Greedy Goblin

Monday, September 19, 2016

Our generation doesn't gain wealth like our parents because...

We hear all the time that the wealth of our parents and grandparents were growing when they were young and this "golden age" is gone. There are many-many theories why our wealth don't follow this pattern. Here is a very interesting article from Deloitte that gives a very unconventional answer: because our parents still keep earning more, despite not working, from instruments and assets. They are and will be in the foreseeable future be more rich than us:
Yep, currently about 1/6 of the US wealth (the study is about the US, but - without any research - I can guarantee its validity for Europe) is in the hands of the adults below the age of 50. Which is kind of surprising if you consider that you spend 2/3 of your productive life below this age. As a rude estimate, I checked the last US age distribution and approximately equal parts of the US population were over 45 years old in 2012 and between 15-45 (which is more or less the same groups as we are talking about now). So an average person over 50 has 5x more wealth than a younger adult and this will only change with the oldest of them dying. The "Baby Boomer generation", who are between 50 and 70 now will keep having half of the national wealth in the upcoming decades.

This is something mankind never experienced before. We are still living under the impression that the elderly is a vulnerable group that survives only by the protection of the active ones. Maybe when a 68 and a 70 years old are running for US president and their boogieman is 64 years old, we should reconsider.

How could it happen? By the high and continuously increasing importance of financial assets. In the times before us, the wealth of a person was in housing and items. These things need constant spending to be kept in good condition and even then they tend to lose value. Buy a horse or car and in a decade you'll have a corpse or a wreck after a bunch of expenses. The stocks and investments on the other hand increase in value without maintenance. In the same time work income is heavily taxed, while income from assets is not, so the average rich is just getting richer and the poor will never catch up. This isn't so new, Piketty became famous over it, but I doubt if many considered its effect on generations. It's not just that distant millionaires get rich while you are staying poor, it's that your own parents get rich and you stay poor. It doesn't need them to actively participate in the stock market as pension funds do it for them and housing is also an investment that tend to increase value over long time (even if less than average stocks)

- OK, this looks bad. I'm young and doomed to be poor forever. - you might say, but it's not true. There are two kinds of "being social" problems stand in your way:
  • Keeping up with the Joneses: while it was present in all times, for the generations before us it was focused on more value-keeping things. Our grandfathers kept up with the homes of the Joneses which left them with a home. The millenials keep up with the food, travel and consumer electronics Kardashians and it leaves them with nothing but selfies. Your income must be invested instead of wasted on "having fun". Any investment (stocks, gold, home, your own education) is better than spending.
  • Being politically inactive because "politics suxx". Young people are tend to not vote in elections. This means that the lawmakers will cater to the older population and this leads to tax and welfare decisions that hurt the young and help the old. Think of the term "death tax" that shows how negative the political opinion is about taxing the elderly. In reality inheritance taxes are probably the least harmful taxes of all, since they take no man's money, they merely limit how much one inherits after a deceased one. In most cases, the deceased is over 75 and the recipient is an over 50 offspring of the deceased. A tax code change that severely taxes inheritance would prevent the wealth of the "Silent generation" to flow into the "Baby boomers" while an equally big income tax cut would be a huge help to young earners. Or a much less aggressive law that makes the default recipient of inheritance (in case of no last will) the grandchildren instead of the children. But this is a daydream while young people don't vote. Hint: there are elections coming up this fall in several countries. Be there!


Anonymous said...

" Any investment (stocks, gold, home, your own education) is better than spending."

That assumes that people on zero hours contracts or minimum wage can invest in property.

You are missing out why your grandparents (or parents) could buy a house at 25.

What is the price of a house relative to the average wage? Bearing in mind a bank will lend you 2½ times your annual income. In the UK, the average house price is £216k, and the average household income is £23k.

Getting onto the property ladder is the problem in that case. Our parents and grandparents are already on it.

Yes, an i-phone is expensive, but, how many of them do you have to go without to be able to put down a deposit on a house?

Riful said...

the funny thing is that i got to know about it first in an article about organised crime:
the little guys doing the most dangerous jobs dream of getting promoted and maybe run a corner and then get even higher. the problem is that there is no rotation at the top:
the same guys that are at the top were the ones that either started the business or got there a few decades ago.

basically: a generation time (~25y) is way less than the time of potential working life (~80y).

dobablo said...

Wealth has always been generated by work done by people and work done by assets. These days assets generated wealth is in the ascendance. Someone with no assets is going to struggle to move up the chain and hence social mobility is at an all-time low.
High death taxes would be a very good way to prevent slackers from locking out the top of the wealth-chain with their asset generated wealth. Allowing someone to keep the wealth generation that their parent earnt does nothing to promote entrepreneurship or the creation of new ideas and wealth sources. Far better to remove inheritance from the equation and invest it in young people so the the best and brightest are not locked out of the top table and can succeed.

