Tuesday, May 06, 2008

Broad Based Generational Wealth Transfer Coming to an End

In recent years there has been a view expressed in the financial press that we are on the cusp of the greatest generational transfer of wealth that this country has ever seen. The question posed here is that, with the exception of the very wealthy, what if the bulk of that transfer has already occurred. It could not only mean that an expected longer term economic stimulus or stabilizer is not there, but that additional creeping economic pressure on the stretched U.S. consumer is beginning to unfold.

This thought is based on observations, anecdotes, logic and intuition. There are no statistics here, but sometimes statistics are a lagging indicator. This may be the case on this issue.

The generation passing on the wealth is the one that is now over 70 at a minimum. They cut their teeth in the work force in the 1940's and 50's, years of increasing prosperity after the end of WWII. Their careers blossomed in the 1960's and 1970's. Their pensions and savings then began to benefit from the bull market of the 80's and 90's, whose interruptions were brief in hindsight. This was the generation in which many had union contracts in manufacturing with good wages, health benefits, and pensions coming from defined benefit plans. In the white collar world the protocol of both merit and inflation adjusted wage increases was the rule, company loyalty was returned in kind, and until the early 1990's defined benefit plans led to reliable retirement income. This generation lived through or was born in the Depression and generally had spending and saving habits that reflected that experience. They saved for the future and did not spend what they did not have except on those big purchases like a home and a car that were their primary experiences with credit. They retired and now they are on the decline, having already gone to or inexorably heading to whatever's next.

Their children, the baby boomers, have also had the opportunity to have a good run at economic prosperity. They have, however, also gone through all of the changes that have led to a different landscape in our economy today. Those changes include the significant decline in the U.S. manufacturing base, the demise of the job for life bond in corporate America(both white collar and blue collar), the replacing of defined benefit plans with defined contribution plans, the significant rise in health care costs and the decline in health care benefits, and the constant reshuffling of corporate America as result of mergers, downsizing, outsourcing, and the continuing introduction of productive but disruptive new technologies. On top of these changes the mentality of much of the boomer class was one of ever higher expectations and their approach to consumption and credit was, broadly speaking, entirely different from their parents. This consumption was not necessarily driven by some materialistic flaw but by a very American belief that each generation should have a better economic life than the preceding one. In addition to securing their own slice of a good life, the boomer's expectations for and investment on behalf of their children drove their consumption.

With this generational dynamic, the wealth transfer has been ongoing, and may soon be going, going, gone in the old great middle class of America. The aging generation with its stable retirement income, home equity, and assets compounded by the market has been a backstop and a contributor to the wealth of the boomer generation. Those certain pensions supplemented by social security, those houses once almost totally equity, and those bank accounts reliably available have been generously handed down piecemeal over time, often willingly by a generation so glad to be of use and value to their children and grandchildren and at times by necessity as circumstances and missteps have made helping out a necessity . Also factor in the not so uncommon malfeasance or incompetence by probable heirs, caretakers and financial advisors and there has likely been significant diminution of this wealth over time. The money left is now being marshalled for retirement living, health care expenses, Alzheimer's care, and nursing homes as well as the continued needs of some of their now truly stressed offspring in today's economic environment.

This scenario is certainly not the case among the wealthiest of American families. That wealth transfer will be substantial. The world's greatest consumption machine, however, is the vast center of the American consumer market and one of the key underpinnings of that group's confidence is eroding just at a time of increasing stress. In fact it is already a likely component of the boomer generation's angst, the realization that they are on their own, and a consequent contributor to the uncertainty that their children feel about the future.

The observations here are not politically oriented, value based or resentment fueled. From this perspective there is an unfolding economic event that seems to not yet be recognized in any broad way. Maybe the observation is wrong, but I don't think so. If correct, the implications of this are significant. A generational wealth transfer that is already spent has economic consequences that will be evident in the near term, and political and social consequences that will play out over a longer time frame. Near term, this phenomenon is clearly fertile ground for the self help publishing niche.

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