ARE YOU BORN to be BETTER OFF THAN YOUR PARENTS?
Which of today’s generations is the worst off economically? Look around and you’ll find countless arguments for each one. Boomers, we hear, will never retire. Xers are underwater on their mortgages. Millennials are buried in student debt and unable to start their careers.
Experts have been making these worst-case arguments in succession ever since overall productivity and wage growth in the U.S. economy sharply decelerated around 1973—their rhetorical intensity rising during each cyclical downturn. In the mid-1980s, a dark cloud appeared over the economic future of young Boomers: Beneath that Beemer-and-Sharper Image exterior, these yuppies were in trouble. Then, in the mid-1990s, people began lamenting the hopeless “buster” future of Generation X. Post-Great Recession, the familiar refrain has started up again, this time about Millennials.
To find out whether any of these claims are warranted, look at the data, the most often-cited measure of U.S. living standards, the Census series for median family income in constant dollars.
Things don’t look great here. There’s been a flattening trend since the early 1970s, and recently, even a shallow decline. But does it really indicate that the young are worse off than the old? No. Unless, of course, the flat average trend balances steep life cycle declines for later-born Americans with ongoing life cycle rises for earlier-born Americans.
Unfortunately for the young, that’s just what has happened. Rearrange the same Census data by birth cohort to see the underlying generational story.
Today’s younger generations really do face a troubled future. Every cohort through early wave Boomers has seen upward jumps in their life-cycle income—all the way up until 2012. But every younger generation that has not yet reached age 60 has experienced no such progress. In fact, the 1955-64 birth-year cohort is the oldest group ever in this Census record to fall beneath an earlier cohort at the same phase of life. Later-born cohorts at younger ages have meanwhile been falling beneath first-wave Boomers for decades—in what amounts to a horrible traffic jam.
Examine living standards by another metric: wealth, the median real-dollar net worth of U.S. families. This illustrates how the expansion of credit since the 1980s boosted household asset values over incomes for many years—and how everything came crashing down by 2010. But as with income, it’s impossible to locate any generational issue until you break the numbers down by age.
Again, the generational contrasts are unambiguous—and even starker than they were for income. From 1983 to 2010, real median net worth nearly tripled for Americans over age 75 and doubled for Americans age 65 to 74. But it fell by 30 percent for Americans age 35 to 40. Reality bites, Gen Xers!
Why do younger cohorts, once again, lag so far behind in their median net worth trajectories? One obvious explanation is the inferior median income growth of younger cohorts: With less income, there’s less to save. Another is their rising degree of income inequality (since this causes median incomes to sink below average incomes).
Why is the impact on wealth even more exaggerated than the impact on income? By applying James Duesenberry’s relative income hypothesis and hypothesize that younger cohorts have saved at lower rates to the extent they’ve had trouble keeping up with the consumption of the cohort just ahead of them. Indeed, emerging research shows that savings rates differentially declined among nonaffluent households in the twenty years preceding 2008. Post-2008, with steep deleveraging among the nonaffluent, this differential has finally started to show up in a sharp rich-up versus poor-down divide in consumption.
The unusual shift in median net worth could also be linked to the timing of catastrophic asset-price declines. The exceptionally long “great moderation” preceding the 2008 crash has worked to the benefit of anyone retiring and cashing out just before that date—and to the detriment of younger cohorts, especially those with 10 to 30 years still ahead before retirement.
Generations do well or badly in the economy for a wide variety of reasons, many of them not obvious or even “economic” at all. Think of how generations are shaped in ways totally beyond their control—such as their aggregate number or their ethnic composition. They’re also shaped in ways they do, in some sense, collectively choose—such as their attitudes toward authority, family, or risk. Along the way, each generation redefines “the American Dream” according to its own vision.
The World War II-winning G.I. Generation came of age with D-Day and defined success in terms of a strong middle class and a “Great Society.” Many of their Boomer kids came of age with Woodstock and celebrated radically more individualistic and values-driven life goals. These differences aren’t mere cultural footnotes. They’ve driven huge changes over time in how much families save, how parents finance their homes or kids’ education, and how voters sway regulatory, tax, and fiscal policy.
These are the stories of five successive generations: the G.I.s (born 1901-24); the Silent (born 1925-42); Boomers (born 1943-60); Generation X (born 1961-81); and Millennials (born 1982-2004), looking at how each generation was viewed by others; how it redefined the American Dream; how it tried to achieve that dream; and how it was helped or hurt along the way by external events.
Born to Be Better Off Than Your Parents? A Recap
What can we learn from these generational narratives?
First, the declining generational trend in median affluence is not a new development.
