Trendspotting: Xer Wealth Still Lags Way Behind

NEWSWIRE: 10/18/21 

• According to Federal Reserve data, the net worth of Gen-X households jumped by 50% during the pandemic. As of Q2 2021, Generation X holds 28.6% of the nation’s wealth. (Bloomberg)
• NH: Good news, Xers! Your fortunes have at last turned around! According to Bloomberg, your net worth has grown by 50% in the five quarters since the pandemic lockdown. Let me go on: Xers are experiencing "robust gains" from a "wealth boom in the U.S. since Covid-19 was declared a national emergency." It's a wonderful story. The only thing missing is Mike Myer's addendum... NOT!
• The article draws its numbers from the Fed's new and interactive "Distributional Financial Accounts" which I first described in detail back in June of 2019. (See "The Richest 10% of Households New Represent 70% of All Wealth" and "The Graying of Wealth... in One Picture.")
• Is Bloomberg's claim correct? Literally, it is. According to Fed data, the net worth of Xer households rose 49.5% over these five quarters. But the implied message--that Xers have turned around their generation's economic prospects--is nonsensical. Indeed, the Fed data expose a distinct risk orientation in the Xer wealth portfolio that ought to make them more, not less, worried about what the future has in store. And, by any measure, Xers remain far behind where Boomers were at the same age.
• So let's put the numbers in context.
• To begin with, according to Fed data, household net worth climbed gloriously over this period for every generation, not just for Xers. Total net worth for all American households climbed by +29%, ranging from +10% for the Silent Generation to +64% for Millennials. Why? In part because equity and real estate prices took a dive in Q2 of 2020. So Bloomberg is measuring the jump from the market trough. Compared with the last pre-pandemic quarter (Q4 of 2019), the growth numbers look a bit different: Still good for total household net worth: +22%. But less impressive for Gen X: +35%.

• So does this mean that all generations have been vastly enriched by the pandemic recession? Of course not. And that raises my next problem: Even this +22% figure for all generations since the end of 2019 is a pipe dream. And for two big reasons: First, the federal government has subsidized American households by roughly $7.5 trillion over the past two years (spending minus taxes, all borrowed); and second, the Fed has deliberately boosted asset valuations by subsidizing credit at every maturity and risk level.
• If we accounted for the liabilities directly generated by more federal debt, we would have to reduce the household net worth gain by 7 pp to only +15%. And the Fed-engineered revaluation of assets would account for all, or more than all, of the rest. Consider: If the ratio of net worth to GDP had remained unchanged since the last pre-pandemic quarter, net worth would have risen by less than the new publicly held debt issued by the U.S. Treasury.
• So how might Americans lose the +22% they think they have gained? IMO, in one of three ways: taxation, inflation, and valuation decline triggered by debt deleveraging. (I'm listing these in reverse order of likely importance.) See my essay two weeks ago, "Why Nobody Knows Anything."
• But at least Gen-Xers are now doing relatively better than other generations, right? Perhaps. But gauging your progress by how you're performing during the current valuation runup is perilous. What this may simply reflect is the risk-bias of the Gen-X asset portfolio.
• Keep this in mind: Xers didn't just do better than older generations in recovering from the lockdown crash, they also did a lot worse than other generations during the crash. During Q1 2020, total Silent assets fell by -4.9%, Boomer assets by -3.9%, and Millennial assets by -5.6%. But Xer assets fell by -9.7%. Unlike younger Millennials, Xers are by now fully loaded into real estate and pension assets. But unlike older generations, more of that real estate is mortgaged and less of those pension assets are in DB plans, near-cash, or annuities and whole life policies. And when Xers do invest in equities they tend to go more toward the high-beta, high-leverage end. As you have sown, so shall you reap.

• Many Xers may feel they have gotten so far behind that they have no choice but to assume more risk in order to catch up. I sympathize. It's certainly not their fault that all the comfy DB pension plans that took care of so many Silent and Boomers just happened to disappear before they showed up. But let's confront the truth. This generation remains way behind. And part of the reason their net worth could jump ahead by 50% in just five quarters is that it started from such a miserably low base.
• Let me illustrate by using the Fed data to compare Gen Xers with Boomers at the same age. For this purpose, we'll have to accept the Fed's definition of these generations: Boomers, born 1946 to 1964; and Xers, born 1965 to 1980. (Everyone older is "Silent and Earlier" and everyone younger is "Millennial.")
• The oldest Xer in Q2 of 2021 is therefore 56 years old. So let's go back to Q2 of 2005 when the oldest Boomer was 56 years old. This way, we'll be lining these two generations up at a matching moment in their lives. Here's how they compare.

