Question of the ages: How you're doing financially might depend on your generation | St. Louis Public Radio

Question of the ages: How you're doing financially might depend on your generation

Nov 6, 2013

This article first appeared in the St. Louis Beacon. - Timing isn't everything, but when people were born might play a role in how they're doing financially, according to economists at the St. Louis Federal Reserve.

Here are a few quick takeaways from some new research by economists William Emmons and Bryan Noeth at the Center for Household Financial Stability:

  • In general, Americans born after World War II are on track to earn lower incomes and accumulate less wealth than Americans born in the 1930s and early 1940s. This includes Baby Boomers born in the 1950s and early 1960s and Generation X-ers born in the late 1960s and 1970s.
  • The young were at a greater risk financially during the Great Recession, regardless of a family’s race, ethnicity or education level.
  • In general, older families fared better financially than young and middle-aged families. And "old-old” families – those headed by someone 70 or older – fared better than "young-old families” headed by someone between ages 62 and 70.

The economists based their findings on data from the Fed’s survey of consumer finances for their report titled "The Economic and Financial Status of Older Americans: Trends and Prospects." As in previous studies published by the St. Louis researchers, they were trying to reach beyond statistics about income and net worth to identify demographics that affect consumer finances.

Some factors that have benefited older Americans might be considered good luck -- or good timing, said Emmons.

These Americans were young during the post-World War II period when the U.S. economy was growing rapidly.  And due to strong unions in the 1950s and 1960s, Americans without college degrees could find jobs that paid middle-class wages, with pensions and health-care benefits. As retirees, they  benefited from having a social safety net – Social Security and Medicare -- and one whose benefits were sheltered from the Great Recession.

"It’s not just the actual dollars, but the fact that these were very, very secure doing this rough period,’’ Emmons said. "Somebody on Social Security may not be rich, but they had a guaranteed uninterrupted income, and they had health care throughout. Whereas, a young person might have lost their jobs and their health care at the same time.’’

Americans born during the Great Depression and World War II – the majority of the so-called Silent Generation -- benefited from the rising standards of living in the first half of the 20th century; they tended to have higher incomes and wealth than people born before them, according to Emmons. That effect begins to level out for Americans born in the middle part of the century and drops "like a stone” for people born later in the century.

"So you’re getting less bang for the buck for a year of education or good health or whatever it might be for people born in the second half of the 20th century,’’ Emmons said.  

There aren't enough data available for people born after 1980, so it’s too early to know whether that will hold true for succeeding generations, he said.

An up side and a down side

While the report might seem disillusioning, Emmons pointed to an up side: The social safety network -- Social Security and Medicare -- has accomplished its original intent to keep elderly Americans from falling into extreme poverty and having no health care.

"We’ve done it. These are success stories,’’ he said. "The good news is that older Americans are probably in better shape economically and financially than a lot of people think.”

While luck may have played a role, he noted that older Americans also approached spending differently, and they didn’t have easy access to credit.

"People born in the Depression era saved more money. They didn’t spend and they didn’t borrow,’’ he said.

For their children and grandchildren, though, access to credit grew, and their savings rates dropped. Younger generations have a higher debt load, particularly with respect to mortgages and student loans.

Emmons voiced a cautionary note about the growing cost of safety net programs in the future, particularly with respect to the numbers of Baby Boomers headed toward retirement. While the programs work, Americans will have to decide how -- or if -- to fund them.

As the generations continue along the time continuum, he expects that older Americans will find a changing financial landscape.

"There is nothing magic about turning 65,’’ he said. “People aren’t coming into that age in the same position that the previous generations did. They didn’t save as much; they have more debt. It’s not that magically turning 65 solves all your problems. The current system is written so that everyone automatically gets this package of benefits, but it’s not budgeted. We don’t have a position on this. This just gives more information about this issue.”

And with that, Emmon went into the bad news of the findings: Americans are still recovering from the recession in an economy altered by globalization and automation.

"The rest of the population -- the middle-aged and especially young segments of the population -- are in volatile times,’’ he said. “It’s a real struggle for many, many people. We’re definitely seeing that. The big housing boom and bust just made it worse.’’

Two constants: Education and race

In previous studies, the researchers found that younger families – those headed by people under 40 -- lost more wealth during the Great Recession. They have also recovered more slowly afterward, largely because they had fewer resources to fall back on but also because their investments were not diversified. They had put all of their wealth into one basket: their homes.

Emmons said the research on household finances is important in understanding the unevenness of the economic recovery.

"The stock market’s recovered, so what’s the problem? It’s a problem because not everybody owns stocks. Unemployment is down to 7 percent, but for those who are unemployed or underemployed it is a problem,’’ he said.

Statistics about income inequality don’t go far enough, he added.

"You need to think about the demographics of an individual family. A $50,000 income family could be very different: They could be young, old, white, black, high school/college. You would expect different outcomes going forward, depending on what those demographics are.’’

Emmons said that past research has found education to be a key factor in income and wealth building, and this latest study is not an exception.

"On the one hand, you can be discouraged and say that it’s not possible to have a middle-class life with a high school degree, which seems to be true as a general statement. And yet the reality is that we need to re-emphasize how critical education is,’’ he said.

The other constant is race, Emmons said.

"The most disturbing things we’ve found fairly consistently is that race continues to matter, even when you control for education and health status and marital status and all the rest,’’ he said. “We consistently find that being black or Hispanic, independently of everything else seems to result in lower income and wealth. It’s an unpleasant topic for many people, but it is still there. We are not a post-racial society in that respect yet.’’