A front page note entitled
Generational Wealth Gap Increases
(USA Today Money Section,
11/7/2011) calls attention to the growth of wealth, or not, by
American households. Based upon a Pew report, the anonymous
journalist’s short note is duplicated as follows:
The wealth gap
between younger and older Americans has stretched to the widest on
record. The typical U.S. household headed by a person 65 or older
has a net worth 47 times greater than a household headed by someone
under 35, according to an analysis of census data by the Pew
Research Center released today. The gap is more than double what it
was in 2005, and nearly five times the 10-to-one disparity 25 years
ago, after adjusting for inflation. More young adults are pursuing
degrees, taking on debt as they wait for the job market to recover.
Others struggle to pay mortgages on homes worth less than their
purchase cost. The report spotlights a government safety net that
has buoyed older Americans on Social Security and Medicare amid cuts
to education and cash assistance for the poor.
There are two distinct parts to
this report. The first part is data based, presents objective
findings verbatim from the Pew report, and ends after “adjusting for
inflation”. This would be an appropriate point to highlight the Pew
report’s findings which explain the gap with some clarity. The
journalist chose not to do so.
In its place, he/she states the report “spotlights a
government safety net that has buoyed older Americans on Social
Security and Medicare amid cuts to education and cash assistance for
the poor.” This is pure creative writing, and is not to be found
anywhere within the Pew report. To suggest that wealth in America
is achieved through a government safety net, Social Security and
Medicare, flies in the face of any rational thought. The alleged
cuts to education and cash assistance to the poor are a liberal’s
fantasy. Only in Washington’s are reported budget cuts actual
increases in annual federal expenditures.
The importance of the Pew report is its perspective on
wealth in America. Wealth is not a fairy tale like Jack’s Bean Stalk
which grew to full maturity overnight. Wealth is an asset which
grows, or not, over a lifetime of many decades. Wealth is the
by-product of deliberate individual and household effort following a
prescription which is well known, but not widely practiced.
Statistics and ratios add little to understanding wealth, although
the findings, on which it is based, are reinforcing for those who
tolerate the numbers. For those who know and love America, the Pew
report documents numerically the experience of many who live the
American dream to the fullest. Household wealth is one measure of
this dream. Wealth is not a “given”, but the byproduct of
individual and household effort based upon hustling rather than
entitlement, working rather than living on the dole.
The primary message of the Pew report is that the American
dream over the 25-year period from 1984 to 2009 is alive for some
and difficult to achieve. Contrary to President Obama’s public
pronouncements of doom and gloom, those who pay attention and follow
a clear and relentless prescription for several decades have an
opportunity to create a nest egg and retire with some comfort. Data
and tables from the Pew report display these stages quite clearly,
while common knowledge fills in the major blanks nicely.
The lifelong stages in the growth of household wealth are as
1) Growing to
2) Young households
3) Home ownership stage
4) Saving and investing
Each stage requires fulfilling
basic tasks which allow moving to the next step in the process with
a greater opportunity for success. Failure to complete any stage
responsibly is likely to reduce the overall growth potential of the
individual, and limits his or her eventual household wealth. The
Pew report puts numbers on household net worth by age group and
arrives at the oldest group, 65 and over, where the level of net
worth helps to define the lifestyle that follows. These stages
define the household behavior and the individual choices that
determine a successful path. The level of success at each stage
determines how far up the ladder one may climb.
Growing to adulthood
adolescence is a relentless struggle with school. While genetics
may play a major role in this first step, growing up in a specific
family contributes significantly to doing well in school. In
addition to what one learns through twelve years of schooling, the
education of both parents is a major contributor to success in
school as measured by college admission scores.
Future wealth through education is best addressed by
focusing on those skills and abilities that support working,
employment, and building a foundation for future learning. The
schools do a fair job preparing students through their academic
tracks, which are college preparation programs. The schools’
greatest failures are in developing those skills and abilities
needed for employment when a college degree is not needed. A great
salesman is probably not helped much through higher education. A
large numbers of students would have a leg-up if the schools guided
the majority of students toward the skilled and semi-skilled
occupations in construction, manufacturing, business, and industry.
In the most general sense the schools should train individuals to
read, write, communicate well, and follow instructions, as many
workers learn their basic job performance skills after they are
Illiteracy, on the other hand, and many other gross
performance deficits are almost certain predictors of difficulty
getting and holding jobs in today’s economy. Steps 2, 3, and 4
above are supported exclusively through steady employment over a
full productive lifetime. An increasing number of entry-level jobs
today require understanding computers, touch screens, and data entry
to perform some simple business or production function.
One widespread myth currently in vogue is that poverty
explains the huge gap in student learning. Responsible research
essentially takes poverty off the table for individual students even
from the poorest of homes, other things being equal. (See
High and Low SAT Scores: The Differenced)
The gremlin in education is that other things are rarely equal.
Poorly educated parents, broken families or no families, and the
cultural values of an individual’s surroundings are the major
predictors of poorly educated children. They are almost certain
predictors of poverty when viewed through wealth in America.
the age of 35 include a wide variety of flavors, from single wage
earners to extended families with children. Almost by definition,
young households in America have no wealth. In the beginning they
are starting a job, a career, and most are working for the first
time outside the home. Many live at home with parents, and only the
census-process and the IRS determine whether adult children living
at home are part of one or more households.
