Pew Report on Young-Old Wealth Gap is Misleading and Divisive; Could Fuel Intergenerational Class War
A new study purporting to show that older households are doing much better than younger ones in terms of wealth and income threatens to spark an intergenerational class war, pitting Americans of different ages – people who have all been devastated by the crash caused by Wall Street's recklessness -- against one another. But there are serious flaws in how the research is being interpreted.
The analysis, by Pew Research, is being spun as evidence that the government “spends too much” on the elderly while leaving younger Americans hanging out to dry. It's already becoming another weapon in the corporate right's long-running battle against Social Security.
There's no doubt that this economy is especially grim for young people. Unemployment among young adults continues to hover around 18 percent, and a report by the Federal Reserve found that full-time undergraduate students are borrowing 63 percent more for school than they did a decade ago. (Outstanding student-loan debt broke the trillion-dollar mark for the first time this year.) Young people have few prospects for decent jobs. This bleak situation is clearly a driving factor behind the emergence of the Occupy Wall Street movement; studies suggest that the “occupiers” skew young, don't have a lot of income and suffer from a much higher rate of unemployment than the country as a whole.
The Pew study's main finding is that, “in 2009, households headed by adults ages 65 and older possessed 42% more median net worth (assets minus debt)" than they did in 1984, but that trend was reversed in younger households. In 2009, “households headed by adults younger than 35 had 68% less wealth than households of their same-aged counterparts had in 1984."
As a result, whereas older families had 10 times the accumulated wealth of those headed by people under 35 back in 1984, that ratio has now risen to 47-to-1. The authors acknowledge that people accumulate wealth as they get older, and that young people didn't have a lot of it back in 1984, but economist Dean Baker told AlterNet that this fact renders the finding little more than a bit of trivia. “The idea of using a ratio is really problematic in this context,” he said. “Young people have no wealth. They had no wealth in 1984 and they have no wealth now. The fact that the ratio of the wealth of older households to younger households has increased hugely tells us almost nothing.”
It tells us even less because, as Baker noted, the study contains a serious flaw. Back in the 1980s, traditional, employer-managed pensions were the primary means of saving for retirement in the United States, but during the intervening years there was a huge shift toward 401(k)s (and similar accounts), which now represent over 80 percent of private retirement savings. Traditional pensions weren’t counted as part of a household’s net-worth, but 401(k)s are. So comparing the wealth of older households that didn’t include their nest-eggs in 1984 to those in 2009 which count the money people have socked away as part of their net worth is like comparing apples to oranges.
“It’s incredibly dishonest that the Pew study didn’t mention the impact of the switch from defined benefit pensions to defined contribution plans,” Baker said.
What’s more, 1984 was a very different point in the business cycle than 2009. Back then we were in the second year of a robust recovery following the 1981-'82 recession, with real economic growth of over 7 percent and an unemployment rate that was under 8 percent and falling rapidly. The recent crash officially ended halfway through 2009, giving way to an anemic recovery. Economic growth for the year was negative, and unemployment for the year stood more or less steady at 9.3 percent.
Most of the difference between older and younger families' net worths relates to housing wealth. Half of homeowners over 65 bought their homes before the run-up of the housing bubble began in the late 1990s, while many younger families with homes bought while the bubble was inflated and were badly hurt when it popped. Almost two-thirds of those over 65 who have a home own it free and clear with no mortgage.
So, stripping away the sensational headline numbers, what you get is that the median household headed by people 65 and over saw the values of their homes increase by about $50,000 over the past 25 years, but were able to accumulate little in the way of other assets. Somewhat buried in the study is the fact that when you exclude housing wealth, the median net worth of households headed by older Americans is a third lower today than it was back in 1984.
Another, longer-term factor in younger families' lack of wealth, note the authors, is that people are waiting longer to get married and are starting their careers later – “two markers of adulthood traditionally linked to income growth and wealth accumulation.”
The other finding, perhaps more dangerous in the hands of demagogues seeking to loot Social Security and shift more healthcare costs onto the elderly, is that while the incomes of households headed by people over 65 has risen by 109 percent since 1984, households headed by people under 35 have only seen their incomes increase by 27 percent – a dismal reflection of a stagnant middle-class.
The Associated Press – which has published several wildly dishonest hit-pieces on Social Security this year (see here and here) – quoted Georgetown University economist Harry Holzer saying, "It makes us wonder whether the extraordinary amount of resources we spend on retirees and their health care should be at least partially reallocated to those who are hurting worse than them." But the idea that older Americans are lucky ducks living the high life while younger people struggle is flat-out wrong. While it's true that without Social Security, the poverty rate among older Americans would be almost 50 percent, that's simply a sign of how successful the program has been.
People over 65 are still struggling badly in this economy. As I wrote back in May, studies show that one in three seniors can be classified as “economically insecure.” And according to the Census Bureau's new poverty metric – which does a better job factoring out-of-pocket healthcare costs – the elderly population has a poverty rate of almost 16 percent, close to double what it was using the Bureau's traditional methodology.
Almost all of that increase is due to out-of-pocket healthcare costs, a problem that would increase dramatically if Medicare were “reformed” because the “reforms” discussed in Washington do nothing to lower the cost of healthcare in the United States (costs that are growing more quickly in the private sector than in the Medicare system). They simply shift more of the burden onto the backs of seniors themselves. Social Security, meanwhile, remains solvent. The government doesn't “spend money” on these benefits, working people pay a tax dedicated to finance them.
The Pew study also notes that the percentage of Americans over 65 who are still working rose by 60 percent between 1984 and 2009. That correlates with a long-term decline in employer-provided retirement benefits. Our elderly are struggling to retire, which is anything but good news for people who have spent a lifetime in the labor market.
The authors of the Pew study write, “households headed by older adults have made dramatic gains relative to those headed by younger adults in their economic well-being over the past quarter of a century.” The key bit here is “relative to” -- older households in the middle of the pack have gained nothing over that period; they've simply treaded water. Their incomes have doubled and their wealth has increased by 40 percent during a period in which the size of the American economy doubled.
The real story here is that younger families in the middle of the pile have fallen way behind, as those at the top have grabbed an ever-increasing share of the nation's income. As Dean Baker put it, “the ratio of the wealth of the top one percent to the rest of the population has risen by much more than that of people over 65 and those under age 35.”
The way these findings are being interpreted can only stoke young people's sense of resentment and divide the vast majority of Americans who are suffering through the same economic catastrophe. It can only feed the politics of grievance, which is ultimately just what the “granny-bashers” want.