Shocker: Wealth-age gap widens in era of entitlements, high unemployment
posted at 9:15 am on November 7, 2011 by Ed Morrissey
Alternate headline: Pew Research Pushes Grandma Off A Cliff in Her New Mercedes:
Older adults have made dramatic gains relative to younger adults in their economic well being during the past quarter century, according to a new Pew Research Center analysis of data from two key U.S. Census sources.
All right, let’s see a show of hands. Who among us is shocked, shocked to see that a massive transfer of wealth in the form of entitlement spending from younger workers to older adults, mainly retirees, has resulted in the older adults being wealthier? Oh, let’s not always see the same hands.
Trends in household wealth reveal the pattern most vividly. In 2009, the median net worth (all assets minus all debts) of households headed by an adult ages 65 or older was 42% more than that of their same-aged counterparts in 1984. By contrast, the net worth of a typical household headed by an adult under the age of 35 in 2009 was 68% less than that of their same-aged counterparts in 1984.
As a result of these divergent trends, in 2009 the typical household headed by the older adult had $170,494 in net worth, compared with just $3,662 for the typical household headed by the younger adult. People generally accumulate wealth as they age, so it is not unusual to find large age-based gaps on this measure. However, the current gap is unprecedented. In 1984, the age-based wealth gap had been 10:1. By 2009, it had ballooned to 47:1.
Politico picks up on this “news”:
In fact, 37 percent of the younger group had a net worth of zero or less, nearly double the percentage from 1984. But the percentage of the older group with less than zero net worth has remained unchanged in 27 years, at 8 percent.
To be sure, assets do accumulate as one ages. But the gap between the two groups has doubled since 2005. Even adjusting for inflation, the disparity is nearly five times the 10-to-1 ratio recorded over 25 years ago.
Part of the explanation is that older Americans are remaining in jobs longer, have paid off more of their mortgages, and can collect Social Security benefits, while younger adults are facing the increasing cost of higher education, dramatically lower housing value, and record unemployment.
There is nothing magical or surprising about these results. First, thanks to compound interest, investments tend to gain value more rapidly in later years, which accounts for some of the disparity in these results. Adults under 35 put their cash into their homes rather than retirement accounts, which means that they don’t have investments to accumulate — and thanks to the housing collapse in 2008, don’t have a lot of equity, either, even if they still own a home. After buying homes and establishing families, younger adults then start looking to the future. Plus, high unemployment puts younger workers with less experience at arguably more risk of losing opportunities, although it also puts pressure on older workers with higher salaries as well.
However, those are obviously not the only forces at play here. We have built our system to directly transfer wealth from younger adults to older adults, especially retirees, a process that has only accelerated in the past 25 years with expansions of Medicare and lowering retirement ages in Social Security. When anyone questions this, defenders of redistribution produce television ads showing young adults pushing old ladies in wheelchairs over cliffs. We hear horror stories of old people eating dog food, with the unsubtle context being this could happen to you.
Worse, we’re now not just transferring wealth from young working adults, we’re transferring it from young children and a generation or two yet to come. Our deficits have exploded mainly because we have refused to reform our entitlement systems, which means we’re borrowing to pay for the entitlements we’re handing out now as well as eating up the contributions of younger adults. There is no possibility of honoring the commitments those young workers receive in exchange for this redistribution. It is very much a Ponzi scheme, and we may leave a series of generations holding the bag.
As a class, seniors have a serious fiscal advantage over their younger counterparts. If ever there was a moment for reform, the Pew Research poll shows that we’ve arrived at it now.
Update: A few people have responded by saying entitlements do not equal wealth transfers. Of course they do, at least as currently configured, because payments made today aren’t funding benefits for the contributors; they’re paying for benefits taken today by retirees. If we went to a “Chilean model,” as Herman Cain proposes, or even partial privatization, then the payments made by younger workers would count as their wealth. It wouldn’t go to supporting the accumulated wealth of retirees by letting them extend that wealth through supplemental payouts funded by the younger workers. I probably should have made that explanation more explicit, but frankly thought it was so obvious as to not need explanation.