Contrary to popular belief, the young — not the old — were the big losers during the “lost decade.” Indeed, a comparison of net worth changes by age group shows that those 20-to-39 years old in 2010 have significantly lower net worth than their peers had in 2001.
What’s “significant,” you might ask?
Well, try this. Older people generally gained in real net worth while younger people lost real net worth. So we’re talking about different directions, not one group losing or gaining more than the other. We’re talking about real losses versus real gains.
This is not what the conventional view suggests. The conventional view assumes that older people were hit hard by two stock market declines and the crash of residential real estate. And many were. But as a group, today’s 20-somethings have a lower net worth than the 20-somethings of 2001. During the same period, the median level net worth of Americans age 60 and older increased.
The differences can be extreme. Those who were 80 or older, for instance, enjoyed a 53.8 percent increase in real net worth compared with those 80 and older in 2001. Those in their 20s have 21.8 percent less net worth than their peers had in 2001. The spread here is disturbing.
Compare this to the spot news that we see every day. With Facebook and other hot IPOs, there have been dozens of stories of people in their 20s who are sudden multimillionaires. At the other end of the scale, no day is complete without a story about someone in his or her 50s who has been unemployed for a year or more, or retirees who have lost a bundle in the 2008 market crash. The reality — at least in the aggregate — is different.
How did this happen?
The Federal Reserve Bulletin analysis of changes puts a lot of weight on the real estate crash. You can understand this by comparing what happens to a young couple and an older couple who live in the same neighborhood.
The young couple purchased their $250,000 home at the top of the market with a 10 percent down payment of $25,000. When the housing market declined by 20 percent, they lose $50,000 in home value. This wipes out their $25,000 equity and then some. The additional $25,000 loss is enough to offset the value of their cars and much of their small 401(k) account. Because they are young, their smaller 401(k) account is mostly stocks, so that shrinks as well. It’s not difficult to imagine a $100,000 net worth couple seeing their net worth chopped by 50 percent.
The older couple has owned their home for many years. So while it’s also worth $250,000, they have paid the original mortgage down to $25,000. This leaves them with equity of $225,000. When the value of their house declines the same 20 percent as the young couple’s house, they also lose $50,000 — but it is “only” 22 percent of their $225,000 equity. Much the same happens with their 401(k) plan. Their losses are smaller because stock market declines were partially offset by fixed-income gains.
This doesn’t mean that life is a bed of roses for older folks. The much-discussed issues are still there. Retirement accounts are smaller, there is less time to rebuild them, and yields on secure investments are pathetic. Similarly, the sale of highly appreciated homes that some older couples had counted on to provide retirement cash either hasn’t happened, or has happened at much lower prices.
What it does mean is that younger people are even more endangered by changes in our economy than older people. It means we have a growing generational security gap. The social side of this change is well documented in Charles Murray’s Coming Apart (Crown Forum, 2012). It’s also well described in Anya Kamenetz’s Generation Debt (Riverhead Books, 2006) and Tamara Draut’s Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead (Anchor, 2007). Economist Laurence J. Kotlikoff and I have explored it in The Clash of Generations (MIT Press, 2012).
However you slice it, this is yet another subject that is not being discussed as we head toward Election Day. It is more important than Republican candidate Mitt Romney’s tax returns, President Barack Obama’s birth certificate, or wrangling over tax cuts or tax increases that are trivial compared to actual taxes and actual spending.
Questions about personal finance and investments may be sent by email to scott@scottburns.com.