Riful said...

you could also increase the financial gains tax, wealth tax, etc.

these things of course depend heavily on the country as they are quite different in us and (different parts of) europe

dobablo said...

There was a related Guardian article on a related subject this morning.

Yes you would need to take further actions, since average net wealth of everyone that dies in the UK each year is about £80m (or 10% of the annual budget, about equal to the education spend). If you don't want to kick families out of their homes that would fall to to £20B.
Taxing financial gains or wealth taxes can be argued to disincentivise wealth creation, while death taxes encourage spending and philanthropy.

Anonymous said...

"kick families out of their homes"

see, thats part of the problem. little old ladies in 4 million dollar homes get aged care pensions. they should need to take reverse mortgages and pay for their own retirement.

why should a worker on minimum wage, trying to save for a home, support the rich elderly living in a home they can only dream of.

then the little old lady dies and leaves the property to her ~60 year old children who already have homes.

Anonymous said...

After reading your (very good) piece today, I rub my eyes in surprise: You seem to suggest that taxing wealth and inheritances are good ideas.
Which I think contradicts your earlier stances on taxation (after all, taxes punish the fruits of effort), and taxing inheritances is a very socialist idea. But I like to see (regardless of the actual topic) when people re-think their believes and are capable to keep or change opinion based on reasons.
Would you consider a piece on taxing behaviour instead of taxing income, wealth or generating added value?

Gevlon said...

@Anon: I'm against all taxes. But if there is a tax (and there is), death tax is the least harmful of all taxes, while income tax is the most harmful.

Anonymous said...

The rich get richer and the poor get poorer, is such a load of crap. We are now in the 21st century not the 1800's. The gap between the rich and poor maybe widening. The big difference between then and now is we have more choice than ever, and most people are choosing to spend there money now to satisfy their wants and forgetting to plan for the future.

I talking about 1st world countries and would assume that most of these countries have similar systems in place for free secondary education and loan schemes for tertiary education. Then add in the internet and everyone has access to higher education and more information then previous generations.

The idiots who say that they are supporting oldies on pension while they are on the average wage are kidding themselves. The taxes that you pay won't even come close to covering the costs the government pays on your behalf; roads, utilities, education, medical, defence and the list goes on. The same can be said for the oldies who receive a pension and think they have paid their taxes over the years and therefore have paid for it; do the sums and it wont add up.

Housing affordability is higher now argument is getting so old. Have a look at the lending criteria for previous generations had to meet; it is far easier to borrow money today. Next have a look at the type of house that previous generations bought or built, substantially smaller than what the current generation want. Next have a look at the locations where these house were built or bought; they weren't buying in the upmarket/trendy locations of their day for their first house.

Death taxes have never worked at catching the rich, yes they will catch the middle class. The rich simply come up with a legal way of getting around it; or simply move themselves and their assets to a county/state/country that doesn't have one.

Why do the so called poor keep buying big tobacco, Oil, Alcohol, Electronics, etc products. Yes in the modern world you do need oil and electronics to function, but do you need a new car or the latest gadget all the time.

Dont get me wrong there are people who will always struggle; the disable or some people personal life make it extremely hard, etc.

The majority of us have choices, if you stuff up your education; party from the day you leave school, have to keep up with the Kardies, etc dont blame others for what you cant afford. You control yourself no one else.

If you think I full of crap and dont know how the world works that fine; keep blaming other people and you will make is substantially harder to get what you want.

Anonymous said...

Who cares - National Security is the number 1 issue and the only reason we need govt

Denethal said...

There's an alternative explanation to this, as you might have overlooked: We're seemingly not getting richer, due to capitalism doing it's magic in distributing capital and wealth to everyone involved in trading.

If you look at the overall poverty-levels in the world since 1982, it has gone down from ~50% of the world population living in absolute poverty (1,6 USD a day or less income), to just below 9% in 2015.

The effects of global trade and values being transferred, have reduced the growth in already wealthy areas and substantially increased the growth in wealth in poorer areas of the globe. We're not more wealthy in the already well off areas, since we're now facing competition from other parts of the world, where they are now producing what we used to do in our own factories, for a cheaper price, both in labor and material costs.

A good illustration of this effect, can be seen in the movie "I, pencil", which explains this fairly well. (I'm certain you're aware of how capitalism works, but for the rest, please go have a look.)

In the end, though, we all benefit from this, as we're all getting wealthier.

Capitalism. It works, bitches.