Media stories often imply that post-2008 Millennials are the first generation of young adults to experience “downward mobility.” Most Xers already know that’s BS. Some have penned eloquent and barely printable responses pointing out that not only did Xers get “f—d over,” but that—unlike Millennials—“Generation X wasn’t surprised. Generation X was kind of expecting it.” Which is why so few of them complained.
Yet, as we’ve seen, even Xers get it wrong: The first cohort group to fall behind was not the Breakfast Club (born in the early ‘60s), but the Madonna – and Michael Jackson-age kids at the tail end of the Boom (born in the mid-to-late ‘50s). As youth, they got buffeted young by the turmoil of the ‘60s. Coming of age, they got slammed by the Ford-Carter stagflation and ultimately started careers much later than first-wave Boomers. More recently, they’ve become 50somethings aiming to retire later in hopes of retiring comfortably—or, abandoning hope, “retiring” early in record numbers on Disability Insurance.
Five years from now, this leading edge of generational downward mobility will begin hitting retirement age. More than a decade ago, it was foreseen that many former yuppies were destined to become “dumpies” (downwardly mobile urban middle-aged people). That era dawns. According to Pew, “early Boomers may be the last generation on track to exceed the wealth of the cohorts that came before them and to enjoy a secure retirement.”
Second, the relative affluence of today’s elderly is historically unprecedented.
Behold the flip side of the declining life cycle fortunes of younger generations. Never before have Americans age 75+ had a higher median household net worth than that of any younger age bracket. And never before have poverty rates among seniors been so much lower than among the young. In 1985, 12% of Forbes’ richest 400 Americans were under age 50—and 4% were under age 40. Today those figures are 8% and 2%, respectively. In fact, though Xers today outnumber the Silent by over 3-to-1, the Silent collectively possess nearly twice as much wealth.
Understandably, today’s elders have become economic backstops for their grown kids and grandkids—subsidizing them, housing them, co-signing their loans, funding extended-family vacations, and setting up college trust funds. The Silent Generation came of age in an era (the early 1960s) when the elderly were vastly more impoverished than younger Americans—hence the need to declare a federal “war” on their destitution. Today, many Silent find themselves waging their own campaign against youth poverty within their own families.
Third, Generation X is currently in the greatest danger.
If you ask which generation is worst off economically. The answer, isn’t Millennials. Few were old enough to lose much wealth in the recent crash. And though they’re encountering a very rough start, they have decades to make up lost earnings and savings. Barring a catastrophic national future, they should be OK.
One should be more worried about Gen Xers, who were hit harder and at a more vulnerable stage in their lives—considering that a large share were not doing well to begin with. Many have become detached from the labour force. Most are used to getting by on their own without recourse to safety nets. And the oldest Xers don’t have much time left to repair their balance sheets before retirement.
Policies targeted at this generation (Americans today aged roughly 35 to 55) should therefore be a national priority—and should emphasize self-help and labour force reattachment. Such policies, at relatively modest cost, might include enlarging the EITC, expanding refinancing options for underwater homeowners, allowing the nondisabled employed to buy in to Medicaid coverage, and slashing student-loan interest rates on continuing education for older adults. We need to help millions of Xers save more, find jobs, and even re-engage with our political system.
Finally, the American Dream is reimagined by each generation.
There was a time when young adults defined the Dream as a bigger home and a bigger pension for everybody. Millennials don’t talk as much about homes and pensions— and certainly not for everybody. They’re more drawn to social networks and peer-to-peer sharing—things that they like, yes, but also that they know they can all afford. In recent decades, Boomers and Xers have gradually redefined the Dream as more qualitative than quanti¬tative—and more private than public.
As goes the Dream, so goes the direction of our nation. We’ve become an economy less focused on building things for our collective future and less interested in the prosperity of younger generations. Remarkably, despite the unprecedented relative wealth of today’s seniors, Congress continues to spend massively on them: Over one-third of the federal budget consists of benefit payments to 65+ Americans. That’s well over $1 trillion, or about $25,000 per person—mostly without regard to financial need. Meanwhile, future-related spending is getting all but squeezed out of public budgets, causing infrastructure to rust and an alarming share of today’s college students to drop out or rush to food banks out of dire need.
As a brute economic proposition, the prospects for America’s younger generations are unlikely to improve until our nation invests as much in the young for what they will do tomorrow as it rewards the old for what they did yesterday. A half-century ago, we were such a nation. Might we become one again? I expect that, in time, the American Dream will shift back again. I already see many signs of this happening among Millennials—in their higher savings rates, desire for community, and closer connection to family life. As voters and leaders, this rising generation will sooner or later galvanize a change in that direction.