The PEW data on American household net worth across ten
household age groups over this single 25-year period is shown in the
following table. The comparisons by age group are dramatic.
Adjusting for inflation does not make the groups comparable, but
makes the basis for comparison more equitable. The essence of the
values reported is seen in the change column.
Median net worth by age of household in 2010 dollars
65 and over
While the median net worth during
this 25 year period increased only 10%, or $6,000, the pattern of
change across the age groups is startling. The younger each
subsequent household age group, the poorer each group performed 25
years later. These change scores are plotted in Table 2 for visual
Such dramatic and
consistent results suggest a single factor is at work which
influenced the older groups less, or the younger groups more. While
there are undoubtedly many factors in play, this single factor is so
powerful that it must be considered the dog that wags the tail.
This single factor is the increased use of debt, also known as
credit within the national economy. As a general rule wealth is not
created through debt. Over 5, 20, or 50 years the cost of credit is
a relentless drain upon household finances. A young family may
depend heavily upon credit to cover the exorbitant costs involved in
raising children and paying its bills. Unless this demon is
recognized and managed prudently, young family finances may spiral
out of control.
Staying above water financially by young families is
accomplished more easily when there are two income earners in a
household. At this stage the prudent management of credit and the
eventual elimination of most debt is the key to the subsequent
growth of household wealth. Over the past few decades the primary
pattern of family households is the increased divorce rate, more
households with single parents, taking on mortgages with little or
no down payment, and making minimum payments on credit card debt.
The more recent purchase of new and used homes by individuals with
little or no initial equity in those homes is the most recent bubble
to erode the net worth of all families. These are the recurrent
financial burdens young families face which delay or prevent the
growth of household wealth.
the rule among young families. Renting a place to live is often the
expedient first choice for new and growing families. Saving cash
for a down payment on a home mortgage is a common struggle on this
path. Home ownership is identified in the PEW report as the
primary source of household wealth in America over 25 years.
Equity in a home builds slowly. It requires many years to mature
fully, and may involve buying and selling several homes as each
household grows and circumstances change. This is not a foolproof
investment, but home ownership, when managed well, accounts for the
largest single asset among families with positive net worth.
The comparison tables above show clearly that those folks
in the 65 and over group are the only group which performed better
than the median 10% growth rate. These folks have been paying on
mortgages on their homes throughout their working lives, and many
have fully paid off their mortgages by the time they reach
retirement. Having no home mortgage is a rare luxury which allows
diversification into other assets.
Saving and Investing
mature, the hope is for the children to complete school and go to
work. Achieving this, the savings may be diverted into other
investments. Many of these investments are virtually hidden from
view while working. One hidden investment is Social Security whose
benefits at retirement depend upon the level of contributions, from
working, averaged over a period of many years.
Most employers offer retirement plans based upon individual
and company contributions. Funds within these plans are invested in
securities which grow over time. Individuals may establish
retirement accounts independently of employment that grow through
tax paid or tax deferred contributions. Individual investment in
stocks is probably not the best plan. A better alternative is to
invest through stock funds which are managed by professionals and
are traded publicly, like Fidelity’s family of funds.
One known individual purchased 1,000 shares of Aflac as a
young working man in his 20s. This may have been the only stocks he
ever owned. With the growth of value of these shares over his 40+
working years this single asset grew to an amount greater than that
owned by Aflac’s CEO. While he was living primarily on stock
dividends and Social Security at retirement, he was such a
skin-flint that only his heirs fully enjoyed the wealth he
accumulated through his great patience. This is an unusual example
of the growth of wealth through stock ownership. He was debt free,
but appeared to be unable to fully enjoy this unusual freedom.
Practically all retirement funds are heavily invested in America’s
publicly traded companies through common and preferred stock, and
bonds which may yield a smaller return, but carry an improved risk
The PEW report
is a revelation through what it does not say. The youngest
households’ net worth is less than a third of what their
age-equivalent peers had 25 years earlier. The three youngest
groups each had less net worth than their earlier peers.
Increasingly what evolved was the introduction of credit, also known
as debt, as the means to grow wealth. As debt increases, as it
clearly did, household net worth is decreased by an equal or greater
Making only the minimum payment on credit card debt pays off
this debt in 22 years, provided no additional charges are added.
Virtually all of the payments go toward interest on the debt in the
same way that most mortgage payments on a home go to pay interest.
It is only the prudent management of debt that allows net worth to
grow to positive numbers. Over this 25 year period, the younger
households have not learned this lesson, and most are managing their
debt into the poor house.
To report a statistical ratio, 47 times, as the meaningful
gap in the growth of household wealth does a serious disservice to
the opportunity to get ahead in America. Over this 25-year period
it is the growth of debt that multiplied the gap in wealth. As
ratios like household wealth go, the lower figure, the denominator,
is the terminator of wealth. A clearer picture of this negative
influence on household net worth is not possible.
equally clear that our federal and most state and local governments
have been growing debt like Topsy. The vast majority of America’s
debt is not even on display, as our congress exempts itself from
reporting retirement debt obligations into the future. Debt
obligations coming due decades into the future may be ignored at
ones peril. Like our younger American households, our federal
government seems to believe that increasing debt will, somehow, be
converted into wealth. All that is missing is the magic wand.