One of the interesting results of the study was that inequality in the US has risen sharply not between class groups or even between ethnic communities. According to the Federal Reserve, virtually all of the increase in wealth that has occurred in the country since 1989 has been accounted for by citizens over 55. In those households headed by older Americans, wealth has doubled since 1989. The economic situation for younger residents of the country is far from rosy. For example, those who are now between 20 and 40 years old have, on average, only maintained their wealth at a constant level (adjusted for inflation). Today, 30-year-old Americans are on average $200,000 poorer than their older compatriots.
Future debt
The ancestors of US citizens have almost always, since the 19th century, been wealthier than the youth. What has changed in the last two decades is the growing gap between generations. This was driven by two parallel processes. On the one hand, older Americans became richer, both in absolute terms — thanks to investing accumulated funds — and in relative terms. The latter concerns less wealthy citizens whose incomes in old age increase due to various government social and tax programs. On the other hand, young people, conversely, gradually became poorer, in particular due to longer periods of study, which delayed the start of their careers.
The problem of growing inequality between the richest and poorest US citizens has long attracted the attention of authorities, the media, and public organizations. “The growing gap between rich and poor has for a long time raised questions in the US about social justice, the effectiveness of the tax system, and so on. The topic of increasing inequality is raised from time to time by Democrats, Fed Chairman Ben Bernanke, and President George Bush, whose tax policy throughout his tenure has been aimed at the interests of the rich. However, there is no consensus today on what should be done in this situation,” Nariman Behravesh, chief economist at research company Global Insight, told Expert.
The press, meanwhile, is interested in another aspect of this problem: in recent years, there have been frequent reports about the multi-million-dollar salaries of corporate top managers and managers of the largest hedge funds. Their incomes grew, while the wages of ordinary Americans — increasingly forced to compete for their jobs with residents of Asia or Latin America — stagnated. However, many economists believe that it is not the salaries of top managers or tax policy, but rather the “aging” of wealth and income that is one of the most characteristic features of inequality in the US in the first half of the 21st century.
Be that as it may, the consequences of the process of stratification and “aging” of wealth are very serious. With increasing life expectancy in the US, the budgets of the state social security system (which handles pensions) and medical care for the elderly are constantly growing, which essentially transfers funds from young Americans to older ones. The sharp increase in the wealth of older Americans has led to a noticeable reduction in poverty among the elderly population, especially compared to 1960, when the Medicare program in healthcare was introduced and social insurance payments were significantly expanded.
The financial deficits of the social security and healthcare systems for the next 75 years are projected to be enormous — $340,000 per household. This deficit is effectively a hidden debt that will increasingly weigh on the finances of young Americans each year. According to Federal Reserve estimates, spending on social security, Medicare, and Medicaid in 2030 will amount to about 15% of GDP, compared to today's 8.5%.
Children of the post-war boom
In the US, according to a Federal Reserve survey, people reach maximum income at 57 and maximum wealth at 63, that is, just before retirement. Wealth is understood as all net assets, which include lifetime savings, investments, and inheritance minus debts. Over the past decade and a half, inequality within age groups has remained virtually unchanged — the gap between generations has widened. For example, the average net worth of households of 55-59-year-old Americans grew by 97% from 1989 to 2004 (the years of the study), and their incomes by 52%. Meanwhile, those who were 35-39 in 2004 lost 28% of their net worth and 10% of their income since 1989.
According to American economists, the gap in wealth and income will only grow in the near future, and very quickly, partly due to the aging of the largest generation, the baby boomers — people born in the post-war years from 1946 to 1964 (that's 79 million Americans, or 26% of the population). Now, every year, tens of millions of Americans will be approaching the age of maximum income and wealth, so inequality between generations will only increase — until baby boomers start passing on their inheritance to children and grandchildren. “The baby boomer generation provided a significant portion of economic growth in the 70s and 90s, so their financial condition is not surprising. Their exit from the working-age population will be a difficult moment for the American economy,” Nariman Behravesh believes.
Another way
«In any country, a significant portion of wealth accumulation occurs rather late in life – after children grow up and start earning on their own, when incomes are quite high, debts decrease, savings accounts and real estate values gradually increase. For Americans, this problem is especially acute. Social insurance and Medicare programs have led to older Americans spending their wealth much more slowly than before. Most of those over 60 have already paid off their mortgages and have practically no debts,» says Frank Furedi, a sociologist at the University of Kent in Britain.
Young people are in a much worse situation. They not only start their careers later than baby boomers (since they remain students longer), but also start families later (shared households reduce individual expenses), have children later (so their wealth begins to grow later), and receive inheritances later (parents live longer than before). Finally, today's youth accumulate more debt. First, prolonged study leads to increased education debt. For example, each year of university study adds on average $10,000 to debt. Second, trying to lead an independent lifestyle, young people quickly accumulate consumer debt. Home purchases are usually postponed until after age 35 – the peak mortgage obligation for most young Americans now falls between 35 and 39.
«Baby boomers were the last to take advantage of the existence of an industrial economy, where they stayed in one job for quite a long time and can afford to retire with a pension. The new, more flexible modern economy requires greater adaptation, so young people have to change jobs more often, trying to speed up their careers,» says Matthew Sherwood, senior economist at the Economist Intelligence Unit in London.
Middle class under siege
Another aspect of the growing gap between rich and poor is the erosion of the middle class, which is under pressure from both sides: some become richer and move into the rich category, while others cannot compete successfully in a harsh environment and slip to lower socio-economic positions.
This is largely facilitated by the current US tax system. The poorest are helped by government tax credit programs, which provide about $37 billion annually to more than 20 million of the poorest households. And the richest benefited from tax cuts implemented under President Bush. The result of such a tax system has been an improvement in living conditions for the top 10% and the bottom 25%, but not for the middle class.
One of the challenges facing the middle class today – and not just the American one – is the need for social mobility. The key factor for this is education, which significantly enhances career opportunities. It has at least proven economically beneficial for the older generation. For example, Americans aged 55-59 with a higher education earn $100,600 per year and have $526,000 in wealth – almost double that of 1989.
Nevertheless, while still in demand, education today does not allow young Americans to catch up with their elders in income and wealth. «This is largely due to the growth of ethnic minority communities, whose numbers surpassed 100 million people early this year – a third of the population. Although, for example, young Americans of Hispanic or Asian origin start their working lives at a higher level than their parents, they still lag behind their white peers. Since the proportion of ethnic minorities among the youth is higher than in the overall population, this only widens the income gap between generations,» says Irwin Seltzer, economist at the Hudson Institute in New York.
That is why issues of inequality, tax regime, education, social security, and the growing wealth gap between generations will be among the key topics of the 2008 presidential election campaign.