The Growing Generational Wealth Gap - YouTube

It’s the hope of almost every generation in  history that their children and grandchildren  

will go on to live wealthier more  prosperous lives than their own.

People put countless hours of thought and planning  into things like their children’s education,  

life insurance, and estate  inheritance to make this dream  

a reality, but overwhelmingly  it is still not coming true.

The long-suffering generation of millennials  

are now set to be significantly poorer  than both baby boomers and gen X’ers.

Having entered the workforce during the fallout  of the 2008 mortgage crisis and then being hit  

particularly hard during this current crisis  has meant that today millennials only account  

for 3% of national wealth, where boomers at the  same point in their lives accounted for 27%.

This trend is more than just another pity  party for our fellow latte-sipping millennials.  

On a wider level, the share of wealth  owned by people under the age of 40  

has shrunk from 13% to just  under 7% over the past 3 decades.

Even if we ignore the social issues of younger  families having to make do with half that  

of what their parents did this can have  some serious economic implications.

Young families establishing themselves in life  make up a huge portion of consumer spending.  

Typically speaking people between the age of 25  

and 40 have been seen as the perfect consumer  market. They have full-time jobs and disposable  

incomes unlike younger buyers but lack a  bit of the weariness of older consumers.

Therefore if this trend continues businesses  

around the world might start to lose out on  their Goldilocks zone of consumer spending.

so …

What is causing this downward pressure  on wealth in younger generations?

What will this mean for the future  growth of nations like the USA?

And could this just be a waiting game of  wealth, inevitably getting passed down?

Now even without looking at the headline  figures, most people would be able to  

tell you that new generations are falling  further and further behind financially.

What they might not be able to tell you is why…  sure two major financial disasters didn’t help and  

they often get the blame but if anything shouldn’t  these economic downturns hit established estates  

with more to lose harder than younger people  with decades left in their careers to recover.

Well in theory yes. But of course,  it didn’t really pan out like that.

So what are the economic headwinds  blowing the younger generations

Off course.

The foundation of building wealth is being  able to save money. The reality is for every  

millionaire lottery winner, startup wiz or  beneficiary of great aunt bergets estate  

there are 100 millionaires that  got there by earning good incomes,  

living below their means,  and saving the difference.

In a perfect world of all  other things being equal,  

this process naturally benefits younger investors.

Consider two colleagues, one is a baby boomer  on the verge of retirement one is a millennial  

who has just been promoted into their new job.

Both are earning a good income of $150,000 per  year working as insurance actuaries. Both are  

very sensible with their income and save $50,000  per year after paying taxes and living expenses.

Because of the age difference, the millennial  worker is only just starting to build up some  

wealth and has around $100,000 saved  into a diverse portfolio of stocks.  

The boomer on the other hand has been doing this  for decades and has 2 million dollars invested in  

a very similar format, as well as a family home  that is fully paid off worth around $500,000.

Now lets say a major economic  downturn comes around and causes a 30%  

drop in financial asset and real estate prices.  This means that the millennial worker will lose  

$30,000 in value from their portfolio,  but that baby boomer would lose $600,000  

from their portfolio and be living in  a home that is worth $150,000 less.

In this hypothetical example, the boomer has lost  25 times more than their millennial colleague.

Now I can hear what the comment  section is about to say already. Yes  

these losses are not actually felt unless  either party sells off their assets and  

yes the boomer is still alot richer  than the millennial but consider this.

Assuming the market does not recover it  will take the millennial less than a year  

to recover the loss by saving  their standard $50,000 per year.  

The boomer on the other hand would take  15 years to make up the difference,  

which might be especially difficult considering  that they were on the verge of retirement.

The time series of investment returns over a  long enough time frame are actually not very  

important but short term they can make a huge  difference. In theory people with more money take  

longer to recover from downturns, which we have  demonstrated with our perfect little example here.

All of this to say, that it is not  enough to expain that millennials  

had to go through the 2008 mortgage crisis  early in their careers and use that as the  

sole explanation for the growing generational  wealth gap, there has to be something more.

That something more is likely to be one of the  assumptions that we made we assumed that these  

two colleagues from different generations  were earning as much, saving as much,  

and only using their regular income to contribute  to their savings. Which is of course not true.

