The 2-Minute Thought: The Year You Were Born Matters to Your Wealth

Source: Ray Boshara, Federal Reserve Bank of St. Louis, “The Future of Building Wealth: Can Financial Capability Overcome Demographic Destiny?”

Source: Ray Boshara, Federal Reserve Bank of St. Louis, “The Future of Building Wealth: Can Financial Capability Overcome Demographic Destiny?”

When it comes to building wealth, personal ability matters -- but so does luck.  That’s something Warren Buffett always has acknowledged in his quips about winning “the ovarian lottery” -- his way of saying he had the good luck to be born white, male, in the United States, and in the year 1930. “My wealth,” he says, “has come from a combination of living in America, some lucky genes, and compound interest.” 

What else?  “I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions.  In short, fate’s distribution of long straws is wildly capricious.”

Perhaps Mr. Buffett is a bit too modest about his abilities.  But few can dispute the role of fate in wealth-building.  Being born at the right time into the right circumstances doesn’t guarantee wealth.  But it does put one on a path where good choices present themselves more often. 

That’s the topic of “The Future of Building Wealth: Can Financial Capability Overcome Demographic Destiny?” by Ray Boshara of the Federal Reserve Bank of St. Louis.  While nothing is destiny, he says, the worry is that headwinds and tailwinds associated with one’s birth circumstances are having greater effect. 

Boshara divides the U.S. into “thrivers” and “strugglers”.   Thrivers – about 1 out of 4 U.S. households – are largely white or Asian, well-educated, and older.  Strugglers – the remaining 3 out of 4 U.S. households – are more likely nonwhite, less educated, and younger.  Blacks and Hispanics have median wealth that’s 90% lower than for whites.   Those with a college degree have wealth about three times greater than those with just a high school one.

The surprise, however, is that the year one was born turns out to be the strongest predictor of the state of the family’s balance sheet.  It’s not just that younger people are less wealthy than older people – that is expected.  But after correcting for age, as well as education levels and race-ethnicity, those born in the 1930s and 1940s simply are wealthier than those born in the second half of the 20th century.  And it’s not just about income growth, but also about the opportunities to convert income into wealth.

Up to mid-century, each successive generation did better than the last, and the baby boom generation was the last to do better than their parents.  In contrast, generations X and Y have accumulated less wealth than their parents did at the same age.  A person born in 1970 will on average have half the wealth of someone born in the 1940s -- holding education, race, and age constant.  

A slew of factors is behind declining wealth for younger generations.  But it’s a reminder that living in the right era can make a difference. 

Famed bond manager Bill Gross said as much in a somewhat different context in Barron’s this past weekend.  Gross said it would be hard for a young, up-and-coming bond manager to replicate his success in the future -- not because he was “some kind of “Babe Ruth” as a bond manager, but because his career happened to coincide with a unique period in history where credit expanded from $1 trillion to $58 trillion.  And he adds, “That isn’t going to happen again.” 

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