-important role that your age plays in how much income you make and how much wealth you accumulate. It offers a few clues as to how young people can game the system and end up like their wealthy older counterparts, as well as a lot of evidence to show that things are just different for young people today.
One of the most important points that the paper makes is that everyone’s income and wealth tend to follow a kind of natural pattern during their life.
Young people (generally defined here as those under 40) haven’t been working for many years, so they don’t have an opportunity to save as much; they also need to make investments in things like education and new home ownership. Middle-aged people (40-61) have been working long enough that they start to accumulate wealth rapidly. And old people (62 and up) begin to draw down on their wealth, to finance their retirement.
You can see these trends in this incredible graph below, from their paper. People born in different years (1901, 1904, 1907 and so on) were surveyed at various times between 1989 and 2013 about their median family income. The chart below shows their age on the horizontal axis, and the median family income they reported making at the time on the vertical axis.
The slope of each of the different colored lines shows how income was changing for that group between 1989 and 2013. For example, for the youngest generations, who appear on the left-hand side of the graph, the lines sharply slope upward because their net income is rising.
Here's the same graph for wealth (assets minus debt), rather than income. If you compare this with the previous chart, you can see that net worth takes a longer time to amass than income, and then declines less slowly. That's partly because a lot of people take on debt at the beginning of their lives -- student debt, mortgages, etc -- and thus have negative net worth. It's also because people lose their incomes as they retire, but tend to hold on to their largest sources of net worth, like their homes.
From bad to worse
Basically, young people have always been poor. But looking beyond that basic trend, you can see that today’s young people are poorer than young people of the past.
The period of time in which someone is born can also have a dramatic effect on their wealth compared with other generations. The winners of this historical jackpot appear to be those who were born between 1930 and 1945 and came of age after World War II, who are sometimes called The Silent Generation.
Both the Silent Generation and the generation that came before them, called The Greatest Generation because they fought in World War II, benefited from America’s rapid economic growth after World War II. (As Thomas Piketty describes in Capital in the Twenty-First Century, this was not necessarily a happy story: The U.S. grew so fast after World War II because it was the only place in the world with manufacturing capacity – Europe had literally been leveled.)
But The Silent Generation appears to get an additional boost because they were born during the Great Depression, a time when people had fewer babies overall. Their lower population meant that they had less competition overall for jobs, housing, investments and other opportunities. Sociologist Elwood Carlson called the generation “the lucky few” because they were smaller than the generation that came before. African-Americans and women born in those years had far more opportunity, and the generation also benefited from the expansion of the American safety net, including Social Security and Medicare, during their lives.
“[P]eople born in the first half of the 20th century simply may have been in the right place at the right time as they were lifted by a rising tide,” the economists write.
Then came the Baby Boomers, the populous generation born after World War II. They haven’t fared as well as their predecessors, in part because their greater numbers have meant more competition, and perhaps in part because the world is just a different place. The Boomers were the first generation to really experience the effects of globalization and competition from workers in the developing world. That, as well as automation and the decline of labor unions have all eroded wage growth on the lower end of the income spectrum.
The charts below illustrate this difference. A sliver of the Greatest Generation, born in 1915-1917, is represented on the far right side of both graphs in teal. Part of the Silent Generation (born 1933-1935) appears in cornflower blue, while some Boomers (born 1954-1956) appear in beige. The horizontal axis shows the person's age, and the vertical axis shows their income (on the left) or median net worth (on the right).
If you look at Figure 3 on the right, you can see how much better the Silent Generation did than the generations that came before or after them. Notice where the blue line overlaps with the teal line -- that shows that those born between 1933 and 1935 had a much higher net worth in their 70's than those born between 1915 and 1917. In the same graph, the overlap between the blue line and the beige line shows that the Silent Generation also had a higher net worth than the Boomers did when both generations were in their mid to late 50's.
But even Boomers appear to be doing quite well when compared to the generations that came after them. The really sad story is Generation X, which has benefited much less from rising living standards, the St. Louis Fed economists say. They are represented by the purple line in the right-hand graph above. Millennials also appear to be faring poorly, though they haven’t really been earning income long enough to make historical comparisons -- in the graphs above, they are just a black dot.
In just 25 years, the wealth gap between young and old people has yawned wider. In 1989, old families had 7.6 times as much median wealth as young families. By 2013, it had grown to 14.7 times.
According to the economists’ calculations, someone born in 1970 has a quarter less income and 40 percent less wealth than an identical person born in 1940.
It’s not clear exactly why this is, the economists say. The financial crisis and Great Recession certainly set young people back, but young people were doing comparatively worse even before that. And the trends are true even though America’s younger generations are its most educated ever.
Part of the reason could be that younger Americans are far more diverse than older generations, and race- and ethnicity-based disadvantages continue to loom large in the U.S., the economists say. White and Asian families are far wealthier than black and Hispanic families in the U.S., across all age groups.
The difference may also be due to the difference in financial decisions between young and old people. Old people generally have more diverse investments, carry less debt and are more cushioned against financial shocks than younger people.
If young people want to increase their chances of being wealthy, one strategy is to emulate the behavior of older people: keeping an emergency fund, paying down debt, avoiding high-cost credit, and putting money into higher-returning investments, the economists say.
One strategy that might work for young people is delaying the purchase of a house. By doing so, young people can save and make a bigger down payment later, and thus lower their debt burden, as well as make more diverse investments in the interim.
But even if Millennials and Gen Xers follow these strategies, the historical trends don’t appear to be on their side. “Some people are just born lucky,” the economists conclude.
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