Boomers are on average further into their  respective careers and therefore attract  

higher salaries, whats more is that even  at the same point in their working lives  

boomers were earning 20%  higher real take-home incomes.

This was all despite paying significantly less  for their education. The average mathematics or  

statistics degree that would qualify one to become  an actuary would cost just over $12,000 in 1980.

That same degree today would  cost a student around 80,000  

which is more often than not, paid for with debt.

Even in this very generous example  with two very high-income earners  

that puts the millennial 2 years behind their  boomer colleague in terms of saving money,  

and for most people on more average salaries  this difference could take decades to make up.

Saving is another big one, if  we were to take our example of  

a boomer and a millennial in the  same role earning the same salary  

it is going to be significantly easier for that  boomer to save the prescribed $50,000 per year.

A fully paid off family home means that not only  is the boomer benefiting from appreciating real  

estate prices, but they are also avoiding  having to pay rent. Which in the major  

cities that actuaries tend to habitat tends  to cost around $1,500 a month conservatively.

This either means the boomer can live a  nicer lifestyle while saving the same, or  

can save an extra $19,000 a year tax-free.

One of the largest determinants of wealth  

is home-ownership. With the median  net worth of homeowners being $231,400  

compared with the median net worth of US  renters not even breaking 5 figures ($5,020).

A quick disclaimer here is that of course  wealthier people are naturally more likely  

to be homeowners because they can save  a deposit and qualify for a home loan,  

so this correlation is not 100%  causation. But on the flip side  

people that are able to become homeowners, almost  always greatly benefit from being able to do so.

And in fact, this weird quirk of  statistics gives us some insight  

into one of the underlying  causes of this discrepancy.

There were undoubtedly some big wins for boomers,  and some strong headwinds for millennials,  

but this generational wealth gap is actually  just a sign of a problem on a larger scale, 

a regular wealth gap.

Ask yourself, would you rather be in  the bottom 10% of millennials or baby  

boomers in terms of net worth. The correct  answer is that it doesn’t really matter,  

both of these groups are  worth pretty much nothing.

At the other end of the spectrum is  where this difference becomes staggering.

The collective net worth of all 80 million  millennials in the USA is 6 trillion USD.  

that is including everybody from the recent med  graduate with nothing but a cup of noodles and  

half a million dollars in student loan  debt all the way up to Mark Zuckerberg  

who personally contributes about 1.5% of the  total wealth to this collective net worth pool.

6 trillion dollars is  certainly an impressive figure  

but just the top 3,000 richest  baby boomers are worth more.

These 3,000 billionaires  alone make the arguments of,  

student loan debt, housing affordability,  job opportunities and financial instability  

almost completely irrelevant  to the generational wealth gap.

These factors do have implications on the economy  

but when we are looking at why one generation  has such a large collection of total wealth,  

its because it just so happens to be  stacked with massively wealthy billionaires.

Talking about the fallout of the financial  crisis in the context of the generational  

wealth gap would be like talking about a bad  referee call in a little league soccer game  

where one team has lionel messi. Sure those other  factors aren’t helping but at the end of the day,  

it aint gonna make much difference.

Now uber-wealthy people are nothing new but never  in history have they claimed so much wealth,  

and simply by virtue of the fact that boomers  are in the age group that have had enough  

time to found major companies or have had those  companies passed down to them by their parents  

they tend to claim a larger portion  of these statistical wealth outliers.

Ok but one last thing, wouldn’t this have been  the case when boomers were starting out too?  

Despite this their generation  claimed 27% of national wealth  

at the same median age that  millenials only claimed 3%.

Well, this is actually due to 3 main factors.

1 the concentration of wealth that tends to pool  in the hands of 40 - 70 year olds has swelled  

to extreme levels off the back of continued  growth in financial markets over the past 100  

years. This means that even a modest nest egg  accounts for a larger slice of a smaller pie

2 yes admittedly baby boomers did enjoy a  period of good incomes and low costs of living,  

there is no getting around  the fact that this did help.

But maybe not as much as the third point

Which is that there were alot of them. The baby  boom is reference to a figurative boom in the  

number of babies that were born after the end of  world war 2 when this generation went on to join  

the workforce they collectively accounted for  a much larger portion of the total population.