• As you can see, there's simply no comparison. Xers today own 29% of all household wealth. In 2005, at the age Xers are now, Boomers owned 46% of all household wealth.
• Sure, you could object and say that Boomers (as defined by the Fed) have more birthyears than Xers (19 versus 16) and so include 3 more younger birth cohorts. You might also quibble that Boomers are slightly more numerous per cohort than Xers. Fine. Let's compensate for this by giving Xers today the three oldest Millennial cohorts (born in 1981, 1983, and 1983) to match the Boomers. Indeed, let's go much further. Let's give Xers control of all Millennial wealth. This way, Xers will control the wealth of 58% of all U.S. households in 2021. (Back in 2005, Boomers comprised only 32% of all U.S. households.)
• Even then--amazingly--Xers would not approach where Boomers were in 2005. They would be at 34%, still not close to 46%.
• You might also argue, correctly, that households older than age 56 represented a smaller share of households back in 2005 than they do today. Back then, such older households comprised 33% of all households; today they comprise 43%. So let's compensate for this too. Let's go back and inflate the number of older households in 2005, keeping their average wealth the same, so that their share of all households is equal to today's. This would bring the Boomer share of wealth in 2005 down to 40%. That remains 6 pp above where Xers are today--still assuming that Xers have expropriated everything owned by 39 million Millennial households.
• The conclusion is inescapable: Gen X is falling way behind the wealth benchmark set by the generation that came just before it. What's more, surveys show that most Gen-Xers understand they're falling behind. (See "Gen Xers Hitting the Wall.")
• Now I don't want to paint a simple picture here of Boomer privilege and Xer penury. The story is more complicated than that.
• As I've often pointed out, Boomers themselves are a generation of steep and mainly negative economic trends from first to last birth cohort. Early wave Boomers born in the mid- to late-40s have done very well, along with the late-wave Silent, in both income and accumulated net worth. Late-wave Boomers, born from the late-1950s on, have done little or no better than Xers. (This is one reason why I define generations a bit differently than the Census Bureau.) Including these large early-60s cohorts as Xers rather than Boomers would not, in fact, improve the Xer comparison with Boomers.
• As for Millennials, they too are lagging behind prior generations, including Gen Xers, in wealth accumulation. Today, with their oldest members (by the Fed definition) at age 40, Millennials account for 5.6% of all wealth. Back in 2005, when the oldest Xers were 40, Xers accounted for 8.4% of all wealth. The Fed data don't go back quite far enough to look at the Boomer share at a similar age in 1986. But we do have data starting in Q3 of 1989, which show Boomers accounting for 21.6% of all wealth. Three years earlier I reckon it was at least 15%.
• So the wealth outlook doesn't look great for Millennials, either. Yet there is one critical difference. The oldest Millennial is still 27 years away from his or her "normal" retirement age under Social Security (67). That's the year 2048. The oldest Gen-Xer by the Fed definition is only 10 years away, in the year 2031. The oldest Gen-Xer by my definition is only 5 years away, in the year 2026. The net worth challenge facing Millennials is thus less urgent. The world may be a vastly different place, economically and politically, by 2048. It's unlikely to be all that different by 2026.
• Finally, a word about generational transfers. Yes, as I'm often reminded by readers, most of the wealth of older generations (that which is not consumed away or taxed away) is indeed passed down to younger generations via bequests. These transfers have always benefited younger generations. Over the last two decades, however, as both the number and affluence of older Americans have swelled, they are growing in importance as a source of wealth accumulation for younger households. Since Q2 of 2001, 55+ wealth has quintupled while GDP has only doubled. 

• No question about it: The rising size of this bequest flow has helped to boost Xer and Millennial household net worth higher than it otherwise would have been. Yet this just deepens the mystery: Why have Xers and Millennials been unable or unwilling (take your pick) to generate more wealth accumulation out of their own income?
• It also underscores the magnitude of the underlying economic problem. Boomers in their 20s, 30s, and 40s, after all, did not benefit from a comparable inheritance flow from their own Lost, G.I, and early wave Silent Generation parents and grandparents. Adjusting for this difference would substantially enlarge the wealth gap between Boomers and younger generations. 
• More seriously, today's growing bequest flow adds a troubling further dimension to the slowdown in generational progress. It steepens the tilt of wealth inequality among young families. In other words, it's not just that younger generations are less wealthy on average at the same age, it's that the declining average masks an even faster decline in the typical younger generation household.
• We see this clearly in the Fed's SCF data. In 2019, when asked how much they have received or will expect to receive in lifetime inheritances, 50% of households under 35 said $29K or less; yet one percent said $941K or more. Put another way, while highly unequal bequests help raise the average household wealth of younger generations, they do almost nothing to raise their median household wealth. Among households under age 35, average net worth in nominal dollars more than doubled between 1989 and 2019 (to about $150K); but median net worth actually dropped a bit over those twenty years (to $24K in 2019). 
• Is there a moral to this story? Maybe this: The next time the media imply that recent market moves have somehow turned everything around for Gen Xers--or Millennials--don't be fooled. Take a closer look at the numbers, put them in context, and weigh any improvement against the magnitude of the underlying problem. A better future for younger generations is possible. But for that to happen, we need something more substantial in place than a post-recession Powell put (and pop).

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