Sunday, April 15, 2012

A Comparison of the Wealth and Income of the Old and Young Over Time ... Without the Young's Earnings, the Old's Benefits Won't Come

It's seems unfair that the young have to work to pay for government's mandated benefits for the old.

Each generation should set aside enough while working to satisfy its needs in old age. At least that's my view.

And it's especially unfair for the younger workers to support the retirees if the oldsters have more resources than the young, as is the case today. But if you don't like the fairness argument, let's at least agree to be practical about all this generational stuff.

To wit, even if we consider it otherwise fair for the old to have more than the young while the young have to pay for the old, a very practical question surfaces. How will payment of the down the road oldsters' benefits be assured if the younger workers don't have sufficiently high incomes to pay for the oldsters' Social Security and medical related benefits? The money has to come from somewhere.

In other words, in our silly pay-as-you-go U.S. government designed retirement system, the active younger workers are the essential source of funds for the oldsters' retiree benefits. Not the government because that emperor has no clothes of his own to redistribute or give.

So why does this wealth and income disparity between old and young persist today? To be fair, the wide discrepancy is primarily related to housing, but other factors such as student debt, a tough job market for the younger generation, global competition, later marriages and single parent households play big parts as well.

In other words, it's mostly attributable to things other than today's poor economy. Demographics, debt, housing and global competition all play big roles.

In any event, as a society we can't afford for this growing gap to continue indefinitely. I don't have the answers, but the questions are definitely worth asking.

The Old Get Richer, the Young Get Poorer summarizes a newly released report by the Pew Research Center:

"The old have gotten wealthier, while the young have become poorer. That’s the conclusion of “The Old Prosper Relative to the Young,” a recent report by economists and researchers at the Pew Research Center.

In documenting a rising age gap with regard to economic well-being, the authors compare households headed by adults over age 65 to households headed by adults younger than 35. They examine data over time–particularly from 1967, 1984, 2005, and 2009-2010. (The comparison between 2005 and 2009-2010 illustrates the impact of the Great Recession.)

Here are some of their conclusions:

• From 1984 to 2009, the median net worth of older households rose 42%. For younger households, it declined by 68%.

• The gap in wealth between older and younger households widened over time. In 1984, the median net worth of older households was $108,000 higher than that of younger households. But by 2009, the median net worth of older households was $166,832 higher than that of younger households, the “largest (gap) in the 25 years that the government has been collecting this data.” (All figures are expressed in 2010 dollars.)

• In younger households, median adjusted annual income rose 27%, from $38,555 in 1967 to $49,145 in 2010. (Again, the figures are in 2010 dollars.) At the same time, income for older households rose 109%, from $20,804 to $43,401.

• From 2005 to 2009, median net worth for older households declined 6%, versus a 55% decline for younger households. Meanwhile, the adjusted median income of the oldest households rose 8%, while the youngest households experienced a 4% drop.

Housing plays a big role in the trend . . . . Older Americans have been “the beneficiaries of good timing, in the form of the long run-up in home values that enabled them to accumulate wealth via home equity,” the report says. While older homeowners purchased “long ago, at “pre-bubble” prices” many younger adults “bought as the bubble was inflating,” and now owe more on their mortgages than their homes are worth. (They have also been saddled with higher college loan debt than their same-aged peers of past decades, the report says.)

There are labor market trends at work, too. Due in part to the recession, today’s young have experienced a “delayed entry into the labor market.” But older adults are staying in the job market longer. Currently, 16% of those ages 65 and older are employed, versus 10% in 1985.

With Social Security as a steady income source, older Americans have experienced less poverty and earnings volatility than their younger counterparts."

Summing Up

It would be convenient but not accurate to attribute the growing old-young problem solely to when homes were purchased. And to be sure, that's a big reason for the growing disparity.

In fact, many of the oldsters indeed did buy their homes before the housing bubble while many youngsters bought at or near housing's peak. That said, it's not the only troubling part of the old-young financial comparison.

The oldsters are better off than ever. Not the case for the youngsters.

In addition to more home equity, the opportunity to work past age 65 is helping many oldsters cope. When these factors are combined with guaranteed and inflation adjusted Social Security benefits, the oldsters are doing pretty well as a whole. Add in low out-of-pocket and virtually cost free medical care, and most retirees can live well during retirement.

So the incomes of the oldsters are fixed while the younger generation likely will have to fend for itself. Who will pay for them?

And many of the young are off to a tough start. Burdensome student loans and an inability to land good jobs will cause lots of young people to struggle getting established in their careers. Meanwhile, the global labor market will make things even tougher.

And a delayed start and early struggle to get a good job often results in a lifelong struggle to get ahead of the game. When this is combined with a heavy load of student debt and a competitive job market, things may be difficult for today's younger workers for a long time.

I don't have the answers to how we fix all this, but I do know it has to be fixed.

For one thing, we all need to face reality and try to get the private sector back on track and leading us forward to a healthy economy and job market.

Energy independence, too.

Then we can move forward together, young and old alike, as Americans should.

Thanks. Bob.

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