One of the great American assumptions — that while individuals and families may rise and fall, each generation will end up on average better off than the one that preceded it — has been the subject of much scrutiny in the past decade. Democrats and their affiliated would-be wealth redistributors have argued that the large income gains enjoyed by the highest-paid workers threaten the American dream of ever-upward generational mobility, while others have worried that the housing meltdown and the Great Recession, which inflicted serious damage on the net worths of many American families, now stand in the way of that dream. Deficit hawks, including yours truly, have long worried that the entitlement system, with its unsustainable wealth transfers from the relatively poor young to the relatively wealthy old, would eventually leave one generation — probably mine — on the hook, having paid a lifetime’s worth of payroll taxes to support a system of retirement benefits likely to fall apart before we’ve recouped what everybody keeps dishonestly insisting is an investment. It’s fashionable to hate the Baby Boomers, who are numerous and entitlement-loving, for the problem, but in fact they may be the first generation to feel the sting of the reversal.
A new paper from the Federal Reserve Bank of St. Louis, authored by William R. Emmons and Bryan J. Noeth of the Center for Household Financial Stability, finds that when it comes to lifetime wealth accumulation, it matters — quite a bit — which year you were born in, and that those born in the late 1930s through the 1940s not only did better than the generations that came before them but also are on track to do better than those born in the post-war era and after. “After controlling for a host of factors related to income and wealth, we find that cohorts born in the late 1930s and 1940s have experienced more favorable income and wealth trajectories over their life course than earlier or later-born cohorts. While it is too soon to know how cohorts born in recent decades will fare over their lifetimes, it appears that the median Baby Boomer (born in the 1950s and early 1960s) and median member of Generation X (born in the late 1960s and 1970s) are on track for lower income and wealth in older age than those born in the 1930s and 1940s, holding constant many factors other than when a person was born.”
One does feel a twinge of envy for those born in the late 1930s and 1940s, the so-called Silent Generation. (Silent until you mention entitlement reform, at which point they become the Generation That Will Not Shut Up.) Talk about great timing: too young to fight in the big war, but just old enough to be entering the work force during the great post-war boom. The dream of constant generational improvement did indeed hold — at least up until their time. This no doubt came as a surprise to many of them: Having been born and raised in the shadow of the Great Depression and wartime austerity, it must have been far from obvious to them that they would represent a high-water mark for generational prosperity.
When it comes to the thrifty ways of those who suffered through the Depression, folk economics is borne out by the data: By the end of World War II, the U.S. savings rate hit 25 percent, according to the Federal Reserve Bank of Kansas City. The children born during that era did not save quite so aggressively as their parents, but the savings rate from 1959 to 1984 totaled 11.2 percent of disposable income. From 1996 — the year our representative Generation Xer (me) finished college — through today, the savings rate ran barely more than half that: 6.1 percent. The rate in August of this year was 4.6 percent, which is down a bit from the August 2012 rate.
Savings is the key to personal and national financial stability, not only because it is the means through which wealth is accumulated over the course of one’s lifetime in order to fund retirement, but for other reasons as well. It provides a cushion against economic turbulence during one’s working years, for example by ensuring that if you lose your job you have the ability to sustain yourself while looking for a new one and the means to relocate for work, which is so often necessary. It means that you have the ability to take advantage of economic conditions, for example by buying a house when prices are low, with a substantial down payment that reduces your interest expenses. It means you can avoid high-interest propositions such as car loans and credit-card financing. Money makes money.