This statistically meant that even if  they were all worth as much individually  

they would account for a larger  portion of the wealth collectively  

because they accounted for a  larger portion of the people.

This chart here does highlight some  very serious issues in the economy,  

but it is not nearly as scary as it’s  publishers would like you to believe.

Consider it like this say you start playing  a video game like world of warcraft.  

If you had started playing this game  when it was first released in 2004  

you would have been doing alright for yourself.

Theoretically, if you so happened to axe the very  first pig or whatever in the game you would have  

accounted for 100% of the total net worth of the  player base even if it only was very briefly.

If you were to start playing the game 1 day later  and slay that same bore chances are it would only  

account for a tiny fraction of a percent  of the total wealth in the economy because  

thousands of players have been hard at work for 24  hours leveling up and making themselves wealthier.

If you start playing the game now, you are  going to end up on a server with the same  

people that have been playing the game for  16 years, if you were to axe that very same  

pig it would account for an infinitesimally  small portion of total in-game wealth because  

this virtual economy is millions of times  wealthier than it was back in the day.

A quick side note is that we are terribly sorry  

for inevitably butchering some of the  finer details about world of warcraft.  

The research phase hasn’t started yet but a  video on the economy of Azeroth is coming soon.

Either way

Millennials have started playing the game of life,  

leveling up and grinding for income decades  after the largest growth period ever.

Which all begs the question  about what this means for the

Future of this wealth

Amongst all of this there is the  comfort that eventually this wealth  

will be passed down from boomers as they  eventually well uhhh hmm you know die.

Unfortunately this does not mean  that we can put our feet up,  

start the clock ticking  and call it problem solved.

A lot of this wealth is in the  form of private companies that  

won’t be worth nearly as much under the  stewardship of their eventual heirs.

We covered this in-depth in our video on  the great wealth transfer, and in many ways,  

this video is an unofficial part 2,  

so if you are curious about this topic go  and watch that video once you are done here.

Shameless plug aside and even if we assume  that this wealth transfer goes flawlessly  

it doesnt solve the issue. Wealth  keeps getting created and most people  

leave their assets to their children who  are normally around 50 - 60 years old.

When this happens it is likely gen X  will be the new wealthiest generation  

in history and then gen Y and so on  and so forth, all while the youngest  

generation which is just starting out from  zero or more likely starting out in debt  

will continue to account for a smaller and  smaller slice of a bigger and bigger pie.

But is this a problem? Well maybe not,  

in many ways the dream of children being richer  than their parents does come true, it’s just that  

they need to wait until an inheritance cheque  comes to them when they are 60 years old.

On a larger scale it could be though. If more  and more wealth pools amongst older generations  

it could seriously impact the potential for  growth amongst people in their prime years.

These are the people between the ages of 25 and 55  

that are out there buying bigger homes for  their families, sending their kids to college,  

buying new cars, going on holidays and  overall being good little consumers.

If a larger chunk of wealth is sitting  dormant with older people who have a  

lower propensity to go out and spend it,  this may exacerbate the entire problem by  

denying young go-getters the opportunity to grab  that money while it is being circulated around.

Final thoughts

The generational wealth gap  is real and it is a problem  

but as with everything it might not be as big  of a problem as people would have you believe.

In the same way that I would rather own 3% of  amazon than 30% of wish.com... a generation should  

be happier owning 3% of modern-day America  rather than 30% of the USA in the 1970’s.

All of that being said these  statistics are perhaps little  

more than a scary looking outcome of  a much larger issue within the USA.

The arguments around wealth inequality are endless  and very divisive but people on both sides of  

the debate need to realize that this wealth  squeeze is just one outcome of this reality.

Would policies like student loan forgiveness,  increased minimum wages, and affordable housing  

policies help to alleviate this? Well, sure  they would certainly alleviate the symptoms.

But anything short of completely  resetting the growth of the economy  

is not going to stop the generational  wealth gap from growing wider and wider.

But if we can’t solve this wealth gap, maybe there  is one that could be addressed, so stay tuned,  

like, subscribe, comment, and all of that good  stuff if you want to see us address that one soon.