The Old, the Young, and the Inter-generational Transfer of Wealth

Elderly Americans are now wealthier than their younger counterparts, and the gap is growing in the wake of the recession. Meanwhile, Social Security and Medicare—largely wealth transfers to the elderly—continue to constitute significant portions of the federal budget. The reasons for this are mostly historic. Social Security was created in the environment of the Great Depression, when GDP crashed more than 45% and unemployment surged from a meager 3.2% in 1929 to 24.9% in 1933. One of the remedies the federal government implemented was meant to ensure that the elderly would not be destitute. This is in a time when an analysis of almost any cross-section of the population revealed poverty to an extent unimaginable by today’s standards. However, older Americans were singled out for aid because their advanced age limited their opportunity to find work and financial security.

But in the intervening eight decades, much has changed. The elderly of the Great Depression, when life expectancy was about 60 years, are not the elderly of today, when life expectancy is 79 years. The economic situation of the old is far from being one of near-destitution. A new study   from the Federal Reserve Bank of St. Louis shows that in 1989 the wealth of households headed by older Americans (ages 62 and above) was about the same as that of the households headed by middle-aged Americans (ages 40-61). By 2010, however, the older households were on average 30% wealthier than households headed by the middle-aged.

This recent study is hardly the first to show how the young are getting poorer while the old are getting richer.  This reality obviously amplifies the perception that policies such as Social Security and Medicare have merely become wealth transfers, as opposed to policies protective of older Americans.

This point stands independently of whether Social Security was a “good idea” at the time of the Great Depression, and independently of whether Social Security and similar government programs are working well or poorly. Whatever one’s answers to those questions, the fact that the old are doing very well while the young are struggling is a challenge to these programs’ underlying premise.

Comparing the economic situation of older Americans to other age groups leads to startling conclusions, especially among poorer Americans. According to the study from the St. Louis Fed , as of 2010 the average net worth of White and Asian households headed by middle-aged Americans in the bottom 20% of the wealth distribution was about $18,000. The net worth of similarly poor White and Asian households headed by older Americans? More than $54,000. That’s a 300% difference. The discrepancy for poor African-Americans and Hispanics is largely similar.  And even more startling is the comparison with households headed by Americans younger than 40, whose average net worth in 2010 was actually negative—the result of mortgages and educational loans. And yet, these younger Americans, saddled with debt and expenses, are required by law to finance the retirement of the now much richer older Americans.

It is no secret that the continued existence of these inter-generational transfer programs is sustained because older Americans are far more politically organized than younger Americans. It seems that despite the changing reality, younger Americans do not seem to be particularly motivated to reform these programs. One reason is that younger Americans are simply busier than older Americans in trying to build a career and a family, and have less time to devote to civic engagement. The sustainability of government transfer programs, while always on voters’ radar, is never the major issue that decides elections. It may be surprising to recall that George W. Bush had campaigned on reforming Social Security in the 2000 election. But partly because it was a peripheral issue in that campaign, there was no majority of Americans to support the reform when the Bush administration finally began to push for it in 2006.

Moreover, stereotypes have a long half-life even when they stop being accurate. If some younger Americans mistakenly believe that older Americans as a group are poor and in need of help, support for change is less likely.

But perhaps the most important reason for the continued wealth transfer from the young to the old may be the long-term nature of problems that these policies create. Problems such as wealth disparities and growing national debt metastasize over a period of decades. It’s not surprising, then, that election after election this issue gets pushed aside in favor of more pressing concerns, like economic growth or terrorism. For a meaningful reform to occur, we might have to wait for these long-term consequences to finally become short-term ones. Unfortunately, this change might well come in the form of a debt crisis when the federal government finally finds itself having trouble borrowing to meet its obligations to the elderly.